Radian Group Inc. will transfer bond insurance subsidiary Radian Asset Assurance Inc. to Radian Guaranty Inc. in an effort to prop up the mortgage insurer, the company said yesterday.
While releasing its second-quarter earnings, Radian Group said the decision to move Radian Asset and its $960 million in statutory capital surplus represented the most effective capital raising strategy of those it considered, which included selling the bond insurer. The company hopes the plan will improve counterparties' perceptions of Radian Guaranty and the company's risk-to-capital ratio, without diluting shareholders' interests, the company said.
Radian expects to complete the transfer during the current quarter. Regulators and banks have already approved the move, Radian said.
The second-quarter earnings release highlighted Radian's troubles in the mortgage market, with the Radian Group reporting a net loss of $392.5 million, while creating a pre-tax first-lien premium deficiency reserve of $421.8 million. The mortgage mess has prompted Radian Guaranty to update its guidelines and pricing, requiring higher down payments in markets where home prices have declined, the company said.
Radian Asset itself has significantly less exposure to mortgage and mortgage-related assets than many other financial guarantors. But like many other bond insurers, Radian's new business prospects have dampened significantly in the current market. It has written just $330.4 million in new deals in 2008, compared to $1.8 billion million at this point in 2007, according to Thomson Reuters data.
Radian, which operated under a double-A business model, was the first of the bond insurers to get downgraded when Fitch Ratings dropped it to A-plus last September. The rating action followed the deterioration of Radian Group's planned merger with MGIC Investment Corp.
In a conference call, Radian Group said it expects Radian Asset Assurance will write minimal new business in the future. This will enable release of significant capital to Radian Guaranty over time, the company said.
"This internally generated capital support that is incremental over time to Radian Guaranty, significantly exceeds the capital we were considering to raise externally with the benefit of not diluting our shareholders, and will translate into a strongly capitalized mortgage insurance entity," Radian Group chief executive officer S.A. Ibrahim said in a conference call with investors.
Radian said it would not take dividends out of Radian Asset that would jeopardize the bond insurer's capital position. Radian Asset recently declared an ordinary dividend of $107.5 million to Radian Group, which then contributed $100 million to Radian Guaranty. The company said Radian Asset has no remaining dividend capacity in 2008.
Radian Group stock rose 8.03% yesterday to $ 2.96. The stock sits well below its 52-week high of $26.72, but also much higher than its low of $0.70, where it traded as recently as July 3.