PHILADELPHIA, PA—Radian Guaranty Inc., the mortgage insurance subsidiary of Radian Group Inc., is selling the company’s bond insurance business for $810 million to help meet capital requirements for remaining in the mortgage insurance business.
Radian has entered into a Stock Purchase Agreement to sell 100% of the issued and outstanding shares of Radian Asset Assurance Inc., Radian’s financial guaranty insurance subsidiary, to Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd., for a purchase price of approximately $810 million. The purchase price is payable in cash consideration on the closing date. The Stock Purchase Agreement allows for a complete transfer of Radian Asset’s $19.4 billion in net par outstanding to Assured Guaranty Corp. as of September 30, 2014. The company expects to complete the sale of Radian Asset in the first half of 2015, subject to satisfaction of customary closing conditions including regulatory approvals.
“While Radian Asset has been an important part of our history and our success, we are committed to streamlining our business and aligning our strategy toward the mortgage and real estate markets,” says Radian chief executive officer S.A. Ibrahim. “We look forward to simplifying Radian’s focus on our core strengths, which we believe will pave the way for future top-line growth.”
Goldman Sachs & Co. is acting as financial advisor on the sale of Radian Asset.
As previously disclosed, the Federal Housing Finance Agency issued proposed new Private Mortgage Insurer Eligibility Requirements (PMIERs) in July 2014. The public comment period for the proposed PMIERs ended in September 2014, and Radian expects the final PMIERs to be published sometime in the first half of 2015, with an effective date 180 days after publication. The proposed PMIERs state that, subject to the approval of Fannie Mae and Freddie Mac, private mortgage insurers may be granted a transition period of up to two years from the publication date to comply with the PMIERs’ financial requirements.
“This agreement marks an important milestone as we prepare for finalization of the proposed PMIERs in 2015,” says Ibrahim. “While we expect to fully comply, the sale of Radian Asset will help to accelerate our ability to do so.”
The financial requirements included in the proposed PMIERs exclude from Available Assets (as defined in the PMIERs) certain subsidiary capital, including Radian Guaranty’s capital that is attributable to its ownership of Radian Asset. As a result, Radian has been pursuing a plan to monetize Radian Asset, including a sale of the company, in order to increase Radian Guaranty’s Available Assets and better position Radian Guaranty to comply with the PMIERs’ financial requirements. While the sale of Radian Asset is expected to result in a GAAP and statutory loss in the fourth quarter of 2014 (the GAAP carrying value of Radian Asset was $1.25 billion and statutory surplus was $1.03 billion as of September 30, 2014), the consummation of the transactions is expected to increase Radian Guaranty’s Available Assets by approximately $790 million. Radian’s book value per share at September 30, 2014, was $9.08 and the valuation allowance against the company’s deferred tax asset (DTA) per share was $4.37. The loss related to the sale of Radian Asset is not expected to negatively impact the company’s previously disclosed expectations regarding the future reversal of its DTA valuation allowance.
Assuming that the final PMIERs are published on June 30, 2015, with an effective date of December 31, 2015, the company currently estimates that, after giving effect to the net proceeds from the transactions contemplated by the Stock Purchase Agreement and Radian’s available holding company cash balances of approximately $770 million, Radian Guaranty’s projected net shortfall in Available Assets would be approximately $400 million as of December 31, 2015. Additionally, the company further projects that Radian Guaranty would have no net shortfall in Available Assets by June 30, 2017, which is the assumed end of the two-year transition period.
Radian Guaranty expects to fully comply with the PMIERs within the applicable transition period, without a need to raise additional capital. While the proposed PMIERs have been the subject of significant comment from private mortgage insurers, other industry participants and regulators, Radian’s projections are based on the proposed PMIERs in their current form, without giving effect to any potential changes to the financial requirements. In addition, these projections do not take into consideration the company’s expected ability to leverage other options, such as pool insurance commutations and additional reinsurance to achieve compliance earlier than June 30, 2017.