Radian Group Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Radian operates Mortgage and Real Estate segments. Comparisons below are with Q1 2019 unless otherwise stated.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $329.1 million | $363.6 million |
| Pretax income | $181.3 million | $216.1 million |
| Net income | $140.5 million | $171.0 million |
| Diluted EPS | $0.70 | $0.78 |
| Adjusted pretax operating income (non-GAAP) | $204.6 million | $202.1 million |
| Adjusted diluted net operating income per share (non-GAAP) | $0.80 | $0.73 |
| Operating cash flow | $155.8 million | $217.8 million |
| Cash and restricted cash, quarter-end | $61.9 million | $127.8 million at Q1 2019 end |
- GAAP revenue fell 9.5%, primarily reflecting a $43.9 million swing in net investment and other financial instrument results, from $21.9 million of gains to $22.0 million of losses. Net premiums earned rose $13.9 million to $277.4 million.
- Net income declined 17.8%, also affected by a $15.2 million increase in provision for losses. Adjusted pretax operating income increased modestly, as higher earned premiums and lower expenses and interest costs largely offset higher losses and lower investment income.
- Mortgage segment adjusted pretax operating income was $205.7 million, up from $203.6 million. Its loss ratio was 12.8%, versus 8.0%; expense ratio improved to 21.9% from 23.6%. Real Estate segment adjusted pretax operating loss widened to $4.9 million from $3.9 million.
- Q1 total comprehensive income was $59.8 million, versus $249.4 million, reflecting $80.7 million of after-tax unrealized investment losses, compared with gains of $78.4 million in Q1 2019.
- At March 31, total assets were $6.69 billion, total liabilities $2.83 billion, and stockholders’ equity $3.86 billion. Book value per share was $20.30. Senior notes were $887.6 million and FHLB advances $173.8 million; debt-to-capital was 18.7%, versus 18.0% at year-end 2019.
- Holding-company unrestricted cash and liquid investments were $648.2 million; including the undrawn $267.5 million revolving facility, total liquidity was $915.7 million. The revolver had no balance outstanding and was amended May 6, 2020 to extend maturity to January 2022.
Material changes and business developments
- Primary mortgage insurance new insurance written increased 53.3% to $16.7 billion. Primary insurance in force was $241.6 billion and risk in force was $60.9 billion at quarter-end.
- Mortgage insurance loss reserves increased to $414.7 million from $401.3 million at December 31, 2019. Claims paid were $23.4 million, down from $34.6 million a year earlier. Management kept key reserve assumptions largely unchanged despite favorable first-quarter trends, citing pandemic uncertainty.
- Radian repurchased approximately 11.0 million shares for $226.3 million in Q1. It suspended repurchases and canceled its trading plan on March 19. The board increased the quarterly dividend to $0.125 per share; $25.4 million of dividends and equivalents were declared in the quarter.
- Clayton was sold on January 21, 2020. Segment reporting was reorganized following the sale; prior-period segment results were recast.
- Radian expanded risk distribution through a new single-premium quota-share agreement and Eagle Re 2020-1 reinsurance, which provided $488.4 million of initial credit-risk protection. The company reported 68% of primary risk in force was subject to risk distribution.
- Radian Guaranty’s risk-to-capital ratio was 13.8:1, compared with 13.6:1 at year-end. It reported $4.1 billion of PMIERs Available Assets against $2.9 billion of Minimum Required Assets, a $1.1 billion cushion (38%). It was compliant at quarter-end.
Outlook, risks and contingencies
- COVID-19: Management expected a material negative effect on results, financial condition and liquidity beginning in Q2 2020 and continuing into future quarters. It anticipated substantially more mortgage defaults, higher loss reserves and PMIERs capital requirements, while warning that the extent and duration were highly uncertain. These expected defaults were not reflected in Q1 reserves because reserves generally are established after borrower payment defaults are reported.
- Under its then-current projections, management said the June 30 PMIERs cushion could absorb defaults of approximately 15% of the estimated insured portfolio; projected total available resources, including holding-company liquidity and the credit facility, could absorb approximately 25%. These were estimates subject to significant uncertainty, not guarantees.
- The company applied a disaster-related PMIERs capital charge to pandemic-related defaults, reducing applicable charges by 70%, but warned the GSEs could interpret or amend the rules less favorably. A substantial increase in defaults could reduce or exhaust the PMIERs cushion and require capital contributions from the holding company.
- For full-year 2020, Radian said it then expected mortgage insurance NIW to exceed $60 billion, but explicitly noted increased pandemic-related risks and uncertainty. It also expected lower near-term mortgage origination and real estate transaction activity. No earnings or loss guidance was provided.
- Management identified risks including borrower unemployment and home-price declines, forbearance and foreclosure delays, higher eventual claim severity, servicer operational and financial strain, investment-market volatility, GSE rule changes, and possible pressure on ratings and holding-company liquidity. It noted that Radian Guaranty could not pay ordinary dividends in 2020 because of negative unassigned surplus.
- Legal matters include ongoing Ocwen arbitration and Nationstar litigation over mortgage insurance claims and related disputes. The company maintained its existing IBNR reserve estimate; outcomes are uncertain and potential payments could exceed accruals. Management said it did not expect pending matters to materially affect consolidated financial condition, while acknowledging possible adverse effects in a particular period.
- Radian recorded $0.6 million of investment impairment losses related to securities it intended to sell at a loss; it reported no credit impairment indicated for other available-for-sale securities and no goodwill or acquired-intangible impairment in its Q1 assessment.
Key facts for investors to verify
- Subsequent reported mortgage defaults, claims, reserve development and claim severity versus the company’s Q2-and-later expectations.
- Changes in PMIERs Available Assets, Minimum Required Assets and cushion, including GSE treatment of disaster-related capital charges and reinsurance credit.
- Holding-company liquidity and any capital contributions required to support Radian Guaranty, alongside dividend payments and any resumption of share repurchases.
- Whether the stated 2020 NIW expectation of more than $60 billion remained achievable as pandemic conditions affected mortgage originations.
- Investment portfolio valuation and realized or unrealized losses, as well as the status and potential financial effects of the Ocwen and Nationstar disputes.