Business context and reporting period
Radian Group Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. It provides private mortgage insurance and related services through its Mortgage segment, and title, valuation, asset-management and other services through Real Estate. The company reported a sharp rise in pandemic-related mortgage defaults, alongside record new insurance written and strong mortgage-origination activity.
Financial results and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.439 billion | $1.527 billion |
| Pretax income | $479.4 million | $849.0 million |
| Net income | $393.6 million | $672.3 million |
| Diluted earnings per share | $2.00 | $3.20 |
| Operating cash flow | $658.4 million | $694.4 million |
| Provision for losses | $485.1 million | $132.0 million |
- Revenue fell about 6%; pretax income declined about 44%, primarily because of higher mortgage-insurance loss provisions. The mortgage loss ratio rose to 44.2% from 11.6%; the expense ratio improved to 21.2% from 22.1%.
- Mortgage insurance net premiums earned were $1.093 billion, down from $1.134 billion. Net investment income declined to $154.0 million from $171.8 million. Net gains on investments and other financial instruments were $60.3 million, versus $51.7 million.
- Mortgage NIW reached a record $105.0 billion, up 47%; primary insurance in force increased 2% to $246.1 billion. The year-end primary default rate rose to 5.2% from 2.0%, after peaking at 6.5% in June. Claims paid fell to $97.6 million from $132.2 million, reflecting forbearance and foreclosure suspensions.
- Real Estate segment revenue was $102.4 million, up 14%; its adjusted pretax operating loss widened to $23.2 million from $18.0 million, reflecting COVID-19 impacts and strategic investment.
- Year-end total assets were $7.948 billion and stockholders’ equity was $4.284 billion; book value per share was $22.36, up from $20.13. Senior notes totaled $1.406 billion and FHLB advances were $176.5 million. The debt-to-capital ratio was 24.7%, versus 18.0%.
- Holding-company available liquidity was $1.1 billion; including the undrawn $267.5 million revolver, total liquidity was $1.4 billion. Radian Guaranty’s PMIERs cushion was $1.3 billion, or 40% above minimum required assets. Its risk-to-capital ratio was 12.7:1.
- Operating cash flow remained positive, while investing activities used $883.2 million and financing activities provided $222.6 million. The company issued $525 million of 6.625% senior notes due 2025.
Material changes versus 2019
- Loss provision increased by $353.1 million as new defaults rose to 108,025 from 40,985, substantially related to borrowers in COVID-19 forbearance programs. Year-end mortgage-insurance loss reserves rose to $844.1 million from $401.3 million.
- Mortgage insurance growth and record NIW were partly offset by falling persistency, down to 61.2% from 78.2%, as low rates drove refinancing and policy cancellations.
- Net income and adjusted pretax operating income fell materially; consolidated adjusted pretax operating income was $432.1 million versus $854.6 million. The 2019 comparison included a $22.7 million debt-extinguishment loss and $4.8 million goodwill impairment.
- Services revenue declined to $105.4 million from $154.6 million, substantially reflecting the January 2020 sale of Clayton. Radian also announced it would wind down traditional appraisal services and focus on digital valuation offerings.
- The annual dividend increased to $0.50 per share from $0.01. Radian repurchased 11.0 million shares for $226.3 million before suspending buybacks in March 2020.
Outlook, risks and unusual items
- Management expected the primary default rate to remain below 6%, assuming continued economic recovery; this is an expectation, not a guarantee. Management cited external 2021 estimates of a 20–25% decline in total mortgage originations and a private mortgage-insurance market of $450–500 billion.
- Management targets a 13–17% unlevered, after-tax return on required capital for new business. It described long-term housing fundamentals as positive, while warning that pandemic duration, unemployment, home prices, borrower cures and claims remain uncertain.
- The temporary PMIERs COVID-19 capital charge reduced required assets on pandemic-related defaults by about $650 million at year-end. The benefit may diminish as loans age or relief rules change, potentially requiring capital contributions and pressuring holding-company liquidity. Radian Guaranty had negative unassigned surplus and was not expected to pay ordinary dividends to the parent in the foreseeable future.
- Other key risks include reserve-estimate uncertainty, extended forbearance and foreclosure delays, reinsurance cost or availability, competition and pricing pressure, lower persistency, GSE and regulatory changes, interest-rate and credit-spread exposure, and servicing, cyber and customer-concentration risks. S&P and Fitch outlooks were negative.
- Radian settled the Ocwen dispute in 2020, including a cash payment; the settlement was consistent with prior reserve estimates. The Nationstar settlement remained subject to GSE consent, and failure to obtain consent could revive litigation. Management stated pending legal matters were not expected to materially affect consolidated financial condition, while acknowledging outcomes are uncertain.
- The auditor issued an unqualified opinion and found internal control over financial reporting effective. Valuation of first-lien primary mortgage-insurance case reserves was identified as a critical audit matter because of the judgment involved in default-to-claim and severity assumptions.
Important facts for investors to verify
- How forbearance exits, cures, redefaults and eventual claims affect the $844.1 million mortgage-insurance reserve and the company’s default-rate expectation.
- Whether the PMIERs cushion remains adequate as the temporary capital relief changes, and whether Radian Guaranty requires parent capital support.
- How refinancing, persistency and premium yield affect future premiums and the profitability of the growing insured portfolio.
- Holding-company liquidity, debt maturities, revolver renewal and the capacity to sustain dividends or resume share repurchases given restrictions on insurance-subsidiary distributions.
- Reinsurance recoveries, collateral and the continuing availability and PMIERs treatment of risk-transfer arrangements.
- GSE consent and final resolution of the Nationstar settlement, as well as any material developments in other legal or regulatory matters.