Radian Group Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018. Radian operates Mortgage Insurance and Services businesses. Mortgage Insurance provides private mortgage insurance and related credit-risk solutions; Services provides mortgage, real estate and title services. EnTitle Direct was acquired in March 2018.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $319.3 million | $302.9 million | $610.8 million | $591.7 million |
| Pretax income (loss) | $180.6 million | ($35.5 million) | $323.0 million | $79.2 million |
| Net income (loss) | $208.9 million | ($27.3 million) | $323.4 million | $49.1 million |
| Diluted earnings (loss) per share | $0.96 | ($0.13) | $1.48 | $0.22 |
| Operating cash flow | Not separately stated | Not separately stated | $300.8 million | $206.4 million |
- Insurance premiums earned rose 10% in both the quarter and first half, to $251.3 million and $493.9 million, respectively. Net investment income increased to $37.5 million for Q2 and $71.4 million for six months.
- Investment and other financial-instrument losses were $7.4 million in Q2 and $26.3 million for six months, versus gains in the comparable 2017 periods, largely reflecting unrealized losses on trading investments amid rising interest rates.
- Mortgage Insurance adjusted pretax operating income, a non-GAAP measure, was $197.4 million for Q2 and $369.2 million for six months, up from $170.4 million and $305.0 million. Its loss ratio was 7.8% for Q2 and 11.6% for six months; the six-month ratio improved from 14.4%.
- Services revenue was $36.8 million in Q2 and $70.0 million for six months, down from $37.8 million and $75.8 million. Services had adjusted pretax operating losses of $6.4 million and $14.0 million, respectively.
- At June 30, total assets were $6.14 billion, stockholders’ equity $3.20 billion and book value $15.01 per share. The loss reserve was $451.5 million, down from $507.6 million at year-end 2017.
- Senior notes totaled $1.03 billion; FHLB advances were $115.3 million at a weighted-average rate of 2.21%. The $225 million revolving credit facility was undrawn. Holding-company liquidity was $202 million, or $427 million including the revolver.
- Six-month investing cash outflow was $376.7 million and financing cash inflow was $84.4 million; cash and restricted cash ended at $104.7 million. Operating cash flow improved principally due to higher premiums and lower claims paid.
Material changes versus the prior comparable period
- Reported earnings rebounded from a Q2 2017 loss, when Radian recorded a $184.4 million goodwill impairment and $15.8 million of other intangible-asset impairment. Q2 2018 also benefited from a $73.6 million tax benefit tied to the IRS settlement and related state and local tax-liability reversals.
- Primary new insurance written reached a quarterly record $16.4 billion in Q2; six-month NIW was $28.1 billion, up 15.1%. Primary insurance in force increased to $210.7 billion from $200.7 billion at year-end. The 12-month persistency rate was 80.9%, versus 78.5% a year earlier.
- Primary default inventory declined 20.9% from year-end to 22,088 loans; the default rate was 2.24%, versus 2.92% at year-end. Claims paid were $116.5 million for six months, down from $173.4 million. Favorable reserve development reflected higher-than-estimated cures.
- Investment-related accumulated other comprehensive income shifted to a $57.9 million loss from $23.1 million of income at year-end, reducing book value per share by about $0.39.
- Radian repurchased approximately 3.0 million shares for about $50 million during the first half, exhausting the authorization. Services continued restructuring; first-half charges were $1.5 million.
Outlook, commentary and risks
- Management projected approximately $55 billion of 2018 NIW and expected the private mortgage insurance market to be slightly larger than in 2017, despite lower overall mortgage originations. The filing cites industry expectations for 2018 originations to decline about 6%, with refinancing down about 24% and purchases up about 4%.
- Management expects new-business pricing to produce a mid-teens blended unlevered return on required capital over policy lifetimes, assuming current projections and proposed PMIERs changes. Pricing adjustments are expected to flow through gradually; management estimated about three years for half of in-force business to reflect current pricing, assuming NIW, mix and persistency remain constant.
- Radian Guaranty was compliant with PMIERs at quarter-end, with approximately $3.7 billion in Available Assets and a $480 million, or 15%, cushion over Minimum Required Assets. Management expected proposed PMIERs changes to take effect at the end of Q1 2019 and anticipated continued compliance, but the changes were not final.
- The IRS settlement resolved the dispute over tax years 2000–2007. Radian expected to pay the IRS about $31 million from $89 million of qualified deposits, with the remainder returned. The settlement benefit increased Q2 earnings per share by $0.34; the expected payment reduces holding-company liquidity.
- Management expected most hurricane-related defaults to cure by year-end 2018. Their elevated default-related capital requirements temporarily reduced the PMIERs cushion. Actual cures, claim rates, claim severity and economic recovery could differ from estimates.
- Risks include competitive pricing and mortgage-insurance alternatives, changes to GSE eligibility or PMIERs, higher interest rates and investment volatility, the accuracy of loss reserves, and Services’ transactional revenues and customer concentration. Ocwen arbitration continued on claims involving approximately 2,500 certificates; the company could not estimate a reasonably possible loss. A separate SEC inquiry concerning single-family rental securitizations was ongoing. Management said pending legal matters were not expected to materially harm consolidated financial condition, while acknowledging uncertain outcomes.
Important facts for investors to verify
- Whether final PMIERs requirements and Radian’s Available Assets cushion match management’s expectations.
- Whether the IRS payment and return of the remaining qualified deposits occur as described, and the resulting holding-company liquidity.
- Whether default cures, paid claims and reserve assumptions—including hurricane-related loans—support the reported loss reserves.
- Whether 2018 NIW, pricing mix, persistency and projected returns develop in line with management’s outlook.
- Whether Services restructuring improves segment profitability and cash generation, and whether customer concentration or legal matters change materially.