Jett, Im glad you're back, we were looking for you over the last week. You know where I stand. I have laid it out here for you. Over next four months as Radian presents it's monthly delinquency reports, the only question will be is, what happen to all the defaults? .
Defaults are going to vanish and the only thing left will be the $3.2 billion in reserves; which Radian will then convert to profits. RDN will Skyrocket like a missle headed to the heavens.
Sentiment: Strong Buy
You are correct that if paid claims end up being less than expected and it turns out RDN over reserved, then the release will show up on the Income Statement as profit and flow to the Balance Sheet as retained earnings -- which will increase Book Value.
However, the amount of claims vs. delinquencies is not as simple as you present. RDN does not reserve 1 for 1 for each delinquency. They assume that only a percentage of the delinguencies will turn into claims. That is why they track their cure rates, recision rates, and previous cures that return to delinquent loans.
Most longs here, including myself, are betting that RDN is not under reserved (and hopefully a little over reserved) and that new delinguencies are about to go down dramatically as jobs have been getting better. Delinquncies are a direct reflection of people having jobs. Also prices have firmed which should reduce the "severity" on each claim paid.
If the defaults declined because claims are paid the reserve will decrease but so does cash. The only gain or loss to the P & L will be to the variance between the estimated claims and the actual payments.
Claims are paid from the Loan loss provision expense, which would be zero in your scenario.
If new claims are paid from the loan loss provison only and then existing claims are paid from the "reserve for loan losses and lae" then the expense loan loss provision would be quite low.
In Q1 2012 Radian paid new claims and existing claims from the loan loss provision of $266 million vs. $427 million in March 31, 2011. The "reserve for loan losses and lae" was $3.316 billion and actually increased from December 31, 2011 when it was $3.310 billion.