ild, re your PM, I thought I'd post my RDN analsyis so that others can look at it and draw their own conclusions. Note that I take no responsibility for the accuracy of my analyis. Use it at your own risk.
DISCLOSURE (short RDN, PMI, and various other sub prime crap)
after reading about RDN's stock buyback, the first thing I did was look at yahoo stats. it says they have $5 billion in cash. I read that and said NFW.
I started looking at the last 10Q. They have $30 mil cash as of 9/30. (they also have $49 mil in trading securities.) this doesn't seem like a lot. I don't know how many more shares they are going to buy back with just 30 mil in the bank.
the next thing I saw was $777 mil in reserves for losses. (later I use $533 mil, which is mortgage insurance only). I looked for the total value of all insurance in force and couldn't find it.
they have $12 bil in notional value of derivatives that the company says are:
...include investments in convertible debt securities, interest rate swaps, selling credit protection in the form of credit default swaps and certain financial guaranty contracts that are considered credit default swaps.
the $12 bil in derivatives is against 3 bil in shareholders equity. a derivative plow up is certainly going to cause a large problem.
The only area where I really dug into the meat was in mortgage insurance, which represents 54% of their business. the rest is financial guarantee (WTF is this?) and financial services.
in the following they say they are going to be writing more sub prime shit business. I found it even more interesting that in the second paragraph it says a reinsurance company (not affiliated with RDN) was formed in bermuda for the specific purpose of reinsuring some of the risk in this business. it may be typical, but I'd rather see reinsurance business with a more diversified reinsurance company.
In addition to insuring prime loans, Mortgage Insurance insures non-traditional loans, primarily Alt-A and A minus loans (collectively, referred to as “non-prime” business). Alt-A borrowers generally have a similar credit profile to the Company’s prime borrowers, but these loans are underwritten with reduced documentation and verification of information. The Company typically charges a higher premium rate for this business due to the reduced documentation. The Company considers this business to be more risky than prime business, but not significantly more risky with respect to loans with relatively high FICO credit scores above 660. The Company also insures Alt-A loans with FICO scores below 660 and charges a significantly higher premium for the level of increased risk. Beginning in the second quarter of 2004, the Company significantly reduced the amount of lower FICO, Alt-A business written. The Company expects to continue to reduce the volume of lower FICO Alt-A business written in the future. The A minus loan programs typically have non-traditional credit standards that are less stringent than standard credit guidelines. To compensate for this additional risk, the Company receives a higher premium for insuring this product, which the Company believes is commensurate with the additional default risk. During the third quarter and first nine months of 2004, non-prime business accounted for $4.5 billion and $11.7 billion, or 38.5% and 35.2%, respectively, of Mortgage Insurance’s new primary insurance written as compared to $4.5 billion and $18.7 billion, or 27.8% and 33.6%, respectively, for the same periods in 2003. Of the $4.5 billion of non-prime business written for the third quarter of 2004 and $11.7 billion of non-prime business written for the first nine months of 2004, $2.6 billion or 57.8% and $7.5 billion or 64.1%, respectively, was Alt-A. At September 30, 2004, non-prime insurance in force was $35.6 billion or 30.8% of total primary insurance in force, compared to $36.4 billion or 30.0% at September 30, 2003. Of the $35.6 billion of non-prime insurance in force at September 30, 2004, $22.4 billion or 62.9% was Alt-A. The Company anticipates that the trend of a high mix of non-prime mortgage insurance business and non-traditional insurance products will continue as a result of structural changes and competitive products in the mortgage lending business.
In the third quarter of 2004, the Company developed an innovative way to reinsure its unexpected losses and to manage its internal credit limits through unaffiliated reinsurance companies funded by the issuance of credit-linked notes. On August 3, 2004, the Company entered into a reinsurance agreement under which it ceded a significant portion of the risk associated with an $882 million portfolio of first lien, non-prime residential mortgage loans insured by the Company. The Company’s counterparty under the reinsurance agreement is SMART HOME Reinsurance 2004-1 Limited (“Smart Home”), a Bermuda reinsurance company that is not affiliated with the Company, which was formed solely to enter into the reinsurance arrangement. Smart Home was funded in the capital markets by its issuance of credit-linked notes rated between AA and BB by S&P, and between Aa2 and Ba1 by Moody’s, that were issued in separate classes related to loss coverage levels on the reinsured portfolio. The Company anticipates retaining the risk associated with the first loss coverage levels and may retain or sell, in a separate risk transfer agreement, the risk associated with the AAA-rated coverage level.
I found this statement fascinating:
The average loss reserve per default increased from $10,253 at the end of 2003 to $11,169 at September 30, 2004.
I thought how can they only have a loss of $11k per claim? I would think that when a house is foreclosed upon, the loss would be much more than that. If it hasn't been in the past it certainly is going to be in the future.
Then a found a statistic which said their avg claim is 26k, which seems more reasonable, but still isn't a lot. I am not sure why there is a discrepancy in the numbers.
The following are their default rates:
3% of their prime loans are in default
12% of their sub-prime loans are in default
6% of their "in-between loans are in default
given that the only people who need PMI are those with less than 20% equity, when housing crashes those numbers are going to go way up.
The numbers aren't presented in an easy to understand form, but this is the most damning statistic I found:
they have a total of $533 mil in bad claim reserves against $115 bil in total mortgage insurance in force. so they have 50 cents in reserves against every $100 in force. assuming I read the information properly (it's not presented clearly), they are in deep shit when the housing bubble bursts. |
