Radian Group Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results. Radian operates Mortgage and homegenius segments, alongside holding-company and other activities.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $313.5 million | $296.2 million | $914.6 million | $876.0 million |
| Pretax income | $201.0 million | $255.5 million | $587.7 million | $749.5 million |
| Net income | $156.6 million | $198.3 million | $460.4 million | $580.6 million |
| Diluted EPS | $0.98 | $1.20 | $2.86 | $3.34 |
| Adjusted pretax operating income (non-GAAP) | $210.5 million | $272.7 million | $594.7 million | $839.7 million |
| Adjusted diluted net operating income per share (non-GAAP) | $1.04 | $1.31 | $2.92 | $3.82 |
| Return on equity | 15.0% | 20.7% | 15.2% | 19.4% |
Q3 revenue rose 6%, but net income fell 21%. Higher investment income and improved investment-related results were outweighed by a substantially smaller benefit from mortgage-loss reserve releases. For the first nine months, revenue rose 4%, while net income declined 21% and adjusted pretax operating income declined 29% year over year. The filing reports net investment income of $68.8 million in Q3 and $192.2 million year to date, compared with $51.4 million and $136.6 million, respectively, in 2022.
Cash flow: Operating cash flow was $264.5 million for the first nine months, versus $282.1 million in 2022. Investing activities used $189.4 million, compared with providing $48.6 million; financing activities used $74.8 million, versus $427.5 million used in 2022. Cash and restricted cash ended at $56.8 million.
Balance sheet and capital: Total assets were $7.38 billion and stockholders’ equity was $4.15 billion at September 30. Senior notes totaled $1.417 billion and secured borrowings $241.8 million. The holding-company debt-to-capital ratio was 25.4%, down from 26.5% at year-end 2022; book value per share increased to $26.69 from $24.95. The available-for-sale investment portfolio had $667 million of gross unrealized losses; management said it intended and was able to hold the securities until recovery and did not expect to realize those losses.
Liquidity: Radian Group reported $1.0 billion of available holding-company cash and liquid investments and $1.3 billion of total liquidity including its undrawn $275 million revolving credit facility. The company reported compliance with debt covenants. Mortgage insurance subsidiaries had $6.0 billion of statutory claims-paying resources. Radian Guaranty had $5.8 billion of PMIERs Available Assets and a $1.7 billion cushion, or 41%, over minimum required assets; two October 2023 reinsurance transactions would have raised the cushion pro forma to $2.2 billion, or 63%.
Segments and material changes
- Mortgage: Q3 adjusted pretax operating income was $218.6 million, down from $295.7 million; nine-month income was $630.8 million, down from $890.0 million. Nine-month net premiums earned declined 7% to $679.0 million, reflecting increased ceded premiums, lower profit commissions and less benefit from single-premium policy cancellations. Higher investment income and cost reductions provided partial offsets.
- Mortgage activity and portfolio: Primary new insurance written was $13.9 billion in Q3 and $42.1 billion year to date, down 21% and 24%, respectively. Primary insurance in force rose to $269.5 billion from $261.0 billion at year-end 2022; 12-month persistency increased to 83.6% from 79.6%. The primary default rate was 2.0%, compared with 2.2% at year-end.
- Loss reserves: The mortgage provision was a benefit of $8.3 million in Q3 and $46.7 million for nine months, versus benefits of $97.5 million and $295.9 million in 2022. Prior-period favorable reserve development continued, but was smaller. New primary defaults rose 17% year to date to 31,555; the gross default-to-claim assumption remained 8.0%.
- homegenius: Q3 revenue fell to $14.7 million from $25.1 million, and the segment reported a $20.9 million adjusted pretax operating loss, compared with a $25.5 million loss. The nine-month loss widened to $68.4 million from $56.7 million as lower title and real estate services revenue exceeded cost savings. Radian recorded $1.9 million of homegenius severance expense year to date.
Outlook, risks and unusual items
- Management expects higher mortgage rates to continue weighing on new insurance written and homegenius revenue, and to contribute to higher mortgage insurance defaults. Higher rates also support persistency and investment income. No specific earnings guidance was provided.
- Management cited favorable longer-term housing fundamentals, including first-time-homebuyer demographics and constrained housing supply, while noting risks from inflation, slower growth, recession and unemployment.
- In October 2023, Radian added up to $353 million of fully collateralized Eagle Re excess-of-loss coverage and up to $246 million under a separate excess-of-loss agreement. These transactions cover specified existing policy portfolios and are subsequent to quarter-end.
- In the second quarter, Eagle Re note tender offers generated $21 million of additional ceded premiums and related costs; management estimated approximately $58 million of future ceded-premium savings and expected to recover the upfront cost within a year. Radian also reestablished $39 million of contingency reserves related to the terminations.
- Key risks include housing and credit conditions, reserve-estimation uncertainty, PMIERs and regulatory capital requirements, reinsurance counterparty performance, investment fair-value volatility, and liquidity or refinancing needs. The $450 million face amount of senior notes due in October 2024 is an upcoming maturity. Management said pending or threatened legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Investor verification priorities
- Track whether mortgage defaults, cures and claim severity support the 8.0% gross default-to-claim assumption and reported reserve releases.
- Verify that persistency and investment-income gains offset reduced new business and elevated ceded premiums as market conditions evolve.
- Assess homegenius revenue trends, ongoing losses, and the effect of expense reductions and capital support.
- Confirm the realized capital and coverage benefits of the October reinsurance agreements, including continued PMIERs credit and counterparty collateralization.
- Review available holding-company liquidity and refinancing plans for the 2024 senior-note maturity, alongside dividends and share repurchases.