RADIAN GROUP INC quarterly report, Q2 FY2012

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Radian Group Inc. — Q2 2012 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2012. Radian is a credit-enhancement company focused primarily on U.S. first-lien residential mortgage insurance; it also manages a run-off financial-guaranty portfolio. Figures are in U.S. dollars.

Financial performance and position

  • Q2 results: Total revenue was $158.2 million, versus $472.0 million a year earlier. Radian reported a net loss of $119.3 million, or $0.90 per diluted share, compared with net income of $137.1 million, or $1.03 per diluted share.
  • First-half results: Total revenue was $338.6 million, down from $1.075 billion. Net loss was $288.5 million, or $2.18 per diluted share, versus net income of $240.1 million, or $1.80 per diluted share.
  • Insurance premiums: Q2 net premiums earned were $186.8 million, down 1.1%; first-half net premiums earned were $354.1 million, down 9.7%. Net premiums written rose 19.0% in Q2 to $181.9 million, but fell 22.6% in the first half to $259.6 million, reflecting reinsurance and financial-guaranty portfolio changes.
  • Losses and investment results: Provision for losses was $210.9 million in Q2 and $477.0 million in the first half, down 20% and 31%, respectively, from the prior-year periods. Net investment income fell 29.5% in Q2 and 23.8% in the first half. Fair-value changes in derivatives were losses of $33.1 million in Q2 and $105.9 million in the first half, versus gains of $188.7 million and $432.6 million in the respective 2011 periods.
  • Cash flow: Operating cash flow was negative $361.9 million for the first half, compared with negative $608.9 million a year earlier. Investing activities provided $503.4 million and financing activities used $144.4 million. Period-end cash was $32.6 million.
  • Balance sheet and debt: At June 30, total assets were $6.03 billion, total liabilities $5.13 billion, and stockholders’ equity $900.9 million, down from $1.18 billion at year-end 2011. Long-term debt carrying value was $666.8 million. The company reported $79.4 million of principal remaining on its February 2013 notes; approximately $250 million is due in 2015 and $450 million in 2017.
  • Holding-company liquidity: Radian Group had $352.6 million of immediately available unrestricted cash and liquid investments at June 30. After quarter-end, it used $11.8 million to buy back $12.0 million principal of 2013 notes. Subsidiary dividends to the holding company were not expected in the foreseeable future.

Material changes and business developments

  • Mortgage insurance: Q2 segment net loss improved to $23.0 million from $97.6 million; first-half net loss improved to $68.2 million from $333.6 million, mainly due to lower loss provisions. Primary new insurance written increased to $8.3 billion in Q2 and $14.8 billion in the first half, versus $2.3 billion and $4.9 billion a year earlier. Primary default inventory fell to 98,450 loans from 110,861 at December 31, 2011; the primary default rate declined to 13.3% from 15.2%.
  • Financial guaranty: The segment reported a Q2 net loss of $96.3 million and first-half net loss of $220.3 million, compared with prior-year income of $234.7 million and $573.7 million. Net par outstanding declined to $41.5 billion from $69.2 billion at year-end, following transactions and portfolio run-off.
  • Portfolio actions: The Assured transaction reduced financial-guaranty net par outstanding by 22.5% and provided a reported $100.7 million statutory capital benefit, while reducing first-half pretax income by $28.8 million. A separate $210 million commutation of distressed CDO and TruPS exposures produced a $108 million GAAP loss in Q2; a related estimated $75 million statutory salvage recovery remains exposed to future losses.
  • Debt repurchases: Radian bought $158.7 million principal of its 2013 notes through June 30 and recorded a $15.9 million gain on purchases during the first half.

Outlook, risks and unusual items

  • Management expected improved mortgage-insurance operating results in 2012 compared with 2011, while still forecasting an operating loss for 2012 and marginal operating profitability in 2013. It projected a 15%–20% decline in new defaults for 2012 and approximately $1.1 billion of claims paid for the year.
  • Radian Guaranty’s risk-to-capital ratio was 21.0:1 at June 30, improved from 21.5:1 at year-end. Management expected it to rise and, absent additional support, exceed the commonly applicable 25:1 threshold and other state requirements in the second half of 2012. Waivers, reinsurance, capital support, and use of subsidiary RMAI were subject to regulatory and GSE conditions; Radian Group could be required to contribute additional capital.
  • The company cited persistent housing-market weakness, unemployment, foreclosure and servicing delays, and risks from older mortgage vintages. Its estimated default-to-claim rate increased to 46% from 43% at year-end; a one-percentage-point increase would raise estimated losses by approximately $58 million. Rescissions and denials reduced reserves by an estimated $532 million, but expected reinstatements increased IBNR reserves.
  • Fair-value results were highly volatile and sensitive to credit spreads and Radian’s own credit spread. A 100-basis-point interest-rate increase was estimated to reduce fixed-income fair value by $179.1 million. These fair-value movements do not necessarily equal ultimate credit losses or settlement amounts.
  • Other exposures include an IRS dispute over 2000–2007 tax years, with proposed adjustments of approximately $128 million plus potential penalties and interest; RESPA-related class actions and a CFPB investigation into captive reinsurance; disputes over insurance rescissions and claim denials; and financial-guaranty exposures including Jefferson County, healthcare and stressed sovereign credits. Radian expected to settle its Greece exposure in the second half of 2012, with an estimated statutory loss of $23.1 million.
  • Radian reported a $923.7 million valuation allowance against net deferred tax assets of approximately $939.7 million. Credit ratings were deeply speculative grade; Moody’s and S&P outlooks were negative. S&P downgrades on August 2, 2012, occurred after quarter-end.

Most important facts for investors to verify

  • Whether Radian Guaranty stays within state capital requirements and maintains waivers and GSE approvals, and how much additional capital support may be needed.
  • Whether holding-company liquidity can cover the remaining 2013 notes, operating needs, potential IRS payments, and subsidiary capital contributions.
  • Whether mortgage defaults, claims, rescissions, denials, and reinstatements develop in line with reserve assumptions and the 2012 claims outlook.
  • Whether the $75 million estimated salvage recovery from the TruPS commutation is realized, and whether financial-guaranty losses or settlements exceed current estimates.
  • Developments in the IRS examination, CFPB inquiry, RESPA litigation, and customer challenges to rescissions and claim denials.