Radian Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results. Radian provides private mortgage insurance and mortgage, real estate and title services through its Mortgage Insurance and Services segments.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $291.6 million | $288.8 million |
| Pretax income | $142.4 million | $114.7 million |
| Net income | $114.5 million | $76.5 million |
| Diluted EPS | $0.52 | $0.34 |
| Operating cash flow | $118.4 million | $83.9 million |
| Cash and restricted cash at quarter-end | $130.1 million | $96.2 million at December 31, 2017 |
- Net premiums earned rose 9% to $242.6 million. Services revenue fell to $33.2 million from $38.0 million.
- Provision for losses declined to $37.3 million from $46.9 million; the mortgage insurance loss ratio was 15.4%, versus 21.3%.
- Net losses on investments and other financial instruments widened to $18.9 million from $2.9 million, primarily reflecting unrealized losses amid rising interest rates.
- The income tax provision fell to $28.0 million from $38.2 million; the effective tax rate was 19.6%, versus 33.3%, mainly reflecting the Tax Cuts and Jobs Act rate reduction.
- Adjusted pretax operating income, a non-GAAP measure, increased to $164.1 million from $125.3 million. Mortgage Insurance contributed $171.7 million; Services reported a $7.6 million adjusted pretax operating loss.
- Total assets were $6.01 billion and stockholders’ equity was $3.05 billion at March 31. Senior notes had a carrying value of $1.03 billion. The company also had $25.6 million of FHLB advances outstanding.
- Holding-company liquidity was $203 million, including an $89 million IRS deposit, plus a fully undrawn $225 million revolving credit facility; reported total liquidity was $428 million. The facility requires a $35 million minimum liquidity level.
- Unrealized investment losses reduced other comprehensive income by $54.6 million and book value per share by approximately $0.27 during the quarter. Book value per share was $14.16 at March 31.
Material changes and operating trends
- Primary new insurance written increased 16% to $11.7 billion; primary insurance in force rose to $204.0 billion from $200.7 billion at year-end 2017. Twelve-month persistency was 81.0%, up from 77.1% a year earlier.
- Mortgage Insurance adjusted pretax operating income increased, supported by higher earned premiums and lower losses. Primary default inventory fell 11.9% from year-end to 24,597 loans; the default rate was 2.55%, compared with 2.92% at year-end.
- Services revenue declined, mainly due to lower real estate and title transaction volumes. Cost reductions improved its adjusted pretax loss from $9.4 million to $7.6 million; gross profit was 32% of Services revenue, versus 28%.
- Radian acquired EnTitle Direct in March, expanding the geographic reach of its title and settlement services. The purchase price was described as not material.
- The company repurchased 531,013 shares in Q1 at an average $18.84 per share. It reported additional purchases of 924,720 shares in April at an average $16.24.
Outlook, risks and contingencies
- Management expected 2018 NIW of approximately $50 billion and the private mortgage insurance market to be comparable in size to 2017. Industry forecasts cited by Radian anticipated total mortgage originations down approximately 7%, with refinancing down and purchase originations up.
- Pricing changes effective June 2018 were expected to reduce overall premium rates by approximately 6% based on Radian’s recent business mix. Management projected a mid-teens blended return on required capital for new business, on an unlevered basis; actual results may differ.
- Radian Guaranty was in compliance with PMIERs at quarter-end, with a reported $526 million cushion, or 16%, over Minimum Required Assets. Management expected to comply with proposed PMIERs changes, which were not expected to take effect before year-end 2018. Hurricane-related delinquencies temporarily increased required assets.
- Management expected most defaults in FEMA-designated areas affected by Hurricanes Harvey and Irma to cure by the end of 2018. Outcomes remain sensitive to recovery conditions and reserve assumptions.
- Management expected an IRS settlement in the coming months. Following April 2018 notice of Joint Committee on Taxation approval, Radian expected approximately $35 million of holding-company liquidity to be used and a second-quarter net tax benefit of approximately $30 million. The settlement was not final at the filing date; failure to complete it could prolong litigation and materially change tax, earnings and cash-flow outcomes.
- Ocwen and Radian Guaranty entered a confidential agreement in April 2018. Radian made no payment under the agreement; approximately 2,500 certificate claims remained for arbitration, and the company could not estimate a reasonably possible loss. Green River Capital was cooperating with an SEC investigation concerning broker price opinions for single-family rental securitizations.
- Other key risks include competitive pricing, shifts toward higher-LTV and higher-debt-to-income lending, GSE and regulatory discretion, interest-rate and credit-spread volatility, insurance capital requirements, and the Services segment’s continuing cash needs. Services had not generated enough cash to reimburse approximately $75 million of accumulated allocated expenses and interest.
Important facts for investors to verify
- Whether mortgage insurance growth, persistency and claims trends support management’s approximately $50 billion 2018 NIW outlook.
- Whether Radian maintains its PMIERs cushion as proposed requirements take effect and hurricane-related defaults develop.
- The final IRS settlement terms, including the cash payment, expected tax benefit and any state or local tax effects.
- The outcome and potential exposure from the Ocwen arbitration and the SEC investigation.
- Whether Services restructuring and new title operations improve revenue and cash generation, and whether investment-market losses persist.
- The continued availability of holding-company liquidity after share repurchases, the IRS settlement and potential subsidiary capital needs.