Radian Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020; filed November 9, 2020. Figures are unaudited and in U.S. dollars. Radian operates Mortgage and Real Estate segments. Clayton was sold in January 2020, affecting comparability of services revenue and segment results.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $375.2 million | $380.3 million | $1,068.8 million | $1,138.9 million |
| Net income | $135.1 million | $173.4 million | $245.6 million | $511.1 million |
| Diluted EPS | $0.70 | $0.83 | $1.25 | $2.39 |
| Provision for losses | $88.1 million | $29.2 million | $428.5 million | $97.4 million |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $498.8 million | $506.8 million |
- Q3 net margin was approximately 36.0%, versus 45.6% a year earlier; nine-month net margin was approximately 23.0%, versus 44.9%. Earnings declined mainly because of higher mortgage-loss provisions.
- Net premiums earned rose to $286.5 million in Q3 from $281.2 million, but fell to $813.2 million for nine months from $843.9 million. Services revenue fell to $33.9 million in Q3 from $42.5 million and to $93.9 million for nine months from $114.6 million, partly reflecting Clayton’s sale.
- Total assets were $7.78 billion and stockholders’ equity was $4.12 billion at September 30, 2020. Book value per share was $21.52, up from $20.13 at December 31, 2019, supported in part by $121.5 million of nine-month unrealized investment gains recorded in other comprehensive income.
- Cash and restricted cash totaled $86.4 million at quarter-end. Nine-month investing cash outflow was $737.7 million, while financing cash inflow was $229.1 million.
- Senior notes carried at $1.405 billion and FHLB advances at $141.1 million. The May issuance of $525 million of 6.625% notes due 2025 increased debt; the reported debt-to-capital ratio was 25.4%, versus 18.0% at year-end 2019. The $267.5 million revolving credit facility was undrawn.
- Holding-company available liquidity was $1.1 billion, or $1.4 billion including the undrawn credit facility. Mortgage insurer Radian Guaranty reported $4.5 billion of PMIERs Available Assets against $3.5 billion of Minimum Required Assets, a $1.0 billion cushion. Risk-to-capital was 13.2:1.
Material changes and operating developments
- Mortgage insurance losses rose sharply amid pandemic-related defaults: nine-month mortgage provision for losses was $427.0 million versus $97.1 million. The primary default rate increased to 5.9% from 2.0% at year-end 2019, while default inventory fell 9.6% from June 30 to 62,737 loans.
- Management’s gross default-to-claim assumption for new defaults was 8.5%, up from 7.5% at year-end 2019. Favorable cures on prior-period defaults partly offset new-default reserving. Claims paid decreased, reflecting forbearance programs and foreclosure suspensions.
- Primary new insurance written increased 51.2% in Q3 to $33.3 billion and 46.6% for nine months to $75.4 billion. Primary insurance in force was $245.5 billion. Twelve-month persistency fell to 65.6% from 78.2% at year-end 2019, largely due to refinancing and cancellations.
- Net investment income declined to $36.3 million in Q3 from $42.8 million and to $115.9 million for nine months from $130.4 million, as lower yields outweighed higher investment balances.
- Real Estate recorded adjusted pretax operating losses of $5.9 million in Q3 and $15.6 million for nine months, wider than the comparable 2019 losses. Services revenue increased, driven mainly by title services, but costs and expenses also rose.
- Radian repurchased 11.0 million shares for $226.3 million during the first nine months, then suspended repurchases on March 19, 2020. The quarterly dividend increased from $0.0025 to $0.125 per share; $74.3 million of dividends were declared during the nine-month period.
Outlook, risks, contingencies, and unusual items
- Management expected 2020 new insurance written to exceed $100 billion. It revised its earlier projected default-rate peak of approximately 8%–9% to an expectation that the rate would remain below 6%, assuming continued economic recovery. Both expectations were explicitly subject to pandemic-related uncertainty.
- Management said COVID-19 would likely continue to affect losses, PMIERs capital needs, persistency, investment income, and business volumes. The temporary PMIERs COVID-19 amendment applied a 0.30 multiplier to eligible disaster-related defaults, reducing required assets; the benefit could diminish, and future defaults or changing rules could pressure compliance and holding-company liquidity.
- In October 2020, Radian entered a fourth collateralized reinsurance arrangement providing up to $390.3 million of coverage. Management estimated it would raise Radian Guaranty’s PMIERs cushion from 28% to 42%. This subsequent event was not included in September 30 figures. Radian also announced the wind-down of its traditional appraisal business, which it did not expect to materially affect results or liquidity.
- Ocwen settlement implementation became effective November 1, 2020 after GSE consent. A Nationstar settlement remained subject to GSE consent. Settlement payments were not quantified in the filing text; management said the agreements were consistent with existing estimates and did not materially affect reserves. Failure to obtain Nationstar consent could restart litigation.
- Other risks include uncertain COVID-19 loss and cure outcomes, higher claim severity from prolonged defaults, servicer disruption, investment-market and interest-rate volatility, possible rating downgrades, and changes to GSE rules or the proposed enterprise capital framework. S&P and Fitch had negative outlooks; Moody’s outlook was stable.
- Radian reported compliance with statutory capital requirements and PMIERs at quarter-end. It said ordinary dividends from Radian Guaranty were not expected for the foreseeable future due to negative unassigned surplus and other restrictions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new defaults, cures, and claim severity track management’s assumptions, and how subsequent reserve development changes loss estimates.
- Radian Guaranty’s PMIERs cushion, including the realized benefit of Eagle Re 2020-2 and any changes to the temporary COVID-19 capital treatment or GSE requirements.
- Holding-company liquidity and potential capital contributions to Radian Guaranty, given restricted subsidiary distributions and debt maturities.
- Persistency, refinancing-driven cancellations, premium yields, and whether strong new business offsets attrition and lower investment income.
- GSE consent and implementation status for the Nationstar settlement, along with any disclosed settlement cash payments or changes in legal reserves.
- Whether the 2020 NIW and default-rate outlooks remain achievable under actual economic, housing, and pandemic conditions.