Radian Group Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; comparisons are with the three and nine months ended September 30, 2017 unless noted. Unaudited consolidated results. Radian operates Mortgage Insurance and Services businesses.
Financial performance
Amounts below are in millions, except per-share data. “Nine months” refers to the first nine months of 2018.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $330.7 | $312.1 | $941.5 | $903.7 |
| Pretax income | $184.7 | $102.8 | $507.7 | $182.0 |
| Net income | $142.8 | $65.1 | $466.2 | $114.3 |
| Diluted earnings per share | $0.66 | $0.30 | $2.13 | $0.52 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $491.9 | $218.4 |
- Mortgage insurance premiums earned were $258.4 million in Q3 and $752.3 million for nine months, up 9% and 9%, respectively. Net investment income rose to $39.0 million in Q3 and $110.4 million for nine months.
- Net investment and other financial instrument losses were $4.5 million in Q3 and $30.8 million for nine months, versus gains of $2.5 million and $5.0 million in the comparable periods.
- Mortgage Insurance adjusted pretax operating income, a non-GAAP measure, was $204.6 million in Q3 and $573.8 million for nine months. Its loss ratio was 8.1% and 10.4%, respectively; the Q3 comparable was 15.2%.
- Services revenue was $36.6 million in Q3 and $106.6 million for nine months. Services adjusted pretax operating losses narrowed to $7.9 million and $22.0 million, respectively, from $12.9 million and $28.9 million.
- At September 30, total assets were $6.27 billion, total liabilities $2.92 billion, and stockholders’ equity $3.35 billion. Book value per share was $15.69, versus $13.90 at December 31, 2017.
- Cash and restricted cash totaled $114.3 million at September 30. Holding-company available liquidity was $246 million; including the undrawn $225 million revolver, reported total liquidity was $471 million. The revolver was increased to $267.5 million after quarter-end.
- Senior notes totaled $1.03 billion; the company also had $71.4 million of FHLB advances outstanding. Holding-company debt-to-capital was 23.5%, down from 25.5% at year-end 2017.
Material changes and business developments
- Net income improved substantially year over year. The comparison reflects higher mortgage insurance premiums, lower loss provision, higher investment income and lower restructuring costs. It also reflects the absence of 2017 debt-extinguishment charges and the 2017 Services goodwill impairment.
- Nine-month 2018 results included a $73.6 million tax benefit recorded in Q2 after settlement of the IRS dispute and reversal of certain state and local tax liabilities. Radian agreed to remit approximately $31 million of $89 million in qualified deposits; the balance is to be returned. The settlement resolved the IRS matter.
- Mortgage insurance new business written was $15.8 billion in Q3 and $43.8 billion for nine months, up 4% and 11%, respectively. Insurance in force increased to $217.1 billion from $200.7 billion at year-end 2017; 12-month persistency was 81.4%.
- Radian completed its prior $50 million share repurchase authorization in the first half of 2018. A new $100 million program was approved in August; the full authorization remained available at September 30. The quarterly dividend was $0.0025 per share.
- EnTitle Direct, a title insurance and settlement services company, was acquired in March 2018 for a purchase price described as not material.
Outlook, risks and contingencies
- Management expected 2018 mortgage insurance new business written to exceed $55 billion. Management cited an expected slightly larger private mortgage insurance market in 2018, supported by purchase originations and insurance penetration, while refinance volumes were pressured by higher interest rates.
- Following 2018 pricing changes, management estimated an approximately 7% overall relative premium-rate decrease on Q3 new business mix and projected a mid-teens unlevered blended return on required capital over policy lives. Management said it could take about three years for half of insurance in force to reflect current pricing, assuming business and persistency levels remain constant.
- Radian Guaranty was compliant with PMIERs at quarter-end, with approximately $3.8 billion of Available Assets and a $530 million cushion over Minimum Required Assets of approximately $3.3 billion. Revised PMIERs 2.0 take effect March 31, 2019. Management expected compliance, but estimated the changes would reduce Available Assets by about $200 million if applied at September 30, 2018, largely due to removal of credit for certain future premiums; it expected operating results to offset this before the effective date.
- Radian announced a planned November 2018 fully collateralized reinsurance transaction covering an existing 2017 policy portfolio, with approximately $434 million of excess-of-loss protection, subject to customary closing conditions. Management said its PMIERs outlook did not depend on this transaction.
- Key risks include housing and credit conditions, competitive pricing, mortgage insurer eligibility and capital requirements, reserve-estimation uncertainty, interest-rate and credit-spread volatility, and exposure to natural disasters. Management said Hurricane Harvey and Irma delinquencies were curing at high rates; the effect of later storms could differ from expectations.
- Pending matters include Ocwen arbitration over insurance claims and a Nationstar lawsuit involving coverage decisions and premium refunds. Radian said it would defend both and could not estimate reasonably possible losses. A separate SEC inquiry concerns broker price opinions for single-family rental securitizations; the subsidiary is cooperating.
- Services remains a loss-making segment. Its fee-for-service revenue can fluctuate with transaction activity, and management said the segment had not generated enough cash to reimburse Radian Group for $90 million of accumulated allocated operating and interest expenses.
Investor facts to verify
- Reconcile GAAP earnings with the $73.6 million Q2 IRS-related tax benefit and assess earnings excluding this item.
- Track the $530 million PMIERs cushion, the implementation effects of PMIERs 2.0, and whether the planned reinsurance transaction closes on expected terms.
- Monitor mortgage insurance reserve assumptions, default inventory and paid claims; reserve estimates are sensitive to claim severity and default-to-claim rates.
- Review Services revenue trends, segment losses, accumulated intercompany reimbursement obligations and any further restructuring or impairment charges.
- Assess holding-company liquidity and debt maturities, including the $159 million principal repayment due in June 2019, alongside the authorized share repurchases.