Reminiscences of a Stockblogger

Aug 8

Week 57: Belatedly

Portfolio Performance

Portfolio Composition

Click here for the last two weeks of trades.

Portfolio Summary

I’m a bit late on this update because I was away for most of last weekend. I wrote the update below over the weekend and to some extent, my concern about under-performance has been mitigated by the out-performance over the last couple of days. So with that said…

I hate it when the market goes up and my stocks don’t follow.

Such was the case over the last two weeks. The market soared, but many of the stocks I own did not. There was the case of company specific news (MGIC) and the collateral damage to other companies in the same industry (Radian and MBIA). There was rumor and innuendo and still no settlement with Bank of America (MBIA). There was the continued malaise of a sector in a prolonged bear market correction (gold and its producers, OceanaGold, Atna Resources). And there were the stocks that I have maybe gotten into a bit too early (Arcan Resources, JC Penney).

Its unfortunate. But I’m not ready to throw in the towel on any of these stocks just yet.

As I have already written about, in the last couple of days I added to my positions in Radian Group and MGIC. I’m not sure whether this is going to prove to be a mistake or not. MGIC has a market capitalization of $150 million. Radian’s market capitalization is about $300 million. Both of these companies insure billions of dollars in insurance, earn premiums on insurance of more than $600 million per year and are talking losses on the insurance written on their old book of anywhere between $200 million to $550 million per quarter.

My point here is not to give an analysis as much as it is to point to the magnitude of numbers involved relative to the size of the companies. The reason these stocks have fluctuated to such extremes in the past and present is because small changes in assumptions about future losses have an outsized impact on the share price. MGIC came out and said this week that the embedded run-off value of their existing insurance book is $1.9 billion. Meanwhile, many analysts are writing writing the company off as bankrupt. When the range of scenarios of future value is between a 10-bagger and a complete loss, you end up with a wildly volatile stock.

As for the oil stocks…

I’m kicking myself for selling out of Mart a couple of weeks ago. I got too cute. I thought that with the news out and the move up I would be able to get back in around the low $1.30s. It even reached that level briefly, but I wasn’t quick enough to the trigger and now the stock is flying towards $1.70 and potentially $2. This is simply a case of missed opportunity. Take the hit (or lack of gain in this case) and move on.

Arcan hasn’t seen the lift I have been expecting. There have been a lot of comments and rumors about the company over on the Stockhouse board. I’m not going to go into the details here, you can read it for yourself, but if its true (and who knows if it is), then there are potentially some issues that the company has to work through. Nevertheless, at $1.40 per share I am not very afraid of holding my shares.

The Canadian Dollar is killing me

Another lead weight in my portfolio over the last couple of weeks has been the Loonie. Living in Canada, I am pricing my portfolio in Canadian dollars. Yet I own a lot of US stocks. The price of these stocks in Canadian dollars is hurt when the Loonie goes up. That has happened over the last few weeks. The dollar has traded up some 4% since the end of June. That is a difficult headwind to combat. The good thing about the movement of the dollar is that it tends to act counter trend to the stocks I own. Its a natural hedge, which is appreciated during a market malaise, but a bit frustrating right now.

Aug 6

Sticking it out with MGIC

As I wrote about Friday, I had a small position in MGIC going into earnings, and after earnings were released and the stock tanked I added to that position on three occasions. The stock price movement after that left me waffling, but in the end I decided to hold on to my shares of MGIC and see how this thing plays out. In fact, I ended up buying a few more shares on Friday afternoon in the high 70’s. The position is still not near the size of the other insurers I own, MBIA or Radian, and its admittedly the most risky stock I have owned in a while, but the upside is there and when I think through the outcomes I see more positive potentialities than negative ones. Hopefully this is the right decision; if not it will certainly be a learning experience.

I listened to the second quarter conference call a couple of times over the weekend and there were a few points that stuck out to me.

1. The Regulator is not a problem

On the call the company said on a number of occasions that there are no issues with the Wisconsin Commissioner of Insurance (OCI). This is a Freddie issue. The OCI is on-board with their capital plan and has been since 2009.

Interestingly, it was pointed out that the original capital plan approved by the regulator called for sending MGIC into run-off when it breached the 25:1 risk to capital ration and from that point writing all new business from MIC. It was the GSE’s that balked at that plan and preferred the revised one they are now going with whereby MGIC writes in states it can write in, and MIC writes in the states where MGIC can’t.

It is also interesting to note that the ultimate goal is to write all business out of MIC. They just have to get the GSE’s on board to do so. To see how this could play out, consider the following. MIC has about $440 million of capital. It can write business up to a 20 to 1 risk to capital level. Therefore it can write about $8.8 billion of risk in force, or $33 billion of insurance in force. MGIC is writing new business at about a $20 billion per year clip right now, so MIC has enough capital to write business for MGIC for about a year and a half as a stand alone entity.

It was asked on the call if any of the other state regulators might balk at the arrangement to write through MIC. CFO J. Michael Lauer responded that he “couldn’t conceive” of a scenario where that would happen. Fannie Mae has also approved the plan without condition.

It seems that Freddie is the only one with a problem.

2. No liquidity problems

They must have said on at least three or four occasions that the company has a risk to capital problem, not a liquidity problem. The point here is that while the MGIC subsidiary has breached the 25:1 risk to capital ratio and that has to be dealt with, there are no issues with the resources of the sub to pay claims. The OCI does not believe that MGIC will be in need of the capital from MIC.

The analysts pressed on the issue as to how the OCI determines that the claims paying resources are adequate. Do they do their own work, or just sign off on the work of MGIC? Management responded that the OCI runs their own numbers. They run off the current pool of business at the MGIC sub based on their own loss assumptions and check to see whether the cash and investments on hand, plus the premiums received over time, are more than enough to cover the losses that are incurred. The outcome of this analysis has been that the OCI is comfortable with the resources in the MGIC subsidiary and its ability to pay all the claims that come in.

The OCI analysis is that MGIC has sufficient claims paying resources. They hire advisors to look at MGIC on a run-off basis and they keep coming up with that conclusion. He’s comfortable with our claims paying resources and therefore he is satisfied with our plan.

At particular issue with Freddie is whether the MGIC sub has access to MIC capital. Clearly, one of the objectives Freddie Mac was trying to achieve in the letter they sent to MGIC was to get more capital into the MGIC subsidiary and to remove constraints of getting capital out of the MIC subsidiary and into the MGIC subsidiary. Now whether this is an objective because Freddie is actually concerned with the claims paying ability of the MGIC subsidiary, or whether its because they are using it as a leverage tool in order to get their dispute with MGIC settled is another story. But the company stated on the call on numerous occasions that this concern is Freddie’s alone, and that OCI, and presumably Fannie Mae too, have no such concerns.

Probably in an attempt to allay some of the solvency fears, management also did something they haven’t done in quite some time, and provided an estimate of the run-off value of the MGIC sub. They said that the value is $1.9 billion.

If you’ll recall, back in April 2010 was the last time we published the estimate of the assets remaining after the completion on the runoff. Then we estimated, which was as of March 31, 2010, that the consolidated insurance operations had excess claims paying resources of approximately $2.1 billion. Using a similar methodology but clearly with updated assumptions, we would estimate that as of June 30, the excess claims paying resources were approximately $1.9 billion. Now that $1.9 billion amount makes no provisions for any adverse contingency development that could arise from disputes with Countrywide, Freddie Mac or the addressing [ph] is not is a stress scenario. It’s kind of a baseline scenario.

$1.9 billion is about $10 per share. I know that number does not include any potential Freddie settlement, any further write downs due to changes in the cure rates, but I’m just saying…

3. This is a negotiation

At first, the analysts on the call seemed to default their phrasing of questions as if to concede that it was a foregone conclusion that MGIC was going to have to downstream $200 million of capital from the parent and pay $550 million to Freddie to settle the issues with the pool insurance. Maybe that turns out to be the case but based on the language of management during the call it didn’t sound inevitable. Here was what was said in response to a question from Conor Ryan about the authority of the OCI to grant Freddie’s requests (again courtesy of SeekingAlpha):

I mean, it’s a negotiation. Certainly, they have — it’s a 3-way, obviously, negotiation with the company, the commissioner, as well as the GSEs. And the issue there, and always has been, and the ability of getting any dividends out of MIC relative to needs of MGIC. Our position going in has been that there is excess capital where it won’t be needed. Freddie Mac wants to discuss some type of agreement with the commissioner about some formula where it would come up, and we’ve agreed to negotiate that with them and have meetings with the OCI on that subject.

This seems to me to be somewhat underlined by the timing of the letter. Freddie delivered the letter to MGIC the night before earnings were released. They knew that MGIC would not have time to talk to the board about the letter, or to the OCI about the letter. Freddie clearly intended to put MGIC in an uncomfortable position. They are trying to get something. Likely, that something is a resolution to the issue with pool insurance.

4. The worst case scenario is still not the end of the world

Ok so let’s assume that Freddie gets everything that they want. I don’t think this is going to happen, in fact I think that even in the act of delivering that letter Freddie underscored that there is wiggle room; if MGIC had no negotiating position it would have never come to a 24th hour tactic like this. But let’s look at what happens if the nightmare comes to pass.

In this worst case scenario the MGIC sub loses $550 million of capital that it pays to Freddie to settle the pool insurance. This is mitigated by the $200 million of capital they get from the parent. So the loss is $350 million total. I estimate that puts total capital at MGIC at around $950 million, and the risk to capital ratio at the MGIC sub is around 37x. While 37x is not a wonderful risk to capital level to operate at, it perhaps isn’t the end of the world scenario that it is being made out to be. Genworth is operating at a risk to capital level of 34x right now. From what I can discern, apart from the 25 to 1 ratio constraints that have already been breached, there is nothing else out there that will trigger based on risk to capital. At the end of the day, what matters to the OCI is claims paying resources, and if you take management at face value, claims paying resources are sufficient and a run-off leads to over $1.9 billion in positive net present value, so more than enough to absorb the $350 million hit. Certainly it puts MGIC closer to the edge than they were before, but they are not quite peering over it on their tiptoes as the stock price would suggest.

At this point, MGIC is writing business out of MIC. At the very least 38% of total new insurance written would be coming out of MIC. So going foward, risk to capital at the MGIC sub will go up more slowly as only 62% of new insurance written will be out of MGIC. Meanwhile the parent holding company, while certainly being less capitalized then it was, still would have $210 million in cash and another $70 million in unrealized investment gains. This is against medium term maturities of $100 million in bonds due 2015. There are longer dated maturities of $345 million in 2017 and $389 million in 2036, but these are a long ways off and I think the position of the company will be settled before we have to worry about either.

Now I don’t think this scenario is actually very likely and I am just running through it to look at the extreme. I think its much more likely that MGIC finds some middle ground with Freddie. But even if it did, is bankruptcy really imminent? I’m not so sure. The question that begs is why is the stock price assuming it is?

I think that when it comes right down to it, the fate of MGIC is going to be determined by the same factors as were going to determine it before earnings. The housing market needs to level out. Delinquencies on the old book need to see further decline. The company needs to write business on the new book to realize the 20% plus returns that it is going to deliver. The Freddie issue creates uncertainty and will potentially make the company position more tenuous, but I don’t see it as the showstopper that the stock price seems to imply.

I’m sticking with that story until I see evidence otherwise.

Aug 2

4 Comments

…And then MGIC released their quarter and it all went to hell (but I bought some)

It was quite the day today. While most of the market was focused and affected by the workings and non-workings of the ECB, many of my stocks were far more affected by MGIC’s 2nd quarter results.

First of all, I did buy some MGIC today. While everyone else was bailing, I decided to do the opposite, go against my position of not adding to a losing one, and basically tripled down on the stock.

I had been, to some extent, waiting for this sort of opportunity in MGIC. Of course I didn’t expect it to be quite the “opportunity” it turned out to be, but nevertheless, leading up to today MGIC was a very small position in my portfolio. It made up a little less than 1%. My hesitation with MGIC, when compared to Radian, had been the Countrywide and Freddie Mac litigation, which I didn’t fully understand, and, as it turns out in the case of Freddie, showed itself to be a rather large iceberg.

I’m going to get into my take of what’s going on but before I do let me just say that both Radian and MGIC are dangerous little companies right now. While I own both, and indeed I added to MGIC today, I will only own them in my accounts where I am willing to accept volatility and loss. I wouldn’t touch either in the accounts I am in charge of for others. The is unquestionably some uncertainty here.

Ok, with that said, onto the MGIC quarter.

I can identify two main reasons that MGIC went down and stayed down today.

Uncertainty with respect to a Freddie Mac settlement and Freddie Mac demands
Cure rates are declining

So um, about those Cure rates…

Cure rates are the rates at which loans that are delinquent (so those that have missed one or more payments) cure and become current again. Cure rates are an assumption that goes into the determination of the reserves that an insurer needs to set aside to meet expected claim payments. The insurer basically subtracts the expected cures from the delinquent loans when they are coming up with the eventual claim rate.

This quarter MGIC took a hit as it added to its reserves because cure rates in May and June were below the expected trend and the company, projecting out that trend, found that they were under-reserved for the number of delinquent loans that would result in a claim.

This is EXACTLY the worry I was talking about yesterday as being my primary concern with Radian. I am very suspicious that the assumptions that the insurers are using on the eventual claims on their delinquent book is going to turn out to be too optimistic. Radian gave me some solace yesterday when they described the mechanism by which the later stage buckets may not be eligible for claims. However the news today from MGIC again raises the question of whether Radian is also being too optimistic and is going to see a similar kind of write down next quarter.

The S&P extrapolated the news on cures from MGIC today in their downgrade of the mortgage insurance group and specifically to Radian.

We believe the risk of a significant adverse reserve adjustment has increased, which could hurt Radian MI’s capital adequacy and future earnings. Although new notices of delinquency (NODs) decreased incrementally to 17,945 in second-quarter 2012 from 18,659 in first-quarter 2012, cure activity (loans returning to current status) declined more quickly to 13,486 from 19,397 during the same period.

S&P also chimed in on the specific concern of the late stage bucket that I voiced in my post yesterday.

We are also concerned about the growing proportion of the delinquency inventory in the late stage (12 payments missed or more) relative to the cure activity within this bucket. That proportion increased to 59% in second-quarter 2012 from 53% at year-end 2011, while the cure rate (not factoring in cures of pending claims) deteriorated to an estimated 2.4% in second-quarter 2012 from approximately 4.5% as of year-end 2011.

These are legitimate concerns and as I said yesterday, to some extent their acceptance or denial is an act of faith (or lack their of) in management. At the moment I’m not inclined to reduce my position in Radian based on the concern, but I will be watching the cure and delinquency rates closely going forward.

The Freddie issue

While the cure rates are an industry problem, I don’t believe that the stock dropped 68% on account of a poor cure number. You get the cures alone and the stock ends up down to maybe $2 at worst. What really killed MGIC today are their Freddie Mac issues. From the MGIC risk factors included in the news release today is a description of the ongoing issue with Freddie Mac:

MGIC and Freddie Mac disagree on the amount of the aggregate loss limit under certain pool insurance policies insuring Freddie Mac that share a single aggregate loss limit. We believe the initial aggregate loss limit for a particular pool of loans insured under a policy decreases to correspond to the termination of coverage for that pool under that policy while Freddie Mac believes the initial aggregate loss limit remains in effect until the last of the policies that provided coverage for any of the pools terminates. The aggregate loss limit is approximately $535 million higher under Freddie Mac’s interpretation than under our interpretation.

$535 million is not small potatoes. I’m not sure of the exact number, but given the $42.3 billion in risk in force, less $7 billion of reinsurance and policies in default, and the 27.8x risk to capital, MGIC currently has capital of about $1.25 billion. So $535 million is a significant portion of that. In fact if you take away that capital you to the 45x risk to capital level that PMI was at before the plug was pulled.

And that’s why the stock was down so much today.

But the above dispute was known about going into the quarter. To an extent I think there is an expectation that the settlement will not be so adverse to MGIC. What has not been known by anybody until just yesterday was that Freddie was going to put the screws to MGIC to come to a settlement by stipulating a number of strict conditions that had to be met before Freddie would agree to let MGIC write business in its MIC subsidiary.

What has happened is this: MGIC has gone above the 25 to 1 risk to capital ratio, and there are some 16 states that have a requirement that you can’t write new business if you go over this ratio. In some of those states MGIC has been able to get waivers to write above that limit, while in others it has not been able to get waivers. To avoid not being able to write in the states where it could not get waivers, MGIC set up another insurance sub, called MIC, to write business in those states. It capitalized MIC with some $440 million dollars. They MGIC approached Fannie and Freddie for permission to write business out of MIC that would subsequently be sold to the GSE’s. Fannie said sure, but Freddie has balked and put conditions on their approval.

The conditions Freddie put on MGIC were stated in a letter than was included as Exhibit 2 in today’s 8-K filing. Below is the excerpt of the 5 conditions that Freddie put on MGIC before they would give the company approval:

One of the misconceptions that I saw reported in a couple cases was that MGIC was being forced into raising capital by Freddie. This isn’t exactly true. The requirement from Freddie is to downstream capital from the parent (MGIC Corp) to the subsidiary (MGIC Inc). The holding company has over $400 million plus in cash and investments and Freddie is asking for $200 million to go to down to the sub. So even in the case that MGIC does have to downstream capital, it is not going to put the holding company in immediate peril. The holding company will still have plenty there to pay interest and pay off the first wave of debts. Its the 2017 debts that aren’t covered by current cash but that’s a long way away.

And I think its still pretty uncertain whether they actually end up having to downstream this capital, I’m not sure what game Freddie is playing, but I suspect this is a tactic by to force a settlement on the litigation.

Freddie Mac certainly holds the upper hand. MGIC sells all their insurance to Fannie and Freddie. Lenders usually don’t know ahead of time which agency a loan will ultimately go to, so not being able to write business for Freddie would create a big obstacle to winning business in general. Freddie knows this and I think is using it as leverage to get MGIC to settle the pool insurance policy dispute with them.

It is worth keeping in mind that all of this only apply to the few states that have a risk to capital limit above 25:1 and that wouldn’t provide MBIA with a waiver. Of the 16, six have so far provided waivers. Three have denied the request. MGIC is waiting on a response from the other seven.

The big question, and the one that I think leaves the black cloud over the stock, is how the litigation goes and whether MGIC is indeed forced to pay up any, some or all of the $535 million discrepancy between their estimate of losses and the estimate of Freddie Mac. I don’t know the answer to this but I do wonder whether Freddie was sliding an offer onto the table by throwing out that $200 million number that had to go from the parent to the sub.

Think of it like this. It’s not really in Freddie’s best interest to send MGIC to the brink. They might, but MGIC has written a lot of Freddie insurance and that insurance is going to be in jeopardy if MGIC is moved into receivership. When the same happened to PMI, they were put on a program where fully insurance claims were no longer paid. As well, Freddie is now run by the government and the government has been pushing for a larger place for private mortgage insurance. Does it really make sense for a government run agency to basically run one of the largest private insurers into the ground?

$200 million, or thereabouts, would make sense as a starting offer for settlement. I can only speculate here, but you have to wonder about the significance of that amount?

So why buy?

I bought today because I don’t believe that a bankruptcy is imminent, I am skeptical that Freddie Mac’s intention is to push MGIC into one, and I believe that there was a lot of misinformation going around today about capital raises and liquidity issues that don’t reflect the reality. Its probably just a trade that the negativity outweighs a reality. Its not an assertion that the negativity is unwarranted. The stock is perhaps not getting back over $2 any time soon, but its reasonable to see it move well above $1 again on some speculation of a positive result with Freddie Mac. If it did I would lighten up once again, because this play right now is all about risk and reward, and the risk is quite large so the potential return has to be equally so.

Aug 1

4 Comments

My Take on Radian’s Quarter

Things continue to get better at Radian. I stepped through the news release this morning when it came out. I really liked what I saw and when the stock opened weakly I checked my doubts at the door and bought a chunk more. Below is the receipts from the practice portfolio I track here.

Having since reviewed the conference call transcripts and presentation slides, I am comfortable in my purchases.

But you have to ignore the GAAP number

Before I get into what the quarter was, first a little bit about what it wasn’t. The first quarter operating results had nothing to do with what was posted in most of the headlines you read about Radian today. You have to ignore the GAAP number. Whenever you read a GAAP number in an article discussing the earnings of a mortgage insurer, I think you have to get more details about what’s going into it, and maybe question the intelligence of the source. Because GAAP for an insurer is more often than not going to include mark to market adjustments that will dwarf the earnings or losses of the real business.

This quarter’s GAAP for Radian was obscured by the commutation (commutation is an agreement to make an up-front pay-out in return for the elimination of the exposure) associated with the default of insurance they had written on a large collateral debt obligation and 6 trust preferred securities . The statutory impact (meaning in the eyes of the regulator) of these reductions in exposure was positive to the company, but because of the accounting oddity that is financial insurance accounting, Radian had to consider the impact to its own viability as a going concern when originally booking the expected loss on these securities, meaning that the exposure was booked on the balance sheet for much less than the actual anticipated loss. The result of the commutation was to realize the rest of the loss (less any net benefit Radian realized from the commutation) so they had to write down a$96 million dollar non-cash loss for the quarter.

And that’s why GAAP is generally a meaningless number for the mortgage insurers.

Radian explains their reserving methodology

So getting past GAAP, my biggest reservation about Radian has been whether they have booked sufficient reserves to meet their claims. In particular, Radian has always booked a surprisingly low claim rate on loans that have been delinquent for 12+ months. As the slide below (from the Q2 conference call presentation) shows, Radian is anticipating a 57% claim rate on the bucket of loans that have been in default for 12 months or more. This number drops to 47% when you account for rescissions and denials of those claims.

Now intuitively, the idea that a loan that has been in default for the last 12+ months only has a 57% chance of resulting in a claim seems somewhat absurd. But Radian has stated on numerous occasions that this is what the historical numbers show. During the conference call today Radian provided some numbers to help back up that claim.

Radian provided the above breakdown of the loans in the 12+ month bucket. 28.8% of that bucket have been in default for 2-3 years. Another 28.3% have been in default for 3+ years. In addition, the company pointed out that “many of our older delinquencies remain in the early stages of resolution, meaning that no foreclosure action has started.”

Clearly these loans are broken. I mean there is a servicer at the other end of these loans and that servicer has every interest to get that loan through to foreclosure as quick as possible. I find it hard to believe that there are servicers out there eating the costs on defaults for 2+ years before getting the loan foreclosed on.

This is the basic argument that Radian has made in the past. If 57% of the loans in 12+ month bucket have been around for 2 years or more, then clearly something else is going on. And if something else is going on, then maybe the expectation that 43% of those loans aren’t going to result in a claim is not such a bad one.

What was really interesting was that the company provided a bit more color than usual with respect to how these late stage lingerers may never result in a claim against Radian.

Based on our preliminary analysis, we believe that a meaningful percentage of these delinquencies, to the extent they do become claims, will be subject to claim curtailments or denial and thus will not become fully paid claims.

You can see in the footnote on the above slide that Radian is reviewing some of these older defaults to see whether they have breached the time limitations. On the conference call one of the questions was with respect to this, and Bob Quint (CFO) expanded on this by saying:

Yes, we mean, we — the servicers are required to begin the foreclosure within 6 months from the default and then may have 1 year to perfect the claim after that. So those are the general time frames within our master policy. Now of course there could be some things within the law that extend that, but those are the general guidelines. So we’re really looking at 18 months from default that the — that’s the time frame: the 6 months plus the year.

If I understand what he is saying correctly, it suggests that potentially a large number of the claims past 18 months due could be in breach of the master policy and therefore not valid for claim. Of course, going back to the original slide, that means that some 57%+ of 12+ month.

So this helps. Now I understand the mechanism by which these late stage delinquencies can be written off without claim. Perhaps I can rest easier about this… well at least a bit.

Provisions down sequentially and year over year

Another pleasant surprise was that provisions on the mortgage insurance book was down sequentially (from $234 million to $208 million). Based on the company’s first quarter guidance and comments I had really thought this number would be up quarter over quarter. That is was down was encouraging. The company did not, however, reduce their provision guidance for the year, deciding instead to leave it at $1.1 billion. However when pressed on the issue in the Question and Answer Quint seemed to buckle a little to the point that they might be sand-bagging this one a bit.

Premiums down as well

I was a little surprised that net premiums earned were down from the first quarter. At first I thought this was simply margin compression. Radian wrote a lot of business in the quarter, and the net insurance written was up some $3 billion, so for overall premiums to be down the old business running off must have a higher premium than the new business. Radian is taking market share, after all, and so it wouldn’t be too unexpected if the company was doing so by shrinking their margins.

But I think that the larger impact is re-insurance. Some of the premiums are getting redirected to the reinsurance companies. You can see when you compare insurance in force with risk in force. Insurance in force expanded to $130.4 billion in Q2 from $127.5 billion in Q1. But risk in force dropped from $33.2 billion to $31.9 billion. The difference is reinsurance agreements that Radian has entered into.

But even if margins are being compressed some, I am not overly worried about it. Margins have expanded significantly since pre-2008 when the mortgage and financial guaranty companies were writing business with 20 basis point margins. Radian looks like they are writing it with 55-60 basis points now. Of course only time will tell if this sort of margin is sufficient, but I am willing to bet that it will be.

And that leads me to my second point. I am fairly confident that the business being written now is going to turn out to be great business in the long run. With credit being as tight as it is, with the US having gone through its consumer debt binge and bust, with the business being 99% prime, 75% with 740+ FICO scores, and only 1.3% with loan to value of greater than 95% I just think we are in a new world here where defaults on new loans trend below rather than above.

Its also not clear how much of the margin compression is due to a move down the risk ladder. If Radian insures more loans in a quarter that have lower loan to values, and from borrowers that have higher FICO scores, premiums are going to come down but that does not necessarily mean the company is taking on more risk.

Keep-in on writing business

Remember that as I wrote a couple weeks ago, the insurers are like movie stars trying to outrun the fireball of their legacy book, and the only way that they stand a chance of doing this is if they keep running by writing new business. Indeed Radian continues to write a lot of new business. In addition to the $8.6 billion in new insurance written in the quarter, Radian wrote another $3.4 billion in July. This is the 7th month in a row that Radian has wrote an increasing amount of new business.

I think that Radian’s strategy of writing as much business as they can, taking market share, and growing, is exactly the right one. I mean clearly this is an example of doubling down. They bet on insurance in the early and mid 2000s and that bet bombed, and so they basically have the choice of walking away (which would likely result in little or no equity for shareholders), or leveraging up and hoping the new business can outweigh the bad. They are leveraging up. As the company pointed out on the conference call today:

If the pace of our new business volume continues, we expect that, by mid-2013, our book of business written after 2008 will be larger than the book written in 2008 and prior.

I like where this is headed. As I said, I decided to buy more stock today near the open. Now we’ll see how it plays out.