Radian Group Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. The filing is an annual report, not a standalone fourth-quarter report. Radian’s continuing businesses are Mortgage Insurance and Mortgage and Real Estate Services.
Business context and material changes
- Mortgage Insurance provides private mortgage insurance, primarily on first-lien U.S. residential loans. Services provides loan review, surveillance, valuation, title, appraisal, and real-estate-related services, principally through Clayton.
- Radian sold its financial-guaranty subsidiary, Radian Asset Assurance, on April 1, 2015, for approximately $810 million; net proceeds after adjustments were $789 million. The business is reported as discontinued operations.
- Clayton acquired Red Bell and ValuAmerica during 2015, expanding real estate brokerage, valuation, title, and appraisal-management offerings.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $1.193 billion | $1.073 billion |
| Pretax income from continuing operations | $437.8 million | $407.2 million |
| Net income from continuing operations | $281.5 million | $1.260 billion |
| Net income | $286.9 million | $959.5 million |
| Adjusted pretax operating income, non-GAAP | $510.9 million | $342.4 million |
| Net cash from operating activities | $13.8 million | $(136.2) million |
| Total assets | $5.642 billion | $6.842 billion |
| Long-term debt | $1.219 billion | $1.192 billion |
| Stockholders’ equity | $2.497 billion | $2.097 billion |
- Insurance premiums earned rose 8% to $915.9 million; Services revenue was $153.8 million, versus $76.7 million in 2014, when Clayton was consolidated for only six months.
- Mortgage Insurance adjusted pretax operating income increased to $513.1 million from $336.9 million. Provision for losses fell to $198.6 million from $246.1 million. The loss ratio improved to 21.7% from 29.1%; the expense ratio on earned premiums improved to 23.9% from 29.6%.
- Services reported revenue of $157.4 million and an adjusted pretax operating loss of $2.2 million, versus $76.7 million and income of $5.4 million in 2014. Lower margins and higher operating costs offset revenue growth.
- Net income was far below 2014, chiefly because 2014 included a substantial tax benefit from reversing most of the deferred-tax valuation allowance. 2015 also included a $94.2 million pretax loss on induced conversion and debt extinguishment; investment gains were lower year over year.
- Year-end investment portfolio carrying value was $4.299 billion, including $1.114 billion due within one year or less; 97.6% was investment grade. Holding-company unrestricted cash and liquid investments were approximately $343 million, including an $89 million IRS deposit.
Mortgage insurance, capital, and liquidity
- Primary new insurance written increased 11% to $41.4 billion. Insurance in force reached $175.6 billion, from $171.8 billion; primary risk in force was $44.6 billion.
- New business was 100% prime; 62% had borrower FICO scores of at least 740. Business written since 2009, including HARP refinancings, represented approximately 84% of primary risk in force.
- Primary defaults fell 22% to 35,303 loans; the default rate declined to 4.0% from 5.2%. Claims paid were $764.7 million, including $321.0 million attributable to settlements. The average primary claim severity rose to 105.8% from 100.2%, partly reflecting the Bank of America settlement.
- Loss reserves and loss-adjustment expenses declined to $976.4 million from $1.560 billion. The reserve estimate depends on judgments about defaults reaching claims, claim severity, cures, and loss-mitigation recoveries.
- Radian Guaranty met the revised PMIERs requirements at year-end, but its Available Assets exceeded Minimum Required Assets by only about $25 million ($4.084 billion versus $4.059 billion). The company transferred $325 million to Radian Guaranty in exchange for a 0% surplus note and contributed $50 million to an affiliated reinsurer.
- Radian Guaranty’s statutory risk-to-capital ratio was 14.3:1. Its negative unassigned surplus meant it could not pay ordinary dividends in 2016 without regulatory approval. The 2015 common dividend was $0.0025 per share quarterly.
- 2015 operating cash flow improved to slightly positive, but remains modest relative to claims and debt obligations. Total debt was $1.219 billion; scheduled principal maturities included $247.9 million in 2017, $690.0 million in 2019, and $350 million in 2020.
Outlook, management commentary, and risks
- Management expected 2016 new insurance written to be comparable to 2015’s $41.4 billion, despite forecasting a smaller overall mortgage origination market.
- Management expected 2016 claims paid of $400–$450 million and further declines in new defaults, potentially at a moderating rate. It projected returns on new business of approximately 13%–14% unlevered and 16%–17% levered; these are estimates, not guarantees.
- Management expected the slowdown in institutional single-family-rental purchases and securitizations to continue in 2016. A return of the non-agency RMBS market is described as a possible long-term opportunity, with uncertain timing and scale.
- Key risks include maintaining GSE eligibility under PMIERs, the small PMIERs capital cushion, changes in housing and mortgage markets, competition from private insurers, FHA and VA, pricing pressure, and possible GSE or housing-finance reforms.
- Other material uncertainties include reserve-estimation risk, foreclosure and servicing delays, reduced future benefit from legacy loss-mitigation actions, customer concentration, Services transaction volatility, goodwill impairment, investment-market volatility, and holding-company liquidity needs.
- The IRS dispute over 2000–2007 tax years remained unresolved. Notices asserted approximately $157 million in unpaid tax and penalties, with about $125 million interest and estimated additional state tax, penalties, and interest of about $32 million; the IRS also asserted approximately $105 million primarily relating to a disputed 2008 NOL carryback. The company contests the matter and had deposited $89 million with the Treasury.
- A February 2016 single-premium quota-share reinsurance agreement was subject to GSE approval; management estimated it could reduce Minimum Required Assets by $120–$150 million if approved. The company gave no assurance of approval.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The filing disclosed nonmaterial cash-flow classification errors in interim 2015 statements, which the company said it would correct in subsequent quarterly filings.
Important facts for investors to verify
- Whether Radian Guaranty maintains PMIERs compliance and builds a larger cushion above Minimum Required Assets, including whether the proposed reinsurance receives GSE approval.
- Whether projected 2016 new business, claims paid, default trends, and new-business returns are achieved.
- How much of reported earnings and reserve improvement reflects recurring insurance performance versus tax effects, investment gains, settlement activity, and other unusual items.
- The development of the IRS litigation, related tax exposure, and the realizability of approximately $1.1 billion of U.S. NOL carryforwards.
- Services segment profitability, client concentration, and exposure to SFR activity and mortgage-origination delays.
- Holding-company liquidity, debt maturities and conversion obligations, and any constraints on subsidiary distributions.