Radian Group Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Radian provides private mortgage insurance and mortgage- and real estate-related services through its Mortgage Insurance and Services segments.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable / December 31, 2016 |
|---|---|---|
| Total revenue | $288.8 million | $313.0 million in Q1 2016 |
| Net premiums earned | $221.8 million | $221.0 million in Q1 2016 |
| Services revenue | $38.0 million consolidated | $32.8 million in Q1 2016 |
| Net investment income | $31.0 million | $27.2 million in Q1 2016 |
| Net investment and other financial instrument gains (losses) | $(2.9) million | $31.3 million gain in Q1 2016 |
| Pretax income | $114.7 million | $102.4 million in Q1 2016 |
| Net income / diluted EPS | $76.5 million / $0.34 | $66.2 million / $0.29 in Q1 2016 |
| Operating cash flow | $83.9 million | $38.9 million in Q1 2016 |
| Cash and restricted cash | $86.4 million at March 31 | $61.8 million at December 31 |
| Total assets / stockholders’ equity | $5.83 billion / $2.92 billion | $5.86 billion / $2.87 billion at December 31 |
| Long-term debt | $1.01 billion | $1.07 billion at December 31 |
Revenue declined 7.7% year over year, primarily reflecting the swing in investment results. Pretax income rose despite that headwind, supported by lower debt-extinguishment losses and interest expense and higher investment income. Net income margin was approximately 26.5% (net income divided by total revenue). Services gross margin was 28%, compared with 31% in Q1 2016. The filing does not report a single consolidated operating margin.
Net cash used in financing was $107.9 million, mainly reflecting the $110.1 million cash settlement of the remaining 2.25% convertible notes due 2019. Investing activities provided $48.5 million. The quarterly dividend was $0.0025 per share.
Material changes and segment trends
- Mortgage Insurance: Adjusted pretax operating income, a non-GAAP measure, decreased to $134.6 million from $140.2 million. Higher losses and operating expenses more than offset increased investment income and lower allocated interest expense. Primary new insurance written rose 24.6% to $10.1 billion; primary insurance in force increased to $185.9 billion from $183.5 billion at year-end.
- Credit performance: Primary default rate fell to 2.8% from 3.5% a year earlier; primary default inventory declined 11.4% from year-end to 25,793 loans. Claims paid decreased to $82.1 million from $127.7 million in Q1 2016. Loss reserve was $726.2 million, down from $760.3 million at year-end.
- Services: Segment revenue was $40.1 million, including intersegment revenue, versus $34.4 million. Adjusted pretax operating loss improved to $9.4 million from $9.9 million. The top 10 customers accounted for 53% of segment revenue, and the largest customer accounted for approximately 11%.
- Consolidated adjusted pretax operating income was $125.3 million versus $130.2 million. This non-GAAP measure excludes investment gains and losses, debt extinguishment, acquisition-related items, and intangible amortization or impairment.
Outlook, liquidity, risks and unusual items
- Management expected 2017 new insurance written to be comparable to 2016’s $50.5 billion. Industry sources cited by the company expected mortgage originations to decline about 20%, with refinance originations down about 50% and purchase originations up about 5%. Management expected the private mortgage insurance market to be only modestly smaller.
- Management estimated 2017 claims payments of approximately $300–$400 million, excluding any payments under commutation agreements. New defaults were expected to continue decreasing year over year, though the rate of decline was expected to moderate.
- Radian Guaranty reported compliance with PMIERs, with approximately $4.1 billion of Available Assets and a $320 million cushion over approximately $3.8 billion of Minimum Required Assets. Its risk-to-capital ratio was 14.3:1; the combined mortgage insurance ratio was 13.4:1. Potential PMIERs updates and proposed state capital rules remain relevant uncertainties.
- Radian Group reported approximately $360 million of unrestricted cash and liquid investments at the holding-company level; this included an $89 million IRS deposit that the company said it could recall. The $22.2 million principal amount of convertible notes due 2017 was expected to be settled in cash no later than November 2017. The $125 million share-repurchase authorization remained unused and was due to expire June 30, 2017.
- The IRS dispute concerns 2000–2007 tax years. The IRS asserted $157 million in taxes and penalties, with approximately $139 million of related interest as of March 31, 2017, plus potentially about $35 million of state taxes, penalties and interest. A separate $105 million asserted amount primarily relates to a disputed 2008 NOL carryback. The parties reported a basis for a possible compromise in January 2017, subject to review; the outcome and payment timing remained uncertain.
- Ocwen litigation and parallel arbitration allege breach of contract and bad faith relating to claims handling; Radian said it would defend the claims and could not estimate a possible loss. Green River Capital was cooperating with an SEC information request concerning broker price opinions in single-family rental securitizations.
- A mortgage-insurance commutation covering certain non-performing loans was expected to involve a cash payment below $25 million, approximately equal to the related reserve, with no material operating impact expected. Radian also expected $57.7 million of reserve-related payment to Freddie Mac from collateral funds under its agreement, subject to the stated measurement and adjustments.
- Other watch items include investment sensitivity to interest rates and credit spreads, competition and pricing, persistency and prepayments, loss-reserve assumptions, Services segment profitability and goodwill, and potential limits on subsidiary dividends. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the IRS compromise is finalized and its ultimate cash, tax-rate and earnings effects.
- PMIERs cushion and capital requirements after any GSE or state regulatory changes.
- Loss-reserve adequacy and the sensitivity of reserves to default-to-claim and severity assumptions.
- Progress on 2017 insurance production and claims-payment expectations, alongside persistency and mortgage-market trends.
- Services margins, customer concentration, cash generation and the assumptions supporting goodwill value.
- Outcomes of Ocwen proceedings, the SEC inquiry and the Freddie Mac collateral measurement and payment.