Radian Group story updated from 1:47 p.m. ET with changes throughoutNEW YORK ( TheStreet) -- Radian Group ( RDN) shares moved lower mid-Wednesday as the mortgage insurer's first-quarter earnings contained a couple of confusing numbers that management explained poorly to analysts on an 11 a.m. conference call Wednesday. One issue was a complex stock-based compensation award that appears to penalize the company when its stock performs well. Radian shares, which opened only slightly lower and spent some time in positive territory Wednesday morning, moved lower after an 11 a.m. analyst call and were down by more than 5% at one point. They recovered slightly by mid-afternoon and were down 3.43% to $11.54 at about 2:15 pm. Compensation-related expenses cost Radian $38 million in the first quarter vs. $13.5 million in the fourth quarter and $8 million in the first quarter of 2012. Overall, Radian posted operating losses of 16 cents per share before taxes, 7 cents below consensus and 44 cents lower than Credit Suisse estimates. A report from Credit Suisse referred to the compensation issue as "more one-time in nature." However, at least three analysts asked Radian about it on Wednesday's 11 a.m. earnings call, and their questions suggested they don't fully understand how the deal works.
Radian shares gained a whopping 75% in the first quarter as its percentage of delinquent loans have declined and business has picked up. Investors are also counting on an increased role for private mortgage insurers as the government looks for ways to reduce its dominant role in U.S. housing. While Radian management attributed the increased compensation-related costs to the strong stock performance, it doesn't appear to be quite that simple. When KBW analyst Bose George asked if a flat stock price would drive the compensation number to zero, Radian CFO Bob Quint replied that it would not, but might more closely resemble the costs in the first and fourth quarters of last year.
"The amount above those numbers was really generated by the increase in stock price and then this quarter we also had some volatility increases and relative performance increases so all of those kind of hit this quarter," Quint said. The confusion prompted Dowling & Partners analyst Geoffrey Dunn to ask "is there any cost-effective way to hedge this out and negate it?" CEO S.A. Ibrahim credited Dunn with "an interesting question," adding "it's a good problem to have and everybody should be happy that our stock went up as much as it did and this was driven in part by the fact that for the years in which this award was given out we did not have enough equity to give out equity-settled awards and so we will consider equity-settled awards as opposed to cash-settled awards in the future." But Ibrahim's response is a head-scratcher that raises larger questions. Settling the awards in stock instead of cash wouldn't make much of a difference, KBW's George said in an interview Wednesday. "It would still go through the income statement and it would still be seen as equally negative because in either case it's a cost to the company," George said. Nonetheless, George, who has an "outperform" rating on Radian, says he isn't overly concerned about the compensation issue because "the stock isn't going to go up 75% every quarter." George believes Wednesday's selloff may also have reflected investor anxiety over a rise in paid claims to $1.3 billion or $1.4 billion from earlier guidance of $1 billion. Again, however, George says the number is only higher because Radian is resolving claims faster than anticipated. "The paid claims doesn't affect the earnings because they've already reserved for it. The question is just when are they paying it." Even if George is correct that the compensation issue and the higher-than-expected claims aren't major problems, Radian Group management appears to have done a poor job of communicating these points to investors. -- Written by Dan Freed in New York. Follow @dan_freed