There appears to be some light ahead for mortgage insurers.

Radian Group Inc. reported a sunny outlook last week despite a spike in insurance claims that contributed to a 30.7% decline in first-quarter net income, to $113.5 million. Related Links Complete 1Q 2007 Earnings Coverage
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The Philadelphia mortgage insurer and financial guarantor is "getting less concerned over time with what we are seeing through the rearview mirror and more excited about what we are seeing … through the windshield," chief executive Sanford A. Ibrahim said on a conference call Wednesday. "What we want to leave behind us is passing by each day."

Geoffrey Dunn, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said Friday that mortgage insurers took hits in the first quarter because of an increase in loss severity - a problem he called temporary.

"The pressure on losses and reserves reflects a seasoning of the book and a changing delinquency mix toward higher loan values, not an underlying credit problem," Mr. Dunn said.

"This issue can be gradually worked through over the next 12 to 18 months and lead to gradually improving returns."

Mortgage insurer stocks rallied last week because "the market was expecting a lot worse adjustments to earnings and there's no evidence that there's a credit problem," he said.

Radian increased its loss provision by 36.1% year-over-year, to $107 million, and the company raised its guidance for paid claims for the full year to a range of $380 million to $410 million, from $340 million to $370 million.

But the company left its 2008 claims projection of $350 million to $400 million unchanged, saying it expects to work past the higher claims from large amounts of bulk coverage written from 2003 to 2005. Radian said it is insulated against more recent vintages because it has been taking second-loss positions and backing away from second-lien coverage.

Radian also gave an update on a large second-lien transaction that prompted an outsize provision in the third quarter. "Through the first quarter, although delinquency counts have begun to stabilize, the deal has not shown the kind of improvement we had anticipated," C. Robert Quint, the chief financial officer, said on the call. "We are working constructively with our counterparty to attempt to satisfy all claim issues in a fair way that mitigates overall losses."

In March National City Corp. in Cleveland said an insurer had rejected "a meaningful number of claims filed" on a portfolio of second mortgages it had retained after selling the subprime unit First Franklin Financial Corp. At the time, people familiar with the situation told American Banker that the insurer was Radian.

So far, Radian said, claims from the deal were $21 million and it has reserved another $27 million.

Radian reported a 34.7% rise in flow mortgage insurance written, to $7 billion. Mark Casale, the president of Radian Guaranty Inc., pointed to a drop in production of piggyback mortgages, which compete with mortgage insurance, and a "little bit" of a contribution from a newly enacted tax deduction on mortgage insurance premiums.

Also, he said, the company's familiarity with Wall Street firms through its guarantee business was giving it a leg up as such firms have become more involved in mortgages. Radian has agreed to merge with MGIC Investment Corp. in Milwaukee.

PMI Group Inc. is scheduled to report first-quarter results today. Keefe Bruyette's Mr. Dunn said the Walnut Creek, Calif., insurer probably will report similar problems with delinquencies and severity but that he expects the company's top-line growth will show some improvement.

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