Radian Group Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Radian provides mortgage insurance and mortgage, title, valuation, asset-management and other real-estate services. It sold Clayton in January 2020.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $364.4 million | $395.0 million | $693.5 million | $758.6 million |
| Net premiums earned | $249.3 million | $299.2 million | $526.7 million | $562.7 million |
| Provision for losses | $304.4 million | $47.4 million | $340.4 million | $68.2 million |
| Pretax income (loss) | $(42.2) million | $209.5 million | $139.1 million | $425.7 million |
| Net income (loss) | $(30.0) million | $166.7 million | $110.5 million | $337.7 million |
| Diluted EPS | $(0.15) | $0.78 | $0.56 | $1.56 |
Q2 operating loss reflected a sharp increase in mortgage-insurance loss provisions as pandemic-related defaults rose. Net investment income fell to $38.7 million from $43.8 million; investment and other financial-instrument gains increased to $47.3 million from $12.5 million. Q2 mortgage-segment loss ratio was 122.8%, versus 15.9% a year earlier. Real Estate segment adjusted pretax operating loss widened to $4.8 million from $3.8 million.
- Mortgage activity: Primary new insurance written was $25.5 billion in Q2, up from $18.5 billion. First-half NIW was $42.1 billion, versus $29.4 billion. Management expected full-year 2020 NIW to exceed $75 billion, subject to pandemic-related uncertainty.
- Portfolio and defaults: Primary insurance in force was $241.3 billion at quarter-end. Primary default rate rose to 6.5% from 2.0% at year-end 2019; management expected it to peak around 8–9% later in 2020 or early 2021. The reserve for losses and LAE increased to $738.9 million from $404.8 million at year-end.
- Persistency and pricing: Twelve-month persistency fell to 70.2% from 78.2% at year-end, as low rates drove refinancing and policy cancellations. Radian said it raised pricing and adjusted underwriting guidelines for pandemic risks.
- Cash flow and liquidity: First-half operating cash flow was $305.3 million, compared with $338.1 million; investing cash outflow was $580.4 million and financing cash inflow was $263.5 million. Holding-company available liquidity was $1.1 billion; total liquidity, including the undrawn revolving credit facility, was $1.4 billion.
- Debt and capital: Senior notes were $1.404 billion and FHLB advances $175.1 million at June 30. Radian issued $525 million of 6.625% notes due 2025 in May. Debt-to-capital rose to 26.0% from 18.0% at year-end. Radian Guaranty’s Risk-to-capital was 13.3:1; its PMIERs available assets of about $4.2 billion exceeded minimum required assets of $3.2 billion by $1.0 billion, or 31%.
- Shareholder returns and equity: The company repurchased $226.3 million of shares in the first half before suspending repurchases on March 19. The quarterly dividend was increased to $0.125 per share. Book value per share was $20.82 at June 30, up from $20.13 at year-end, including investment-related unrealized gains.
Outlook, risks and notable items
- Management said long-term housing fundamentals remained positive but warned that the pandemic could continue to affect defaults, claims, originations, real-estate services, liquidity and results. The timing and ultimate severity of losses remained uncertain; future defaults are generally not reserved until reported.
- COVID-19 forbearance and foreclosure relief may delay cures and claims and increase eventual claim severity. The temporary PMIERs disaster-related capital charge reduced required assets on eligible pandemic defaults, but defaults still reduced Radian Guaranty’s PMIERs cushion. Additional capital support could pressure holding-company liquidity.
- Low interest rates supported refinancing and NIW but also reduced persistency and may lower investment income as assets are reinvested. Market disruption could make future reinsurance less available or less favorable. Delinquency triggers on Eagle Re transactions suspended amortization of reinsurance coverage and related notes.
- Radian settled Ocwen/PHH and Nationstar disputes in June; cash payments were agreed but amounts were not disclosed. Implementation requires GSE consent. The settlements did not materially affect reserves in Q2; proceedings may resume if consent is not obtained.
- Radian Guaranty was compliant with PMIERs at quarter-end, but management did not expect it to pay ordinary dividends to Radian Group in 2020 because of negative unassigned surplus. The company also cited proposed GSE capital rules and mortgage-qualification changes as potential market risks.
Important facts for investors to verify
- Whether new defaults, cures and claim severity track management’s projected 8–9% peak default rate and whether reserves prove adequate.
- Changes in PMIERs minimum required assets, available-asset cushion and any need for parent-company capital contributions.
- Full-year NIW, refinancing-driven cancellations, persistency and resulting premium revenue.
- GSE consent and final cash-payment terms for the Ocwen/PHH and Nationstar settlements.
- Debt servicing and liquidity needs, ratings outlooks, and the availability and cost of future reinsurance.