Radian Group Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Radian provides U.S. mortgage insurance and mortgage and real estate services (MRES). Results include Clayton from its June 30, 2014 acquisition. Financial guaranty results were reclassified to discontinued operations following the agreement to sell Radian Asset Assurance.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $1.073 billion | $749.9 million |
| Pretax income (loss) from continuing operations | $407.2 million | $(173.3) million |
| Net income (loss) from continuing operations | $1.260 billion | $(141.9) million |
| Loss from discontinued operations, net of tax | $(300.1) million | $(55.1) million |
| Consolidated net income (loss) | $959.5 million | $(197.0) million |
| Diluted earnings (loss) per share | $4.16 | $(1.18) |
| Operating cash flow | $(136.2) million | $(664.9) million |
| Long-term debt | $1.210 billion | $930.1 million |
| Stockholders’ equity | $2.097 billion | $939.6 million |
- Profit quality: The $1.260 billion of continuing-operations net income included an $852.4 million income tax benefit, primarily from reversing substantially all of the deferred-tax-asset valuation allowance. Pretax continuing income was $407.2 million. The reported consolidated result also includes a $467.5 million pretax impairment charge on the planned sale of Radian Asset Assurance.
- Revenue and investment results: Insurance premiums earned rose to $844.5 million from $781.4 million; MRES contributed $76.7 million of services revenue. Investment income declined to $65.7 million from $68.1 million, while investment gains were $83.9 million versus losses of $98.9 million in 2013.
- Mortgage insurance: Segment adjusted pretax operating income, a non-GAAP measure, was $336.9 million versus a $67.4 million loss. The loss ratio fell to 29.1% from 72.0%; the expense ratio on net premiums earned was 29.6% versus 36.6%. Primary insurance in force increased to $171.8 billion from $161.2 billion, while new insurance written fell to $37.3 billion from $47.3 billion.
- Claims and reserves: Mortgage insurance provision for losses was $246.9 million, down from $562.7 million. Defaulted primary loans declined to 45,319 from 60,909, and the primary default rate fell to 5.2% from 7.3%. Total mortgage insurance loss reserves were $1.560 billion, down from $2.164 billion.
- Liquidity and capital: Year-end investment portfolio carrying value was $3.629 billion, of which $1.301 billion was short-term investments; 93.5% of the portfolio was investment grade. Holding-company unrestricted cash and liquid investments were reported at approximately $670 million after a $100 million capital contribution to Radian Guaranty in February 2015. Radian Guaranty’s risk-to-capital ratio was 17.9:1 after that contribution, versus 19.5:1 at year-end 2013.
Material changes versus prior year
- Radian returned to full-year profitability, primarily reflecting sharply lower mortgage insurance losses, higher earned premiums, favorable reserve development, and the swing from investment losses to gains. The tax valuation-allowance reversal materially increased reported net income.
- Clayton added a fee-based services business. For the partial-year period included in 2014, MRES reported $76.7 million revenue and $5.4 million adjusted pretax operating income. Its top ten clients generated 64% of segment services revenue.
- Radian agreed to sell Radian Asset Assurance to Assured Guaranty for approximately $810 million, subject to adjustments; estimated net proceeds were approximately $790 million. The business was classified as held for sale and discontinued operations, with a $467.5 million pretax impairment charge.
- Radian issued $300 million of 5.5% senior notes due 2019 and 17.825 million shares in 2014, receiving aggregate net proceeds of approximately $541 million. It used part of the proceeds to acquire Clayton and redeemed the remaining $57.2 million of 2015 notes.
- Operating cash flow remained negative, although the cash used declined substantially from 2013. Stockholders’ equity increased, primarily due to net income and the equity issuance.
Outlook, risks, and unusual items
- Management outlook: Radian estimated 2015 new business volume would exceed 2014’s $37.3 billion and expected total new defaults to decline. It forecast $600–$700 million of claims paid in 2015, including approximately $250 million related to the BofA settlement. These are estimates, not guarantees.
- PMIERs capital requirements: Based on the proposed requirements and assumed timing, Radian estimated an approximately $350 million net shortfall in available assets at December 31, 2015, after considering holding-company liquidity and anticipated sale proceeds. It expected no shortfall by June 30, 2017, the projected end of a possible transition period. Final requirements and the sale were still uncertain. Radian expected to contribute a substantial portion of holding-company resources and was also pursuing reinsurance or commutations for capital relief.
- Sale dependency: The expected $790 million net proceeds from the financial guaranty sale were important to the capital plan. Completion was subject to regulatory approvals and other conditions; failure to close could increase the need for capital, debt, equity issuance, or asset sales.
- Tax dispute: The IRS issued deficiencies for 2000–2007, asserting approximately $157 million in taxes and penalties, plus approximately $115 million of interest as of year-end and potentially $30 million of state taxes, penalties, and interest. The IRS also asserted approximately $105 million primarily tied to disallowance of a 2008 NOL carryback. Radian petitioned the U.S. Tax Court and disputed the assessments; resolution could take years.
- Other risks and contingencies: Mortgage insurance results are sensitive to housing prices, unemployment, foreclosure timing, loss severity, reserve assumptions, policy persistency, and disputes over rescissions, denials, and claim curtailments. Proposed PMIERs, state capital rules, GSE eligibility, competition (including the FHA’s 2015 premium reduction), and restricted subsidiary dividends could constrain business or liquidity. RESPA class actions and a Minnesota regulatory inquiry concerning captive reinsurance remained unresolved; the company said losses could not be reasonably estimated for the class actions.
- Controls and audit: Management and the auditor reported effective internal control over financial reporting as of year-end. Clayton was excluded from the year-end assessment because it was recently acquired; the auditor also excluded it from the internal-control audit.
Important facts for investors to verify
- Whether the Asset Assurance sale closed, and whether net proceeds approximated the estimated $790 million.
- The final PMIERs requirements, Radian Guaranty’s actual capital position, and the amount of holding-company cash ultimately contributed or retained.
- Whether mortgage insurance defaults, claims, reserve releases, and paid-loss trends support management’s 2015 estimates.
- Whether the large deferred tax asset is realizable and how the IRS litigation and disputed NOL carryback affect cash taxes and liquidity.
- Whether the BofA settlement’s implementation, investor consents, claim payments, and reserve assumptions differ materially from estimates.
- Whether MRES revenue and margins are sustainable given client concentration, transactional volumes, and the decline in some single-family-rental activity.