Radian Group Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Figures are unaudited. Radian operates Mortgage and homegenius businesses, with additional activities reported in All Other.
Financial and operating snapshot
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $296.2m | $325.8m | $876.0m | $991.6m |
| Pretax income | $255.5m | $161.6m | $749.5m | $518.3m |
| Net income | $198.3m | $126.4m | $580.6m | $407.2m |
| Diluted EPS | $1.20 | $0.67 | $3.34 | $2.11 |
| Adjusted pretax operating income (non-GAAP) | $272.7m | $160.6m | $839.7m | $512.7m |
| Adjusted diluted net operating income per share (non-GAAP) | $1.31 | $0.67 | $3.82 | $2.10 |
| Return on equity | 20.7% | 11.8% | 19.4% | 12.7% |
Revenue fell 9% in Q3 and 12% year to date. Net income rose 57% and 43%, respectively, largely reflecting favorable mortgage loss-reserve development; the non-GAAP measures exclude investment and other specified items and should not be treated as substitutes for GAAP results.
- Mortgage insurance: Primary insurance in force (IIF) was $259.1bn and risk in force (RIF) $65.3bn at September 30, versus $246.0bn and $60.9bn at year-end 2021. Nine-month new insurance written (NIW) declined 19% to $55.1bn. Twelve-month persistency increased to 75.9% from 60.8% a year earlier.
- Losses and margins: Provision for losses was a benefit of $97.0m in Q3 and $294.6m for nine months, versus expenses of $17.3m and $67.1m in the respective 2021 periods. The nine-month loss ratio was negative 40.7%, versus 8.8%. Favorable development on prior-year defaults was the principal driver.
- Investment income and marks: Net investment income increased to $51.4m in Q3 and $136.6m year to date, attributed mainly to higher rates. Net losses on investments and other financial instruments were $16.3m in Q3 and $87.6m year to date, compared with gains of $2.1m and $12.6m in 2021.
- homegenius: Q3 adjusted pretax operating loss was $25.5m, versus a $5.6m loss; nine-month loss was $56.7m, versus $25.2m. Lower title and services revenue, particularly from reduced refinance activity, and continued strategic investment contributed.
- Cash flow: Nine-month operating cash flow was $282.1m, down from $403.3m. Investing activities provided $48.6m, compared with $34.0m used; financing activities used $427.5m, mainly reflecting share repurchases and dividends. Cash and restricted cash ended at $55.8m.
- Debt and liquidity: Senior notes were $1.412bn and FHLB advances $153.6m. Debt-to-capital was 27.4%, up from 24.9% at year-end. Holding-company available liquidity was $572.6m; including the undrawn $275m revolving facility, total liquidity was $847.6m. The company reported compliance with facility covenants.
- Equity and capital return: Stockholders’ equity was $3.738bn, down $520.7m since year-end, and book value per share was $23.80 versus $24.28. The decline reflected $622.4m of after-tax unrealized investment losses, share repurchases and dividends, partly offset by earnings. Radian repurchased 19.5m shares for $399.2m and raised its quarterly dividend to $0.20 per share.
Material changes, outlook and risks
- Management cited inflation, slower growth, sharply higher mortgage rates, falling home prices, lower refinance activity and recession/unemployment risks. These conditions reduced NIW and homegenius revenue and could increase mortgage defaults and reduce cures. Higher rates may also support persistency and investment income.
- Management expected lower NIW and homegenius revenue to persist near term, and anticipated ending 2022 with approximately 20%–25% fewer employees than at year-end 2021. The filing does not provide a quantified company earnings or EPS forecast. Its cited 2022 mortgage-origination and private-insurance-market figures are industry estimates, not company guidance.
- Management said it intended and was able to hold available-for-sale securities with unrealized losses until recovery of amortized cost; it did not expect to realize losses on those positions. Fair-value declines nevertheless reduced reported equity and net income through recognized items.
- Radian Guaranty remained PMIERs-compliant, with $5.4bn in Available Assets and a $1.6bn cushion, or 44%, over Minimum Required Assets, down from $2.1bn and 62% at year-end. Its risk-to-capital ratio was 11.1:1. Management said it could potentially have positive unassigned surplus by early 2023 if favorable credit performance continued; ordinary distributions remain subject to regulatory restrictions and approval.
- Radian entered a new quota-share reinsurance agreement in Q3 and terminated its Eagle Re 2020-2 excess-of-loss arrangement through a clean-up call. Two new $300m mortgage-loan repurchase facilities were uncommitted, had no amounts outstanding at quarter-end, and were supported by parent guarantees and financial covenants.
- Legal matters arise in the ordinary course; management did not expect pending or threatened actions to materially affect consolidated financial condition, while acknowledging outcomes are uncertain. Risks also include housing-market deterioration, investment-rate and credit-spread exposure, reinsurance counterparty performance, regulatory and GSE requirements, liquidity and execution of new-business initiatives.
Important facts for investors to verify
- Whether favorable reserve releases continue and how defaults, cures, claims and loss assumptions evolve as economic conditions change.
- Whether higher persistency offsets lower NIW, and whether the reported PMIERs cushion remains adequate as RIF and required assets change.
- How much of investment losses remain unrealized, their effect on capital and book value, and the pace at which portfolio yields benefit from higher rates.
- Whether homegenius can reduce operating losses as title and refinance activity weaken, and whether its digital initiatives achieve expected launches and returns.
- Holding-company liquidity, debt maturities, repurchases and dividends; regulatory limits on subsidiary distributions; and covenant exposure under the mortgage repurchase guarantees.