Radian Group Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated financial statements. Radian operates Mortgage and homegenius segments; homegenius was renamed from Real Estate during Q2, with no change to segment composition.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $325.8m | $375.2m | $991.6m | $1,068.8m |
| Pretax income | $161.6m | $161.2m | $518.3m | $300.3m |
| Net income | $126.4m | $135.1m | $407.2m | $245.6m |
| Diluted EPS | $0.67 | $0.70 | $2.11 | $1.25 |
| Net cash from operations | — | $403.3m | $498.8m |
- Q3 revenue declined 13.2% year over year and net income declined 6.4%; pretax income was nearly unchanged. Lower premiums, investment gains and higher operating expenses were partly offset by lower loss provisions.
- For the first nine months, revenue declined 7.2%, while net income rose 65.8%, principally because mortgage loss provisions were substantially lower than in 2020.
- Mortgage insurance provision for losses was $16.8m in Q3 and $66.0m year to date, versus $87.8m and $427.0m, respectively, in 2020. Favorable prior-period reserve development reflected better-than-expected cures and a lower default-to-claim assumption.
- Mortgage loss ratio was 7.1% in Q3 and 8.8% year to date, down from 31.0% and 53.0%. Mortgage expense ratio increased to 29.5% in Q3 and 26.0% year to date, versus 21.5% and 21.2%.
- homegenius revenue increased, but the segment remained loss-making: adjusted pretax operating loss was $5.6m in Q3 and $25.2m year to date, compared with $5.0m and $12.1m. Management cited strategic investment and higher compensation and title-agent costs.
- Book value per share was $23.48 at September 30, up from $22.36 at December 31, 2020. Year-to-date comprehensive income was $295.7m; net unrealized investment losses reduced other comprehensive income by $111.5m.
Balance sheet, debt and liquidity
- At September 30, total assets were $8.04bn, total liabilities $3.78bn and stockholders’ equity $4.26bn. Investments totaled $6.66bn; cash and restricted cash totaled $156.6m.
- Senior notes had a carrying value of $1.41bn; FHLB advances were $172.6m, fixed-rate with a weighted-average rate of 0.87%. The holding-company debt-to-capital ratio was 24.9%.
- Holding-company available liquidity was $768.4m, or approximately $1.0bn including the undrawn $267.5m revolving credit facility. The facility matured January 18, 2022; management expected to renew it before maturity.
- Radian Guaranty reported $5.3bn in PMIERs Available Assets and a $1.7bn cushion over Minimum Required Assets. It was compliant with PMIERs and applicable state capital requirements; its risk-to-capital ratio was 11.4:1.
- Operating cash flow fell to $403.3m from $498.8m. Financing used $306.9m, including $251.5m of share repurchases and $78.2m of dividends paid. The quarterly dividend increased to $0.14 per share in Q2.
Material changes, outlook and risks
- Primary mortgage IIF was $241.6bn, down from $246.1bn at year-end 2020; primary RIF was $59.4bn. Nine-month new insurance written was $68.2bn, down 9.5% from 2020. Persistency for the trailing 12 months was 60.8%, versus 65.6% a year earlier, reflecting refinance-related cancellations, particularly single-premium policies.
- Management said new defaults had returned to pre-pandemic levels and the primary default rate fell to 3.4% from 5.2% at year-end 2020. It also cited home-price appreciation and favorable cures. However, COVID-19 effects, future defaults and claims remain uncertain.
- Management cited industry forecasts for 2021 mortgage originations of approximately $4.2tn and a private mortgage insurance market of $575bn–$600bn, with refinance activity expected to decline and purchase lending to remain strong. These are market estimates, not company earnings guidance.
- A COVID-19-related PMIERs capital charge reduced required assets by approximately $336m at September 30. The benefit was expected to diminish over time; the charge and changing GSE capital rules remain relevant to capital and eligibility risk.
- Radian announced an expected November 2021 excess-of-loss reinsurance transaction providing up to $484.1m of coverage on an existing eligible portfolio, subject to customary closing conditions.
- Unusual items included a $3.5m second-quarter impairment related to exiting and subleasing former headquarters space. The Nationstar litigation settlement became effective in March 2021 and the case was dismissed; management said it did not materially affect mortgage insurance reserves.
- Key risks include COVID-19 and economic conditions, mortgage defaults and reserve-estimate uncertainty, refinance-driven policy cancellations, GSE and PMIERs changes, reinsurance counterparty and capital-relief risk, investment-market volatility, and holding-company liquidity. Radian Guaranty was not expected to pay ordinary dividends without Pennsylvania regulatory approval for the foreseeable future.
Important facts for investors to verify
- Whether default cures, claims, and loss-reserve assumptions continue to develop as favorably as management reported, and how sensitive reserves are to changes in severity and default-to-claim rates.
- Whether mortgage insurance persistency, IIF and premium yields stabilize as refinancing slows, and how new business volumes and mix evolve.
- Whether the $1.7bn PMIERs cushion remains adequate as pandemic capital relief phases down and GSE requirements or default levels change.
- Whether the revolving credit facility was renewed before its January 2022 maturity, and how holding-company liquidity is affected by buybacks, dividends and restricted subsidiary distributions.
- Whether homegenius growth can offset continuing segment losses and strategic investment costs; also monitor the closing and terms of the announced Eagle Re transaction.