Radian Takes Big Conseco Hit

Manufactured housing deal cost Radian $96 million

January 22, 2004

By PATRICK CROWLEY

Radian is reducing fourth-quarter earnings by $62 million, or 66 cents a share. The losses will be paid out over the next several years, though none have been paid to date, the company said.

Dow Jones reported that according to a survey of 12 analysts by Thomson First Call, Radian is expected to make $1.14 a share in the fourth quarter.

Radian Insurance Inc., a subsidiary of private mortgage insurer Radian Guaranty Inc., provided credit enhancement on $45 million in ‘AA’ certificates, $40 million in ‘A’ certificates and $26 million in ‘BBB’ certificates out of a $1 billion transaction.

“This transaction performed within expectations until the end of 2002,” Radian Chief Financial Officer Bob Quint said in the statement. “At that time, the bankruptcy of Conseco led to a deterioration in performance.”

The performance did improve last year but “It became evident during our year-end surveillance review that the correct action was to establish reserves for the entire exposure,” Quint said.

Radian has $15 million in cash reserve set aside for the transaction. That will be increased by $96 million to cover the claims.

“While we believe this is an isolated incident, we are no longer directly participate in this asset class,” Radian Chairman and CEO Frank P. Filipps said in the statement. “Nevertheless, we have learned a difficult lesson limiting our single market exposure and will apply this lesson going forward.”

Conseco Finance was liquidated and sold to Green Tree Servicing Inc. last year as part of Conseco Inc.’s bankruptcy reorganization.

In an email, Conseco Inc. spokesman James Rosensteel referred questions to Green Tree Servicing. Executives there could not be reached to comment.

Radian also said it has “direct exposure” of $140 million in two other transactions with a different manufactured housing lender.

In addition Radian Reinsurance Inc., also a financial guaranty subsidiary of Radian, has $225 million in reinsured manufactured housing exposure.

The company said it does not expect losses on any of the transactions.

Standard & Poor’s Ratings Services (S&P) lowered its outlook to negative from stable on Radian Asset Assurance Inc., Radian Reinsurance Inc. and Radian Group, the agency said in a statement.

“Management has indicated that an amount equal to the tax-adjusted increase to reserves of about $65 million will be contributed as new paid-in capital form the Radian Group, thereby essentially maintaining Radian Asset’s capital adequacy position,” S&P said.

“Nevertheless, the loss is indicative of some continued weakness with respect to the company’s controls and risk management process and perhaps also indicative of inappropriate risk tolerance,” S&P said.

The agency went on to say it is reviewing the company’s exposure in the structured finance manufactured housing sector, where Radian’s “overall performance” is “deteriorating.”

“At a minimum, increases in capital charges in several transactions are likely,” S&P said.

Fitch Ratings affirmed all its ratings within the Radian Group, the agency said in a statement.

But Fitch also said it is “conducting a comprehensive review of Radian Asset and Radian Reinsurance, and … expects to have further commentary on these companies by the end of February.”

“While financial guarantors are not immune to suffering losses,” Fitch said, “the unexpected writedown of the entire insured exposure in this instance is concerning and highlights the risks of Radian Asset’s business strategy, which is one of insuring lower credit quality business than its higher-rated financial guaranty competitors.”

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com