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Shares of Radian Group (NYSE: RDN), a financial company that primarily provides mortgage insurance to mortgage lending institutions, plunged 12% during Thursday's trading session after the company reported its first-quarter earnings results before the opening bell. As you can probably surmise by the reaction, Radian Group's results came up well short of expectations.
For the quarter, Radian Group reported a nearly 8% year-over-year decline in revenue to $288.8 million, yet it managed a 16% improvement in net income to $76.5 million, which worked out to $0.37 in EPS on an adjusted basis. New mortgage insurance written also rose by 25% year over year to $10.1 billion. Finally, book value increased by 9% to $13.58.
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Why the tumble? Wall Street had been looking for Radian Group to deliver $0.43 in adjusted first-quarter EPS, meaning it fell $0.06 per share shy of expectations. Further, there's disappointment with the $10.1 billion in underwriting during the first quarter. Even though this represents a 25% year-over-year increase, it was down significantly from the $13.9 billion in new mortgage insurance written during the sequential fourth quarter.
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Of particular note, refinance insurance fell to just 16% of total new mortgage insurance written compared to 27% during the fourth quarter, implying that the higher interest rate environment is beginning to hamper Radian's refinance-related underwriting business.
If there was a bright spot here, it's that Radian Group's primary mortgage portfolio continues to look less risky and more appealing to long-term investors, albeit it's taken the company the better part of a decade to clean things up. Its first-quarter report notes that 89% of its business was written after 2008, and the number of primary delinquent loans decreased by a double-digit percentage on both a sequential quarterly basis and a year-over-year basis.
The big question that remains unanswered is what might happen to Radian's mortgage insurance underwriting as interest rates rise. It's quite possible we could see a spoiled homeowner spoil Radian's mortgage insurance business. We've seen numerous instances over the past couple of years of mortgage applications plunging with temporary 50 or 75 basis-point increases in the underlying 30-year mortgage rate. If consumers are so unwilling to accept such a nominal increase, which is still well below the historic average mortgage rate, then Radian's quarterly results could be in for some potentially wild fluctuations in the quarters to come.
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