Radian Banks on Solid Insurance Portfolio, Financial Strength
Radian Group Inc. RDN is well-poised to gain from robust mortgage insurance portfolio and improved liquidity position.
The company beat estimates in each of the trailing four quarters with the average positive surprise being 13.56%.
Radian Group’s ROE of 17.3% compares favorably with the industry’s figure of 8.3%. This reflects efficient utilization of shareholders’ funds.
The stock also has a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.
Factors Driving Radian Group’s Performance
The company continues to gain from a solid mortgage insurance portfolio, which has been enabling it to write new mortgage insurance business for quite some time. A strong mortgage origination market and increased private mortgage insurance penetration rates have been benefiting the company’s new mortgage insurance written (NIW). The momentum continued in first-quarter 2020 with NIW surging 53% year over year. On the basis of performance so far this year and a decent mortgage origination market, the company expects to write new mortgage insurance business of more than $60 billion in 2020.
Increased volumes of mortgage insurance business and strong persistency rates have also led to rise in Radian Group’s primary insurance in force. However, the company expects higher mortgage finance volumes due to the COVID-19 pandemic-induced financial turmoil, which in turn are likely to result in lower persistency rates for its insurance portfolio.
Moreover, Radian Group has been making every effort to streamline its business operations with an aim to focus on core business and services with higher-growth potential and ensure more predictable and recurring fee-based revenues.
Additionally, the company’s improved liquidity position has led to a strong balance sheet. Radian Group even has a credit facility of $265.5 million that can be utilized till January 2022. Its total debt to total capital of 21.6% lies below the industry’s average of 30.3%. Further, the company’s times interest earned of 16.4 is good when compared with the industry's figure of 10.3, implying that its earnings are sufficient to cover interest obligations.
By virtue of its robust capital position, Radian Group also engages in effective capital deployment. Its dividend yield of 3.2% compares favorably with the industry’s figure of 2.8%, thus making the stock an attractive pick for yield seeking investors. However, the company has withdrawn its share repurchase program as of March 19 owing to the volatile market condition.
Notably, the Zacks Consensus Estimate for earnings for the second quarter has been revised upward by 27.8% over the past 30 days.
However, shares of this Zacks Rank #3 (Hold) company have lost 31.8% in a year compared with the industry’s decline of 22%. Escalating expenses, which are likely to put pressure on margin expansion, remain a concern. Notably, in first-quarter 2020, net margin contracted 100 basis points (bps) sequentially and 630 bps year over year.
Nevertheless, we believe that the company’s strong fundamentals are likely to drive its shares going forward.
Stocks to Consider
Some better-ranked insurance stocks include CNO Financial Group, Inc. CNO, Kinsale Capital Group, Inc. KNSL and Palomar Holdings Inc. PLMR. While Kinsale Capital sports a Zacks Rank #1 (Strong Buy), Kinsale Capital and Palomar carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CNO Financial is a top-tier holding company for a group of insurance companies operating throughout the U.S. It has a trailing four-quarter positive earnings surprise of 12.51%, on average.
Kinsale Capital offers various insurance and reinsurance products in the United States. It has a trailing four-quarter positive earnings surprise of 3.44%, on average.
Palomar provides specialty property insurance products for individuals and businesses. It has a trailing four-quarter positive earnings surprise of 10.93%, on average.
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