Radian Group Inc. — Q2 2022 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Radian operates Mortgage, its principal private mortgage insurance and risk-services business, and homegenius, which provides title, real estate and technology services.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $286.8 million | $337.0 million | $579.8 million | $665.8 million |
| Net income | $201.2 million | $155.2 million | $382.3 million | $280.8 million |
| Diluted EPS | $1.15 | $0.80 | $2.16 | $1.44 |
| Adjusted pretax operating income (non-GAAP) | $302.0 million | $184.7 million | $567.0 million | $352.0 million |
| Adjusted diluted net operating EPS (non-GAAP) | $1.36 | $0.75 | $2.53 | $1.43 |
Drivers and segments. GAAP pretax income was $259.9 million in Q2 and $494.0 million in the first half. The Mortgage segment reported adjusted pretax operating income of $316.5 million for Q2 and $594.4 million for the first half. homegenius recorded adjusted pretax operating losses of $17.7 million and $31.2 million, respectively, as investment in the business and operating costs exceeded segment revenue. Consolidated return on equity was 19.9% for Q2 and 18.7% for the first half; adjusted net operating return on equity was 23.6% and 21.9%, respectively.
Revenue, reserves and investments. Net premiums earned were $253.9 million in Q2 and $508.1 million in the first half, down from $254.8 million and $526.6 million. Net investment income increased to $47.0 million in Q2 and $85.2 million in the first half, mainly reflecting higher rates. Net losses on investments and other financial instruments were $41.9 million for Q2 and $71.3 million for the first half, versus gains of $15.7 million and $10.5 million in 2021. Mortgage loss provision was a benefit of $113.9 million in Q2 and $197.7 million for the first half, driven by favorable development on prior-period defaults; the first-half 2021 provision was an expense of $49.8 million. Management cited better-than-estimated cures and home-price appreciation.
Cash flow and balance sheet. First-half operating cash flow was $176.9 million, down from $275.9 million; investing cash flow was $12.6 million versus a $76.4 million outflow, and financing cash flow was a $206.3 million outflow. Cash and restricted cash ended at $135.8 million. At June 30, total assets were $7.27 billion, total liabilities $3.34 billion and stockholders’ equity $3.93 billion. Equity fell from $4.26 billion at year-end, principally reflecting $449.3 million of after-tax unrealized investment losses, $205.1 million of share repurchases and $71.6 million of dividends, partly offset by earnings. Book value per share was $23.63, versus $24.28 at December 31, 2021.
Senior notes had a carrying value of $1.41 billion and FHLB advances were $184.3 million; total debt was approximately $1.60 billion. The $275 million revolving credit facility was undrawn. Holding-company available cash and liquid investments were $772.5 million, or approximately $1.0 billion including the revolver. Radian Guaranty’s PMIERs cushion was $1.4 billion, or 38% above minimum required assets, down from $2.1 billion, or 62%, at year-end. Its risk-to-capital ratio was 11.9:1; it remained compliant with applicable statutory and PMIERs requirements.
Material changes and outlook
- Primary mortgage NIW was $18.9 billion in Q2 and $37.6 billion in the first half, down 12.6% and 10.1% from the comparable 2021 periods. Higher persistency helped lift primary insurance in force to $254.2 billion from $246.0 billion at year-end; the 12-month persistency rate rose to 71.7% from 57.7% a year earlier.
- The primary default rate was 2.2% at June 30, 2022, down from 2.9% at year-end. The company reported 17,402 new primary defaults in the first half, 13% fewer than a year earlier.
- Management said inflation and rising mortgage rates are reducing refinance activity and are expected to weigh on NIW, homegenius revenue and investment fair values. Higher rates may also support persistency and net investment income. The filing cites industry estimates of approximately $2.6 trillion in 2022 mortgage originations, about 42% below 2021, and a $400–$450 billion private mortgage insurance market; these are market estimates, not company guidance.
- Management described long-term housing fundamentals as positive, citing first-time-buyer demographics and constrained housing supply, while noting that near-term macroeconomic conditions and the outlook remain uncertain. It stated that it did not expect to realize losses on securities in unrealized-loss positions, based on its intent and ability to hold them until recovery of amortized cost.
- After quarter-end, Radian agreed principal terms for a quota-share reinsurance agreement, subject to final documentation, expected to cede 20% of eligible policies issued from January 1, 2022 through June 30, 2023, subject to conditions and an $8.5 billion ceded-risk limit. It also launched Radian Mortgage Capital and entered into an uncommitted $300 million mortgage repurchase facility with Goldman Sachs, backed by a Radian Group guaranty and subject to covenants.
- The board raised the quarterly dividend to $0.20 per share in February 2022. The company repurchased 10.0 million shares for $205.1 million in the first half; it reported $195.0 million of remaining authorization at June 30 and $97.6 million after July repurchases. Management expected approximately $133 million in dividends and equivalents over the next 12 months, subject to board decisions and applicable covenants.
Risks, contingencies and unusual items
Key risks include housing and economic weakness, inflation, higher rates and unemployment, mortgage credit deterioration, changes in GSE or PMIERs requirements, and the ability to maintain insurance-subsidiary capital and holding-company liquidity. Management’s reserve estimates depend on default-to-claim assumptions, cure activity and housing prices; adverse changes could increase loss reserves. A one-percentage-point change in primary net default-to-claim rate was estimated to change the primary reserve by about $12.7 million.
Radian Guaranty cannot currently pay ordinary dividends to the parent without Pennsylvania regulatory approval; it received approval for a $500 million return of capital in February 2022. Management said positive unassigned surplus could potentially be achieved by 2023 if favorable credit performance continues. Legal proceedings arise in the ordinary course; management did not expect pending matters to materially adversely affect consolidated financial condition, but acknowledged outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Assess how much reported earnings depend on favorable reserve releases and whether those releases persist as cure trends and home prices change.
- Review investment losses, interest-rate sensitivity and the distinction between unrealized losses in equity and realized losses in earnings.
- Track NIW, persistency, premium yields, defaults and the implications of a weaker housing or employment environment.
- Verify final terms, execution and PMIERs treatment of the 2022 quota-share agreement, and monitor the decline in the PMIERs cushion.
- Review the mortgage repurchase facility’s use, collateral and parent-guaranty covenants, alongside holding-company liquidity, debt maturities, buybacks and dividends.
- Monitor homegenius operating losses, strategic spending and management’s stated launch delays and near-term revenue pressures.