Radian Group Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 4, 2023. Radian is a diversified mortgage and real estate business with Mortgage and homegenius reporting segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $290.4 | $286.8 | $601.0 | $579.8 |
| Net premiums earned | $213.4 | $253.9 | $446.7 | $508.1 |
| Net investment income | $64.2 | $47.0 | $123.4 | $85.2 |
| Pretax income | $182.7 | $259.9 | $386.7 | $494.0 |
| Net income | $146.1 | $201.2 | $303.8 | $382.3 |
| Diluted EPS | $0.91 | $1.15 | $1.89 | $2.16 |
| Adjusted pretax operating income (non-GAAP) | $184.4 | $302.0 | $384.2 | $567.0 |
Revenue was broadly flat in Q2 and increased 4% for the first half, as higher investment income and a more favorable year-over-year change in investment and financial-instrument results offset lower earned premiums and services revenue. Net income fell 27% in Q2 and 21% in the first half. Return on equity was 14.1% for Q2 and 15.0% for the first half, compared with 19.9% and 18.7%, respectively, in 2022.
Reported loss provision was a benefit of $21.6 million in Q2 and $38.6 million in the first half, versus benefits of $113.9 million and $197.7 million in the comparable 2022 periods. These reserve releases materially supported earnings in both years, but were smaller in 2023. Q2 expenses therefore include a negative provision for losses; total expenses were $107.7 million versus $27.0 million in Q2 2022.
Cash flow and liquidity: First-half operating cash flow was $189.2 million, versus $176.9 million in 2022. Investing activities used $90.0 million, compared with providing $12.6 million; financing activities used $93.3 million, mainly reflecting dividends and share repurchases. Cash and restricted cash were $62.5 million at June 30. The holding company reported $1.0 billion of available cash and liquid investments and $1.3 billion of total liquidity including its undrawn $275 million revolver.
Debt and capital: Senior notes totaled $1.416 billion and secured borrowings $178.8 million; no revolving-credit borrowings were outstanding. Debt-to-capital was 25.3%, down from 26.5% at year-end 2022. Stockholders’ equity was $4.171 billion and book value per share was $26.51, up from $24.95. Radian reported compliance with debt covenants.
Mortgage insurance and capital: Primary insurance in force was $266.9 billion and risk in force was $68.3 billion at June 30. Radian Guaranty’s PMIERs cushion was $1.7 billion, or 41% above minimum required assets; risk-to-capital was 10.8:1. The company said it remained compliant with PMIERs and applicable state capital requirements.
Material changes versus the prior comparable period
- Primary new insurance written declined 11% in Q2 to $16.9 billion and 25% for the first half to $28.2 billion. Management attributed this to lower housing and mortgage origination activity amid higher rates.
- Net premiums earned declined 16% in Q2 and 12% in the first half. The second quarter included $21 million of additional ceded premiums from Eagle Re note tender offers; management also cited lower single-premium cancellation revenue and lower reinsurance profit commissions.
- Net investment income rose 37% in Q2 and 45% for the first half, primarily from higher market interest rates.
- Investment and other financial-instrument results were a $0.2 million loss in Q2 2023 versus a $41.9 million loss in Q2 2022; the first-half result was a $5.3 million gain versus a $71.3 million loss. The prior-year comparison reflected market-related valuation losses.
- Homegenius revenue fell 54% in Q2 and 58% in the first half. Its adjusted pretax operating loss widened to $24.4 million in Q2 and $47.5 million in the first half. Q2 2023 included $2.0 million of severance expense.
- First-half new primary defaults rose 17% to 20,399, while the default inventory declined to 19,880 from 21,913 at year-end 2022, as cures exceeded new defaults. The assumed gross default-to-claim rate on new defaults remained 8.0%.
Outlook, commentary, risks and unusual items
- Radian gave no explicit company earnings or EPS guidance in the provided filing text. Management expects the current environment to weigh on new insurance written and homegenius revenue near term, and expects higher rates to support persistency and investment income. It cited longer-term housing fundamentals, including first-time-buyer demographics and limited home supply, as favorable.
- Industry projections cited by management estimated 2023 mortgage originations of about $1.7 trillion, down approximately 27% from 2022, and a private mortgage insurance market of about $325 billion. These are market estimates, not company guidance.
- Starting July 1, 2023, the new QSR agreement is expected to cede 22.5% of eligible policies issued through June 30, 2024, subject to a $3.0 billion ceded-RIF cap. Following the Eagle Re tender offers, management expects approximately $58 million of future ceded-premium savings, including recovery of the $21 million one-time cost within one year.
- Key risks include persistent inflation, higher rates, recession and unemployment; lower housing and origination activity; mortgage defaults and uncertainty in cure rates and claims; changes to GSE eligibility or PMIERs; reinsurance counterparty performance; and market interest-rate and credit-spread exposure in the investment portfolio. Management noted that the PMIERs benefit from the disaster-related capital charge is expected to diminish over time.
- Radian Guaranty paid $200 million in ordinary dividends to the holding company in March and May. It had $168 million of positive unassigned surplus at June 30, subject to insurance-law restrictions on future distributions. Radian Group also contributed $60 million to homegenius subsidiaries during the first half.
- Management stated that pending legal matters are not expected to materially affect consolidated financial condition or results, while noting outcomes are inherently uncertain. The Eagle Re 2018-1 transaction remains subject to a delinquency trigger that suspends amortization of related reinsurance coverage and notes. LIBOR-linked reinsurance arrangements transitioned to SOFR for Q3 2023.
Important facts for investors to verify
- How much future earnings depend on favorable reserve development, and whether cures remain sufficient as new defaults increase.
- The ongoing effects of the Eagle Re tenders: the $21 million Q2 charge, projected $58 million premium savings, and resulting coverage and capital benefits.
- Mortgage origination, persistency, and homegenius revenue trends relative to management’s near-term expectations and the cited industry estimates.
- Investment portfolio valuation and sensitivity to interest rates and credit spreads; available-for-sale securities had $544 million of gross unrealized losses at June 30, although management said it intended and was able to hold the securities until recovery.
- Holding-company liquidity, upcoming debt maturities ($450 million due 2024, $525 million due 2025, and $450 million due 2027), and the ability of regulated subsidiaries to distribute cash.
- Whether Radian Guaranty maintains PMIERs and statutory capital compliance as disaster-related capital relief declines and reinsurance arrangements change.