Radian Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results. Radian provides private mortgage insurance and mortgage and real-estate services. The financial-guaranty subsidiary was classified as discontinued operations and was sold on April 1, 2015, after quarter-end.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $290.7 million | $258.2 million |
| Net premiums earned | $224.6 million | $198.8 million |
| Services revenue | $30.5 million | None reported |
| GAAP pretax income from continuing operations | $137.5 million | $127.1 million |
| Net income from continuing operations | $91.7 million | $146.0 million |
| Net income, including discontinued operations | $92.3 million | $202.8 million |
| Diluted EPS | $0.39 | $0.94 |
| Adjusted pretax operating income (non-GAAP) | $123.9 million | $84.0 million |
| Cash from continuing operating activities | $0.1 million | $(121.8) million |
| Total cash from operating activities | $(12.1) million | $(137.0) million |
Net investment income was $17.3 million, while net gains on investments and other financial instruments were $16.8 million, down from $43.0 million. The 2015 continuing-operations tax provision was $45.7 million, compared with an $18.9 million benefit in 2014; management attributed the difference principally to the reversal of substantially all of its deferred-tax valuation allowance in Q4 2014. Services revenue reflects Clayton, acquired in June 2014, so the periods are not directly comparable for that segment.
Balance sheet, debt and liquidity
- At March 31, 2015, total assets were $6.81 billion, total liabilities were $4.54 billion and stockholders’ equity was $2.21 billion, up from $2.10 billion at year-end 2014.
- Long-term debt carrying value was $1.219 billion. Its estimated fair value was $1.862 billion.
- Cash was $57.2 million and consolidated investments were $3.62 billion. Holding-company immediately available unrestricted cash and liquid investments were approximately $662 million at quarter-end, before a subsequent $45 million increase from release of sale-related escrow.
- Radian Guaranty received $789 million in net proceeds from the April 1 sale of Radian Asset Assurance. The proceeds went to Radian Guaranty, not directly to the holding company.
- Radian Guaranty’s statutory risk-to-capital ratio was 17.1:1, versus 17.9:1 at December 31, 2014. Its claims-paying resources were $4.0 billion.
Mortgage insurance and segment performance
- Mortgage Insurance adjusted pretax operating income rose to $125.9 million from $84.7 million. Premiums earned increased with higher insurance in force and premium recognition from single-premium policy cancellations; other operating expenses also declined.
- Primary new insurance written was $9.4 billion, versus $6.8 billion. Management estimated 2015 new business volume would exceed 2014’s $37.3 billion, based on then-current mortgage-origination projections.
- Primary insurance in force was $172.1 billion and primary risk in force was $43.4 billion. Post-2008 vintages represented approximately 70% of primary risk in force; the legacy portfolio was approximately 30%.
- Primary defaults declined to 40,440 loans from 45,319 at year-end; the primary default rate was 4.63%, compared with 5.19%. New primary defaults fell 15% year over year.
- Mortgage insurance loss reserves were $1.385 billion, down from $1.560 billion at year-end. The decline reflected paid claims, cures, rescissions and denials exceeding new default notices, with favorable development on prior-year defaults.
- Total claims paid were $207.1 million, including $98.5 million under the BofA Settlement Agreement. Management expected 2015 claims paid of $600–700 million, including approximately $250 million related to that agreement.
- Services reported $30.7 million of revenue, $12.3 million of gross profit and a $2.0 million adjusted pretax operating loss. Its ten largest customers generated approximately 60% of segment revenue; the largest accounted for approximately 13%.
Material developments, outlook and risks
- PMIERs: Final FHFA requirements were issued April 17, 2015 and take effect for existing eligible insurers on December 31, 2015. Management expected Radian Guaranty to comply after the sale proceeds and a portion of holding-company liquidity are applied. Its estimate indicated an approximately $330 million holding-company contribution, assuming conversion of about $130 million of assets and full GSE recognition of about $145 million of quota-share reinsurance benefit. These assumptions and the estimate are subject to change. PMIERs also increase capital and operational requirements and may reduce returns on subsidiary capital.
- Asset Assurance sale: The April 1 sale was for approximately $810 million gross and $789 million net proceeds. It was intended to support PMIERs compliance and refocus Radian on mortgage and real-estate markets. The sale removed a historically volatile business from future results.
- BofA settlement: Implementation began February 1, 2015. Approximately 12% of subject loans required consent from other investors, with the deadline extended to June 1, 2015. The reserve assumes those investors consent; non-consent could result in reversal of the related reserve. The agreement drove claim reinstatements and payments in the quarter.
- Tax dispute: The IRS issued notices asserting approximately $157 million in taxes and penalties, plus approximately $118 million interest as of March 31, 2015. Additional state taxes, penalties and interest were estimated at about $30 million. The notices also included approximately $105 million primarily relating to a disputed 2008 NOL carryback. Radian petitioned the U.S. Tax Court and said resolution could take several years; outcomes and payment timing remain uncertain.
- Other risks: Radian cited intense mortgage-insurance pricing competition, refinancing and persistency effects, possible challenges to loss-mitigation actions, reserve-estimation uncertainty, interest-rate exposure, and potential additional regulatory capital needs. A Minnesota regulatory inquiry into captive reinsurance remained unresolved. Three RESPA class actions were settled for dismissal and release.
Most important facts for investors to verify
- Whether Radian Guaranty meets PMIERs at the effective date, including the actual capital contribution, asset conversions and GSE-approved reinsurance benefit.
- Whether the remaining BofA settlement investor consents are obtained, and how settlement payments and reserve assumptions develop.
- Developments in the IRS Tax Court case, including the disputed NOL carryback and potential total exposure.
- Whether mortgage defaults, claims, cures and loss-reserve assumptions continue to improve, particularly as rescissions and claim denials decline.
- Whether mortgage-insurance pricing, refinancing mix and persistency support the projected new business and earnings outlook, and whether Services can improve profitability despite customer concentration.