Radian Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results. Radian provides mortgage insurance and mortgage- and real-estate-related services. It sold its financial guaranty subsidiary, Radian Asset Assurance, on April 1, 2015; its results are presented as discontinued operations.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $297.3 million | $272.1 million | $918.4 million | $777.6 million |
| Net premiums earned | $227.4 million | $217.8 million | $689.5 million | $620.2 million |
| Net income from continuing operations | $70.1 million | $132.0 million | $207.0 million | $381.5 million |
| Net income | $70.1 million | $153.6 million | $212.4 million | $531.2 million |
| Adjusted pretax operating income (non-GAAP) | $115.6 million | $125.8 million | $386.8 million | $283.9 million |
| Operating cash flow | Not separately presented for the quarter | $(7.8) million | $(222.2) million |
- Q3 provision for losses was $64.2 million, up from $48.9 million. Nine-month provision was $141.8 million, down from $163.2 million.
- Q3 diluted EPS was $0.29 versus $0.67; nine-month diluted EPS was $0.90 versus $2.37. The prior-year comparisons include discontinued-operation earnings of $21.6 million for Q3 and $149.6 million for nine months, versus zero and $5.4 million, respectively, in 2015.
- Continuing-operations income fell substantially year over year, primarily because 2015 had an income tax provision while 2014 benefited from a deferred-tax valuation allowance release. Nine-month 2015 results also included a $91.9 million pretax charge from repurchasing convertible notes.
- At September 30, total assets were $5.76 billion, stockholders’ equity $2.44 billion, long-term debt $1.23 billion, and cash $69.0 million. Investments totaled $4.38 billion. The loss and LAE reserve was $1.10 billion, down from $1.56 billion at year-end 2014.
- Radian Group reported approximately $745 million of immediately available holding-company cash and liquid investments at September 30; after specified subsequent cash outflows, management estimated approximately $710 million remained available.
- Services revenue was $43.1 million in Q3 and $119.2 million for nine months; adjusted pretax operating results were a $0.3 million loss and a $0.4 million loss, respectively. The 2014 nine-month comparison is not fully comparable because Clayton was acquired June 30, 2014.
Material changes and operating trends
- Mortgage insurance new business written increased more than 18% for the first nine months, to $32.3 billion from $27.3 billion. Primary insurance in force was $174.9 billion and primary risk in force was $44.4 billion at quarter-end. Management expected 2015 new business to exceed $40 billion, compared with $37.3 billion in 2014.
- The primary default rate declined to 4.1% from 5.4% a year earlier, and default inventory fell 20.8% from year-end 2014. New primary defaults, net of same-period cures, declined 19% year over year for the nine months.
- About 83% of primary risk in force was from business written since 2009, including HARP refinancings; the Legacy Portfolio was approximately 17%, excluding HARP. The improving portfolio mix supported lower expected losses.
- The April sale of Radian Asset Assurance generated approximately $789 million in net proceeds. The transaction supported Radian’s strategic focus on mortgage and real estate businesses and its efforts to meet new mortgage-insurer capital rules.
- Second-quarter debt and equity transactions included issuing $350 million of 5.25% notes due 2020, repurchasing $389.1 million principal of 2017 convertible notes using cash and shares, and a $202 million accelerated share repurchase. The note repurchase generated the $91.9 million charge; management estimated the combined debt actions would reduce interest and amortization expense by $38.7 million through November 2017.
- Radian Guaranty’s statutory risk-to-capital ratio improved to 16.5:1 from 17.9:1 at year-end 2014. It was compliant with applicable state statutory requirements at September 30.
Outlook, risks, and unusual items
- PMIERs financial requirements were scheduled to take effect December 31, 2015. Management estimated Radian Guaranty would need approximately $320 million of additional Available Assets, assuming GSE approval of reinsurance amendments and an estimated $80 million PMIERs benefit. Radian expected to use holding-company liquidity and was evaluating direct contributions or surplus notes. Estimates depend on approvals, business mix, losses, and reinsurance decisions.
- Management expected total mortgage insurance claims paid of approximately $700 million in 2015, including BofA settlement-related payments, and $400–$450 million in 2016. Nine-month 2015 claims paid were $588.2 million, including $236.6 million related to the BofA settlement.
- The IRS dispute over 2000–2007 tax years includes notices asserting about $157 million of taxes and penalties, approximately $122 million of related interest at September 30, and potentially about $31 million of state taxes, penalties, and interest. Separate notices included approximately $105 million primarily tied to disallowance of a 2008 NOL carryback. Litigation timing and outcome remain uncertain; the tax court trial was postponed.
- Other risks include maintaining GSE eligibility and PMIERs compliance, the capital and liquidity effects of transferring assets to insurance subsidiaries, competitive pricing and FHA competition, mortgage-market and housing conditions, loss-reserve estimation, and challenges to claim mitigation decisions. The Wisconsin regulator requested information about customized rates; the outcome was uncertain. A Minnesota consent order resolved captive-reinsurance inquiries without findings of wrongdoing and restricts new captive arrangements through June 2025.
- Investment values are exposed to interest rates: management estimated a 100-basis-point rate increase would reduce fixed-income market value by $157.4 million, while a 100-basis-point decrease would increase it by $165.4 million. The filing also disclosed an immaterial cash-flow classification error in first-quarter 2015 figures, to be corrected in a future comparative presentation.
- Subsequent items include an October purchase of $8.5 million principal of 2017 notes for $12.9 million cash, an expected November settlement of a $10 million 2019-note conversion for about $15.5 million, Clayton’s October acquisition of ValuAmerica, and a new 15-year Philadelphia headquarters lease with approximately $61 million of base rent over the term.
Most important facts for investors to verify
- Whether Radian Guaranty met PMIERs requirements by the December 31, 2015 effective date, and the actual amount and form of holding-company support required.
- Whether the $320 million PMIERs funding estimate and expected $80 million reinsurance benefit were realized, including necessary GSE approvals.
- How mortgage defaults, cures, claim severity, reserve development, and the BofA settlement affect claims paid and loss reserves versus management’s 2015 and 2016 estimates.
- The progress and eventual financial effect of the IRS tax dispute, including the NOL carryback issue and any payment or settlement.
- Whether mortgage insurance growth and Services profitability can offset pricing pressure, elevated operating costs, and the capital demands of PMIERs.
- The continuing cash-flow classification correction and the financial commitments and performance effects of the ValuAmerica acquisition and new headquarters lease.