RADIAN GROUP INC annual report, FY2019

Business context and reporting period

Radian Group Inc. (NYSE: RDN) filed this Form 10-K for the fiscal year ended December 31, 2019. It operates Mortgage Insurance, which provides private mortgage insurance and credit-risk solutions, and Services, a fee-based real estate, title and mortgage services business. The filing reports full-year results; fourth-quarter figures are identified separately where useful.

Key financial and operating metrics

• Total revenue grew 19.9%; pretax income grew 24.1%; net income rose 10.9%. Net margin was approximately 44.0% of revenue.
• Insurance premiums earned were $1.145 billion, up from $1.014 billion. Net investment income increased to $171.8 million from $152.5 million. Investment and other financial instrument gains were $51.7 million, versus losses of $42.5 million in 2018.
• Provision for losses rose to $132.0 million from $104.6 million; the mortgage insurance loss ratio increased to 11.6% from 10.4%. The expense ratio improved to 22.2% from 23.9%.
• Mortgage Insurance adjusted pretax operating income increased to $868.9 million from $772.6 million. Services’ adjusted pretax operating loss narrowed to $14.3 million from $27.1 million.
• At year-end, primary insurance in force was $240.6 billion, up 9% year over year; new insurance written was $71.3 billion, up 26%. Persistency declined to 78.2% from 83.1%.
• Cash and restricted cash declined $10.7 million during the year. Parent-company available liquidity was $652.6 million, plus an undrawn $267.5 million revolving facility, for total stated liquidity of $920.1 million.
• Debt-to-capital declined to 18.0% from 22.8%. The company repurchased 13.5 million shares for $300.2 million during 2019.

Material changes versus 2018

• Higher premiums reflected growth in insurance in force, while 2019 results also included a $32.9 million cumulative increase in earned premiums from revised single-premium amortization assumptions (about $0.12 per diluted share).
• Operating cash flow increased modestly, partly because claims paid fell. Financing cash flow shifted to a $403.1 million outflow, driven mainly by share repurchases and debt repayments exceeding new issuance.
• Radian issued $450 million of 4.875% notes due 2027 and repaid its remaining 2019, 2020 and 2021 senior notes. Debt extinguishment charges were $22.7 million.
• Investment gains reversed 2018’s losses, primarily reflecting fair-value gains in trading securities as interest rates fell and realized gains on available-for-sale securities.
• The 2018 effective tax rate benefited from a $73.6 million IRS settlement-related tax benefit. The 2019 effective rate was 20.8%, compared with 11.4% in 2018.
• Clayton was classified as held for sale at year-end and sold in January 2020. Radian recorded a $4.8 million goodwill impairment and a $13.7 million impairment of other acquired intangible assets related to the sale.

Outlook, commentary, risks and unusual items

• Management expected 2020 private mortgage insurance market volume to be lower than 2019, mainly because refinancing activity was projected to fall despite expected purchase-market growth. Radian projected 2020 new insurance written of approximately $60 billion.
• Management cited strong 2019 origination demand, high credit quality in the post-2008 portfolio and continued use of reinsurance. Approximately 95% of primary risk in force was from business written after 2008, including HARP refinancings.
• Radian Guaranty reported $3.6 billion of PMIERs available assets and an $804 million cushion over minimum required assets at December 31, 2019. The filing states that compliance and reinsurance credit remain subject to GSE interpretation and potential rule changes.
• Insurance-subsidiary distributions are constrained: Radian Guaranty and Radian Reinsurance had negative unassigned surplus, and the company did not expect ordinary dividends from Radian Guaranty for the foreseeable future. A $375 million extraordinary distribution from Radian Guaranty was paid in April 2019; a separate $465 million distribution from Radian Reinsurance was approved and paid in January 2020.
• Key risks include housing and employment downturns, reduced persistency from refinancing, intense pricing competition, changes to GSE roles or PMIERs, regulatory capital requirements, reinsurer performance, servicing delays, investment-market volatility and cyber or technology disruption. The QM Patch was scheduled to expire in January 2021, with replacement rulemaking uncertain.
• Ocwen and Nationstar disputes over coverage and claims practices remained ongoing. Radian increased its IBNR reserve estimate by $30.5 million in 2019 for its best estimate of probable losses related to these proceedings; ultimate outcomes and potential amounts beyond accruals were uncertain.
• The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified valuation of first-lien primary mortgage-insurance case reserves as a critical audit matter because reserve estimates rely on judgmental default-to-claim and claim-severity assumptions.

Important facts for investors to verify

• Whether the $32.9 million single-premium revenue adjustment is nonrecurring and how revised assumptions affect future premium recognition.
• Whether 2020 new insurance written, market conditions and persistency tracked management’s approximately $60 billion outlook.
• How defaults, claims, cure rates and reserve assumptions evolve, including the adequacy of reserves and potential outcomes of the Ocwen and Nationstar disputes.
• Whether Radian Guaranty maintains its PMIERs cushion and statutory capital position as requirements, reinsurance credits and portfolio risk change.
• How the Clayton sale affects continuing Services revenue, profitability and impairment exposure, and whether remaining Services operations improve toward profitability.
• Holding-company liquidity after the increased dividend, share repurchases and debt maturities, given limits on ordinary distributions from insurance subsidiaries.