Business context and reporting period
Radian Group Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Its two segments are Mortgage Insurance, primarily private mortgage insurance, and Services, which provides mortgage, real estate and title services.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $380.3 million | $330.7 million | $1,138.9 million | $941.5 million |
| Net income | $173.4 million | $142.8 million | $511.1 million | $466.2 million |
| Diluted EPS | $0.83 | $0.66 | $2.39 | $2.13 |
| Adjusted pretax operating income | $212.7 million | $196.7 million | $630.7 million | $551.8 million |
| Adjusted diluted operating EPS | $0.81 | $0.71 | $2.33 | $1.99 |
- Segment results: Mortgage Insurance adjusted pretax operating income was $214.3 million in Q3 and $641.8 million year to date. Services recorded adjusted pretax operating losses of $1.5 million and $11.1 million, respectively.
- Cash flow: Nine-month operating cash flow was $506.8 million, versus $491.9 million in 2018. Investing activities used $162.9 million; financing activities used $398.7 million. Cash and restricted cash declined $54.8 million to $52.2 million.
- Balance sheet and debt: At September 30, total assets were $6.67 billion, total liabilities $2.75 billion, and stockholders’ equity $3.92 billion. Senior notes totaled $886.6 million and FHLB advances $104.5 million. Holding-company debt-to-capital declined to 18.4% from 22.8% at year-end 2018.
- Liquidity and capital: Holding-company unrestricted cash and liquid investments were $730.7 million, with a fully undrawn $267.5 million revolving credit facility. Radian Guaranty reported a $652 million PMIERs cushion, or 24% over minimum required assets, and was compliant with applicable PMIERs and state requirements. Its risk-to-capital ratio was 14.2:1.
- Returns and loss metrics: Q3 and nine-month return on equity were 18.0% and 18.4%; adjusted operating ROE was 17.4% and 17.9%. Mortgage Insurance loss ratios were 10.5% and 11.6%, respectively.
Material changes versus prior comparable periods
- Higher premiums earned, investment income and investment gains supported increased revenue and earnings. Nine-month net income growth was partly offset by a higher tax provision; the 2018 comparison included a $73.6 million tax benefit from settlement of the IRS matter.
- Nine-month 2019 results included a $32.9 million cumulative increase in insurance premiums earned from updated single-premium policy amortization assumptions, plus a $6.2 million reduction in operating expenses from accelerated ceding commissions.
- Primary new insurance written rose to $22.0 billion for Q3 from $15.8 billion, and $51.4 billion for nine months from $43.8 billion. Primary insurance in force increased to $237.2 billion from $221.4 billion at year-end 2018.
- Refinance activity increased as mortgage rates fell, boosting new business but reducing persistency: annual persistency was 81.5%, versus 83.1% at year-end 2018; the quarterly annualized rate was 75.5%.
- Debt transactions retired the 2019 notes and remaining 2020 and 2021 notes, while issuing $450 million of 4.875% notes due 2027. Debt extinguishment losses were $5.9 million in Q3 and $22.7 million year to date.
- Share repurchases totaled $275.2 million in the first nine months. The prior $250 million authorization was completed, and a new $200 million program was approved; $175 million remained under it at September 30.
Outlook, commentary, risks and unusual items
- Management expected 2019 mortgage insurance new business written of $65 billion to $70 billion, and said industry forecasts indicated higher full-year mortgage origination activity than in 2018. This is company guidance, not a guarantee.
- Management described underwriting quality as strong and cited favorable portfolio trends, including declining default inventory and lower paid claims. However, new defaults increased year over year, while the loss provision also rose; favorable prior-period reserve development partly offset current-default costs.
- Two lender/servicer disputes remain significant contingencies: Ocwen arbitration and Nationstar litigation. The company increased its IBNR reserve estimate by $11.8 million in Q3 and $31.2 million year to date for its best estimate of probable losses. Outcomes remain uncertain and payments could exceed accrued amounts.
- Key external risks include mortgage and housing-market conditions, competition and pricing, servicer performance, regulatory or GSE changes, and the possible expiration of the QM patch in January 2021 without a viable replacement. Federal housing-finance reform plans could also affect the business.
- Unusual reporting items include the single-premium recognition estimate change, substantial investment-related unrealized gains, debt extinguishment losses, the $375 million extraordinary distribution from Radian Guaranty, and adoption of lease accounting that added lease liabilities and right-of-use assets.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the 2019 premium and earnings increase reflects the single-premium accounting estimate change, and what are expected ongoing earnings effects?
- Whether mortgage refinancing continues to pressure persistency and how the mix of new business affects premiums, capital needs and future earnings.
- Whether loss reserves remain adequate given new-default trends, changing default-to-claim assumptions, and the Ocwen and Nationstar matters.
- Whether the reported PMIERs cushion and statutory capital remain sufficient under updated requirements, stress scenarios and future reinsurance terms.
- How the QM patch’s potential expiration and housing-finance reforms affect eligible loan volumes, competition and Radian’s market position.
- Whether holding-company liquidity and subsidiary cash flows can support debt service, planned repurchases and other capital needs; confirm subsequent repurchases and distributions.