Radian Group Inc. — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Radian operates Mortgage Insurance and Services businesses. Mortgage Insurance provides private mortgage insurance; Services provides mortgage- and real estate-related analytics and outsourced services.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $302.9m | $330.2m | $591.7m | $643.1m |
| Pretax income (loss) | $(35.5)m | $156.5m | $79.2m | $258.9m |
| Net income (loss) | $(27.3)m | $98.1m | $49.1m | $164.4m |
| Diluted EPS | $(0.13) | $0.44 | $0.22 | $0.73 |
| Adjusted pretax operating income (non-GAAP) | $163.7m | $131.4m | $289.0m | $261.6m |
| Operating cash flow | Not provided quarterly | $206.4m | $150.8m |
Q2 revenue included $229.1m of earned insurance premiums, $37.8m of Services revenue and $30.1m of investment income. Mortgage Insurance adjusted pretax operating income was $170.4m in Q2 and $305.0m for the half year; Services recorded adjusted pretax operating losses of $6.6m and $16.0m, respectively. Services gross margin was 35% in Q2 versus 34% a year earlier, and 32% for the half year versus 33%.
At June 30, total assets were $5.82bn, investments $4.58bn, cash and restricted cash $82.4m, stockholders’ equity $2.91bn and long-term debt $989.0m. The loss and LAE reserve was $651.6m, down from $760.3m at year-end 2016. Holding-company cash and liquid investments were approximately $360m, including an $89m IRS deposit. Consolidated six-month cash flows included $50.2m used in investing and $135.7m used in financing.
Radian Guaranty reported $4.1bn of PMIERs available assets against $3.8bn of minimum required assets, a cushion of approximately $321m. Its risk-to-capital ratio was 14.3:1, compared with 13.5:1 at year-end.
Material changes versus prior period
- Q2 net loss chiefly reflected a $184.4m goodwill impairment and $15.8m impairment of Services intangible assets. These charges followed lower growth expectations, weaker market trends and a strategic reassessment. Remaining goodwill and intangible assets were $10.9m and $58.9m, respectively.
- Investment and other financial-instrument gains fell to $5.3m in Q2 from $30.5m, and to $2.5m for the half year from $61.8m, largely reflecting smaller fair-value gains on trading securities.
- Adjusted pretax operating income improved, led by Mortgage Insurance: lower loss provisions and interest expense more than offset higher operating expenses. Insurance premiums earned were essentially unchanged year over year.
- Services revenue decreased 5% in Q2 to $40.0m, though it rose for the half year to $80.1m from $76.7m. Management cited lower surveillance, REO and loan-review volumes, competition, customer insourcing and delayed technology efficiencies.
- Mortgage Insurance new insurance written increased to $14.3bn in Q2 and $24.4bn for the half year. Primary insurance in force rose to $191.6bn from $183.5bn at year-end. The primary default rate declined to 2.6% from 3.2% at year-end, and default inventory fell 18% to 23,755 loans.
- Operating cash flow increased year over year, mainly due to lower claims paid and higher net premiums written. Financing cash use reflected $141.7m of cash settlements and purchases of convertible notes.
Outlook, risks and unusual items
- Management expected 2017 new insurance written to be comparable to 2016’s $50.5bn, and the private mortgage insurance market to be only modestly smaller despite a forecast decline in total mortgage originations. Management estimated full-year claims payments of $300m–$400m, excluding negotiated commutations.
- Radian expects Services restructuring charges not to exceed $25m pretax; plans were not final and charges could be materially lower. Management intends to focus the segment on core offerings and more predictable recurring fee revenue.
- Management estimated returns on current new Mortgage Insurance business of approximately 13%–14% unlevered and 17%–18% levered, subject to actual mix, pricing, reinsurance and economic conditions.
- The GSEs expected updated PMIERs requirements to take effect in Q4 2018. Radian Guaranty was compliant at quarter-end; management expected no additional capital contribution under current rules, but future requirements could change.
- The IRS dispute over 2000–2007 tax years remained unresolved. Notices asserted $157m of taxes and penalties, approximately $143m of interest, and potentially about $36m of additional state taxes, penalties and interest; a potential settlement remained subject to review. The company had $89m deposited with the IRS and stated it believed its tax provision was adequate.
- Ocwen litigation and parallel arbitration concerned claims-handling practices and listed 8,870 certificates. The court denied Radian’s motions to dismiss and enjoin arbitration in July 2017; the company said it could not estimate a reasonably possible loss. The SEC was also seeking information from Green River Capital concerning broker price opinions for single-family-rental securitizations.
- Services had $7.7m of cash and cash equivalents, including restricted cash, and had not generated enough cash to reimburse $51.3m of allocated operating and interest expense; Radian Group could provide further support. Insurance-subsidiary dividends were constrained by negative unassigned surplus.
Key facts for investors to verify
- Whether Services restructuring costs, business repositioning and cash-flow performance remain within management’s expectations.
- Whether the Services goodwill and intangible asset valuations require further impairment as forecasts and market conditions evolve.
- Progress and financial exposure from the IRS matter, Ocwen proceedings and SEC inquiry.
- PMIERs cushion and capital adequacy under any updated GSE requirements, including the effect of Radian Reinsurance’s expected change in affiliated-reinsurer status.
- Mortgage Insurance claims experience and reserve assumptions, particularly cure rates, default-to-claim rates and claim severity.
- Holding-company liquidity, upcoming debt maturities and potential support needs of the Services segment.