August 5, 2009 / 12:42 PM / 11 years ago

UPDATE 3-Radian shares rally on Q2 profit, improved liquidity

* Posts Q2 profit of $231.9 mln

* To terminate $100 mln credit facility

* Shares surge as much as 59 percent

* Says has capital to write new business in ‘09

* Rivals PMI Group, MGIC rally

(Recasts, adds details from conference call, MGIC results, updates share movement)

By Sweta Singh

BANGALORE, Aug 5 (Reuters) - Radian Group Inc (RDN.N) shares witnessed their sharpest percentage rise ever as investors cheered the U.S. mortgage insurer’s return to profitability and improved liquidity position.

In a post-earnings call, Radian said it has decided to pay down and terminate its $100 million credit facility which will pare 2011 liquidity needs [ID:nWNBB9703].

“To pay off a bank line 18 months before it is due, is a good sign about near term liquidity,” analyst Mike Grondahl of Northland Securities wrote in a note to clients.

Grondahl said he no longer believes that 2011 debt overhang is a big issue for the company.

Radian also said it has sufficient capital to write mortgage business through at least 2009, and it remains open to the idea of raising private capital.

Grondahl raised his price target on the stock by 50 percent to $7.50 and maintained his “outperform” rating.

The Obama administration’s push to ramp up its program to keep home owners in their homes, is also likely to benefit the company as fewer foreclosures will reduce claims that Radian will have to pay out.

Radian’s results spurred a rally in other mortgage insurer’s stocks. Shares of largest U.S. mortgage insurer MGIC Investment Corp (MTG.N) rose about 10 percent while PMI Group Inc’s PMI.N shares rose 20 percent.

The U.S. government’s housing rescue plan is designed to encourage mortgage companies to lower monthly mortgage costs and aims to reduce delinquencies.

For 2009, Radian now sees claims in the $1.1 billion range from its prior view of $1.2 billion to $1.4 billion.

Radian has suffered huge losses in the recent past from backing subprime bonds and mortgages that saw a surge in defaults as credit and housing markets in the United States worsened, impacting economies globally.

Apart from rising defaults, mortgage insurers like Radian, PMI Group and MGIC Investment have also had their credit ratings put at risk due to expected losses in mortgage-backed debt.

In the conference call, company executives said they continue to pursue funds from the U.S. Treasury.

U.S. officials are currently conducting a review of the mortgage insurance industry to determine the present health and future viability of the specialty finance firms battered by the housing downturn.

Mortgage insurance is bought by homebuyers securing loans with down payments of less than 20 percent to repay the lender if there is a default.

SURPRISE Q2 PROFIT

The mortgage insurer swung to a quarterly profit after posting losses in the last two quarters helped by lower claims and a gain on derivatives.

Net income for the second quarter was $231.9 million, or $2.82 a share, compared with net loss of $392.5 million, or $4.91 a share, in the year-ago period.

The company recorded a gain of $272.3 million in the quarter from a change in fair value of derivative instruments.

Analysts expected the company to post a loss of $1.51 a share, excluding special items, according to Reuters Estimates.

The company, which has been actively exploring capital raising options, said expenses for the quarter fell 77 percent to $228.8 million. Provision for loan losses, the amount set aside to meet future losses, fell 71 percent to $132.8 million.

Mortgage insurance claims paid during the quarter of $167.7 million were lower than the company’s forecast of $300 million.

“While there are positive signs in today’s economy, we remain aware of the challenges and uncertainties Radian continues to face in the near term, and the condition of the U.S. housing market,” Chief Executive S. A. Ibrahim said in a statement.

The company said it continues to expect an increase in delinquencies throughout the remainder of 2009, which could result in a higher provision and reserve for losses.

Radian did not immediately return calls seeking comments.

In July, largest mortgage insurer MGIC reported a wider quarterly loss on rising defaults in the battered housing sector.

Shares of the Philadelphia, Pennsylvania-based company, which had touched a low of 95 cents in March this year, rose $2.05 to $5.72 in afternoon trade on the New York Stock Exchange. They earlier touched a high of $5.85. (Reporting by Sweta Singh in Bangalore; Editing by Vinu Pilakkott, Vikram S Subhedar)

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