On Barrons on Radian
There was a piece published in Barrons this weekend on Radian Group. Barrons is free this weekend so anyone can access it here. The article. written by Jonathan Laing follows quite closely the arguments written in this SeekingAlpha piece. Honestly, there is so much overlap between the two articles that I would have hoped that the writer of the Barrons piece contacted OliverDavies, who wrote the SeekingAlpha article, before writing his.
In my post, Does Radian Guaranty have a liquidity problem?, I considered most of the arguments made by Barrons and even came up with my own spreadsheet model to see if they were valid I have yet to hear of any major errors in my analysis, and it is an analysis I have went over a number of times since then in order to verify. Thus I remain of the opinion that my analysis is fair and that my conclusion that Radian Guaranty will not run into a liquidity problem absent the drop of another shoe in the housing market.
I have to wonder whether Johnathan Laing ran his own cash flow analysis before publishing his work. Did he create a model that showed Radian Guaranty would run out of cash? I would love to see that model. I am not academic about this argument; if someone can prove me wrong I will sell my stock and move on. I really couldn’t care less whether I am right or not, I only want to make money on the opportunity.
It appears to me that Barrons instead chose to develop their argument around the circumstantial evidence of what management has said and done over the past year or two. Thus, they haven’t done what seems to me to be the necessary work of running out the Radian Guaranty portfolio and looking at what the cash actually turns out to be. Comments in the article, particularly the one below which compares current cash against total future claims, seem to suggest this:
The mortgage company has only $2.1 billion in cash, short-term investments, and bonds that it could readily sell to cover the more than $3 billion in future claims it has acknowledged. By our calculation, the actual exposure could be at least $3.8 billion.
There is no mention in the article about the future cash flow coming into Radian Guaranty from new insurance written. In fact the only mention of this cash flow is when it is referred to as a “trickle”. My model estimated that cash flow from premiums at Radian Guaranty would be in the order of $750 million in 2013. Needless to say, this is hardly a trickle and has a significant impact on the analysis of whether enough cash will be available to pay claims.
The Barrons article also focused some attention on an argument that has less weight now then it did in the second quarter. Radian released their third quarter last week, and some of the insights provided by the company were in direct conflict with the arguments that Radian has been focused on the single premium business in order to raise cash up front (the single premium business results in a lump sum premium at the beginning of the policy, rather than a monthly amount paid over the life of the policy).
The product mix of Radian’s NIW has continued the recent shift to an increased level of monthly premium business. Of the $25.4 billion in new business written in the first nine months of 2012, 66 percent was written with monthly premiums and 34 percent with single premiums. This compares to a mix of 61 percent monthly premiums and 39 percent single premiums in the first nine months of 2011.
While there has been some truth to this argument in the past, in the third quarter Radian focused their business back to the monthly premium side, monthly premiums became a larger percentage of the total business while single premiums fell, and on the conference call the company said that they intend to continue this trend going forward. If Radian is truly using the single premium business as a way of raising cash up front (which actually, in my opinion, is not such a stupid thing to do given their circumstance) then stopping now, with this presumably gaping cash hole on the horizon, would be foolish.
The argument Barrons makes that point to issues with the cure assumptions raises a valid question, and I have fretted over them myself in my piece “Things that worry me about the Mortgage Insurers“. But what I would have liked to have heard was a rebuttal of management’s explanation of they believe their cure rates are appropriate. Radian Group management has gone into much detail over the past 3 or 4 conference calls to lay out the case why they believe the late stage delinquency bucket assumptions are correct. These are the details that I delved into in my post. Why not address them and rebut them in the article? Instead Barrons called Radian “wildly optimistic” and dismissws the subject. What good is that to me?
And really, that is my point here. The article is not terrible, it has in fact led me to start a comparison between Radian and Genworth, as all my previous work has been done with respect to comparison to MGIC. But as someone who is interested in making a decision to buy or sell, it simply isn’t that useful to me. Circumstantial evidence can be used to speculate, and it makes for good conversation, but it is a tenuous thread to invest money on. I need an argument backed up by facts that I can weigh and make a decision based on. And it still seems to me that the only way one can truly get comfortable with the conclusion one way or another that Radian is or isn’t on the cusp of a liquidity problem is to run the calculations of the cash coming in from premiums and the cash going out for claims and seeing how it plays out. That is the work I did, and I didn’t do that work for the fun of it. I did it because it seemed to me to be necessary. I concluded they aren’t and I am open to someone presenting evidence that this is not the case. But I haven’t yet.