Radian, MGIC call off merger

Radian Group executives today painted a bright future for the Philadelphia mortgage insurer, even though its merger with larger Milwaukee rival MGIC Investment Corp. had been cancelled amid mortgage market turmoil.

And for a time it appeared management had won enthusiastic converts with its vision of Radian's ability to withstand losses, and thrive by returning to its roots in traditional mortgage insurance.

Company shares reached an intraday high of $21.16 - 30 percent more than their opening price of $16.27 - before ending at $18.27, for a gain of 16 cents over yesterday's close, as worries about the housing and credit markets weighed heavily on the stock market.

MGIC's shares lost 29 cents, or 0.98 percent, closing at $30.05. The proposed merger had a value of $4.9 billion when it was announced on Feb. 6.

MGIC and Radian, which had been in a courtroom spat over how much information Radian should provide after MGIC started reconsidering the deal, said they finally agreed that the current troubles in the mortgage industry made it too difficult to combine operations now.

"We are in a market environment right now that is extremely challenging and we need our energies focused on those challenges," Radian's chief executive Sanford A. Ibrahim said during a conference call with investors and analysts.

An important issue for Radian, which employs between 500 and 600 in Center City, is credit ratings agencies' take on its health without MGIC's deeper pockets. Downgrades, such as one today by Fitch Ratings, could make lenders hesitate to do business with Radian. Radian executives said that two major customers recently had committed to continue doing business with the company.

Standard & Poor's Ratings Services said it expected to decided in the next three weeks whether to affirm Radian's rating, or downgrade it by one notch.

"Regardless of the rating, there is a strong possibility that the outlook will be negative because of the challenges confronting the mortgage and housing sectors as well as Radian [mortgage insurance's] recent underperformance compared with its peers," Standard & Poor's credit analyst James Brender said.

Radian projected $623 million in losses from the subprime mortgages for which it has provided primary insurance. That would amount to 29 percent of its overall projected losses, though subprime accounts for only 12.6 percent of its risk in force.

In addition, Radian has two unusual lines of business - insuring second mortgages and insuring an esoteric form of securities linked to interest paid on subprime mortgages - that are expected to incur $570 million in losses in coming years, the company said today.

Ibrahim said in an interview today that Radian, along with other mortgage insurers, offered such nontraditional products in response to the decline in standard mortage insurance during the subprime and exotic mortgage boom.

The projected losses disclosed today are in addition to the possible write-off of its entire $518 million investment in Credit-Based Asset Servicing & Securitization L.L.C., a company that specializes in servicing subprime mortgages and packaging them into securities.

Radian has a deal in the works to sell part of its stake in Sherman Financial Group, which buys distressed consumer debt, for $260 million. That money would be added to Radian capital backing mortgage insurance.

Faced with major losses, Radian last month was still in favor of its acquisition by MGIC, even as the buyer got cold feet. The deal's $185 million breakup fee was eliminated in the termination agreement.

The scuttling of the merger allows Ibrahim, who was slated to be president and chief operating officer in the proposed MGIC Radian Financial Group Inc., to stay in the city he came to from India in 1976 to attend the Wharton School of the University of Pennsylvania.

"It's exciting that Radian continues to be a force in Philadelphia," Ibrahim said.