Business context and reporting period
Radian Group Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2013. The company provides credit enhancement, principally U.S. residential mortgage insurance, and reports mortgage insurance and financial guaranty segments. It stopped writing new financial guaranty business in 2008.
Financial results and position
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Total revenue | $42.4 million | $180.4 million |
| Pretax loss | $202.2 million | $178.1 million |
| Net loss; diluted loss per share | $187.5 million; $1.30 | $169.2 million; $1.28 |
| Net premiums earned | $192.6 million | $167.4 million |
| Cash used in operating activities | $166.0 million | $154.4 million |
| Total assets; total liabilities; equity | $6.37 billion; $5.44 billion; $931.0 million | At Dec. 31, 2012: $5.90 billion; $5.17 billion; $736.3 million |
| Long-term debt | $906.1 million | $663.6 million at Dec. 31, 2012 |
- Revenue and earnings were materially affected by a $167.7 million loss from changes in derivative fair values, versus a $72.8 million loss a year earlier. Investment results also swung from $67.5 million of gains to $5.5 million of losses. These market-sensitive marks were a major driver of the consolidated loss.
- Total expenses were $244.6 million, down from $358.5 million, primarily reflecting lower loss provision. Provision for losses fell to $132.1 million from $266.2 million.
- Investing activities used $437.3 million, including net purchases of short-term investments; financing activities provided $601.1 million, including equity and debt proceeds. Consolidated cash was $29.3 million at quarter-end, versus $31.6 million at year-end.
- Parent-company unrestricted cash and liquid investments were $886.4 million at March 31; this is distinct from consolidated cash. Radian Group raised approximately $299.5 million net through a common-stock offering and $389.8 million net from convertible notes.
Segment performance and operating measures
- Mortgage insurance: pretax loss narrowed to $16.8 million from $57.0 million. Net premiums earned were $183.0 million, up 5.5%; new insurance written was $10.9 billion versus $6.5 billion. New primary defaults declined 20% year over year, and primary default inventory fell 17.4% to 85,109 loans. Mortgage insurance loss reserves were $2.895 billion at quarter-end, down from $3.084 billion at Dec. 31, 2012.
- Claims paid increased to $309.9 million from $218.2 million, which management attributed largely to faster claims processing. The first-lien default-to-claim assumption increased to 49% from 47% at year-end; estimates for rescissions and denials reduce reserves and remain a material source of uncertainty.
- Financial guaranty: pretax loss widened to $185.4 million from $121.1 million, chiefly due to derivative fair-value losses. Net par outstanding declined 16% to $28.2 billion from $33.7 billion at year-end, reflecting terminations, maturities and a commutation. Derivative liabilities rose to $430.9 million from $266.9 million.
Material changes, outlook and risks
- Management expects 2013 new defaults, including pool insurance, to decline approximately 24% from 2012 and claims paid to be approximately $1.4 billion. It expects marginal mortgage-insurance-segment profitability in 2013, assuming improving macroeconomic trends continue; this is a projection, not a guarantee. Management anticipated the legacy portfolio would fall below 50% of the mortgage insurance portfolio sometime in Q2 2013.
- Management intends to keep Radian Guaranty’s statutory risk-to-capital ratio at or below 20:1. It was 18.6:1 at March 31, 2013, after a $115 million capital contribution during the quarter. The company estimated another $100 million to $200 million of parent contributions could be needed over the next 12 months absent other support. Radian Guaranty’s liquid assets under a Freddie Mac approval were $938.5 million against a $700 million minimum.
- Financing actions included exchanging $195.2 million of 5.375% notes due 2015 for 9.000% notes due 2017, repaying $79.4 million of notes due 2013, and issuing $400 million of 2.250% convertible notes due 2019. The convertible notes’ effective interest rate is 6.25%. These actions extended maturities but increased debt and interest costs.
- Derivative valuations are highly sensitive to credit spreads, including Radian’s own credit spread, and rely substantially on Level III assumptions. The company reported that tightening in its credit spread contributed to unrealized losses; such fair-value changes may not equal ultimate claim payments and may reverse before maturity.
- Mortgage loss reserves depend on uncertain default, cure, claim-severity, rescission, denial and reinstatement assumptions. A one-percentage-point change in the overall default-to-claim rate was estimated to change reserves by about $50 million; a one-point change in primary claim severity by about $83 million. Challenges to rescissions and denials, servicing delays, unemployment and housing conditions could change ultimate losses.
- At March 31, the company reported approximately $1.9 billion of federal NOL carryforwards and a $1.019 billion valuation allowance against net deferred tax assets of approximately $1.037 billion. The IRS dispute over 2000–2007 tax years could involve about $128 million in taxes, $42 million in proposed penalties and interest. The IRS had rejected the latest settlement offer and indicated it planned to issue a notice of deficiency.
- After quarter-end, Radian settled the CFPB captive-reinsurance investigation; the settlement, approved April 9, required a $3.75 million penalty and barred new captive reinsurance arrangements for ten years, without a finding of wrongdoing. A RESPA class action, Samp, was dismissed with prejudice on May 7; other related cases remained pending, and the company said potential losses could not be estimated.
- Other material risks include potential changes to the GSE and housing-finance system, regulatory capital requirements, dependence on parent liquidity and subsidiary distributions, and litigation or disputes over mortgage insurance claims. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improving defaults and housing conditions translate into the projected 2013 claims and mortgage-insurance profitability, and whether paid claims track management’s estimate.
- How sensitive reserves are to actual rescission, denial, reinstatement and claim-curtailment outcomes, and whether lender challenges change those estimates.
- Radian Guaranty’s ongoing capital and liquidity requirements, including the level and timing of further parent contributions and compliance with the $700 million liquid-assets threshold.
- The drivers and potential reversibility of derivative fair-value losses, including the impact of Radian’s own credit spread and other Level III assumptions.
- The resolution and cash impact of the IRS tax dispute, remaining RESPA and other legal matters, and the terms and consequences of the CFPB settlement.
- Debt service and refinancing needs following the 2013 issuance and exchange transactions, alongside the parent’s available liquidity and reliance on subsidiary expense reimbursements.