Radian Group Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; financial statements are unaudited. Radian provides mortgage insurance and mortgage and real estate services through its Mortgage and homegenius segments. The former Real Estate segment was renamed homegenius during Q2.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $337.0 million | $364.4 million | $665.8 million | $693.5 million |
| Net income (loss) | $155.2 million | ($30.0 million) | $280.8 million | $110.5 million |
| Diluted EPS | $0.80 | ($0.15) | $1.44 | $0.56 |
| Adjusted pretax operating income (non-GAAP) | $184.7 million | ($88.5 million) | $352.0 million | $116.1 million |
| Operating cash flow | Not provided separately | Not provided separately | $275.9 million | $305.3 million |
Q2 revenue declined chiefly as net gains on investments and other financial instruments fell to $15.7 million from $47.3 million. The sharp earnings improvement primarily reflected a lower provision for losses: $3.6 million in Q2 versus $304.4 million a year earlier. Six-month provision was $49.8 million versus $340.4 million. These comparisons reflect the unusually high pandemic-related default provisions in 2020.
Net premiums earned were $254.8 million in Q2, up from $249.3 million, but were essentially flat for the first half at $526.6 million. Net investment income declined to $36.3 million in Q2 from $38.7 million and to $74.5 million for the half from $79.7 million. The company reported a 20.6% Q2 effective tax rate and 21.3% for the half.
Mortgage segment adjusted pretax operating income was $191.5 million in Q2, compared with a loss of $85.8 million; first-half income was $365.7 million versus $119.8 million. homegenius revenue increased, but its adjusted pretax loss widened to $9.2 million in Q2 and $19.7 million for the half, reflecting higher compensation and strategic investment in title and digital real estate businesses.
Financial position, debt and capital
- At June 30, total assets were $8.01 billion, total liabilities $3.68 billion and stockholders’ equity $4.33 billion. Book value per share was $23.02, up from $22.36 at year-end 2020.
- Senior notes had a $1.408 billion carrying value; FHLB advances were $154.0 million. The reported debt-to-capital ratio was 24.5%. The $267.5 million revolving credit facility was undrawn and matures January 2022.
- Radian Group reported $923.0 million of available holding-company cash and liquid investments; including the undrawn revolver, total liquidity was about $1.2 billion. Holding-company available liquidity decreased $179.7 million during the first half.
- Radian Guaranty reported $5.0 billion of PMIERs Available Assets and a $1.9 billion cushion, equal to 58% above Minimum Required Assets. Its risk-to-capital ratio was 11.4:1; it was compliant with stated statutory and PMIERs requirements at quarter-end.
- Radian Guaranty’s statutory policyholders’ surplus was $596.0 million. The company said ordinary distributions to the parent are not expected to be permitted without Pennsylvania regulatory approval for the foreseeable future.
Material changes and operating trends
- Mortgage new insurance written was $21.7 billion in Q2 and $41.8 billion in the first half, down 14.9% and 0.9%, respectively, year over year. Primary insurance in force was $237.3 billion, down from $246.1 billion at year-end.
- The 12-month persistency rate fell to 57.7% from 70.2% a year earlier, largely due to refinancing and single-premium policy cancellations. The quarterly annualized rate improved to 66.3% from 60.4% at year-end.
- Primary default rate was 4.0% at June 30, down from 5.2% at December 31, 2020 and 6.5% at June 30, 2020. The company cited fewer new defaults and favorable cures. Its gross default-to-claim assumption for new defaults was 8.0%, down from 8.5% a year earlier.
- Cash provided by operations was $275.9 million for the first half, versus $305.3 million. Net cash used in investing was $76.4 million, compared with $580.4 million in 2020; net cash used in financing was $155.7 million, versus $263.5 million provided in 2020, which included a debt issuance.
- The company repurchased 4.3 million shares for $98.7 million during the first half and raised its quarterly dividend from $0.125 to $0.14 per share. A $3.5 million impairment was recorded on headquarters lease assets after the decision to sublease the existing offices and lease smaller replacement space.
Outlook, risks and contingencies
Management cited positive longer-term housing fundamentals, including low interest rates, first-time-buyer demographics and limited home supply. Industry forecasts cited in the filing projected 2021 mortgage originations of approximately $3.9 trillion and a private mortgage insurance market of $550–$600 billion, with lower refinance activity expected in the second half. These are market forecasts, not company earnings guidance. Management said persistency could improve if refinancing moderates.
COVID-19 remains a material uncertainty. Radian expects claims paid could rise after foreclosure moratoriums are lifted; pandemic-related defaults also increase capital requirements and could affect PMIERs compliance. The COVID-19 Crisis Period ended March 31, 2021, changing application of the PMIERs disaster capital charge. GSE capital-preservation measures were extended through December 2021, subject to cushion thresholds for certain actions. Other highlighted risks include housing and employment conditions, interest rates and investment valuations, regulatory or GSE changes, competition, and the ability to maintain capital and liquidity.
The Nationstar litigation settlement took effect in March 2021, included a cash payment, and the case was dismissed with prejudice; the filing says it did not materially affect reserves. Management said pending legal matters were not expected, based on current knowledge, to materially adversely affect consolidated financial condition, while acknowledging outcomes remain uncertain. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Investor verification priorities
- Assess how much of the earnings rebound reflects lower pandemic-era loss provisions and favorable reserve development, and how claims emerge after foreclosure protections end.
- Track default cures, claims, reserve assumptions and the PMIERs cushion, including the effects of changing capital-charge rules and GSE requirements.
- Monitor persistency, refinancing, new insurance written and the mix of purchase versus refinance and monthly versus single-premium policies.
- Review holding-company liquidity, upcoming revolver maturity, subsidiary dividend restrictions, debt maturities, and the pace of repurchases and dividends.
- Evaluate whether homegenius revenue growth can offset continuing operating losses and strategic investment spending.