Business context and reporting period
Radian Group Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Its two segments are Mortgage Insurance, principally private mortgage insurance, and Services, a fee-based mortgage, real estate and title services business.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $395.0 million | $319.3 million | $758.6 million | $610.8 million |
| Pretax income | $209.5 million | $180.6 million | $425.7 million | $323.0 million |
| Net income | $166.7 million | $208.9 million | $337.7 million | $323.4 million |
| Diluted earnings per share | $0.78 | $0.96 | $1.56 | $1.48 |
| Adjusted pretax operating income (non-GAAP) | $215.8 million | $191.0 million | $417.9 million | $355.1 million |
- Revenue growth reflected higher insurance premiums earned and investment income, alongside higher services revenue. Net investment income was $43.8 million in Q2 and $87.6 million for the half-year.
- Q2 provision for losses was $47.4 million, versus $19.3 million; the reported loss ratio was 15.9%, versus 7.8%. Six-month loss ratio was 12.2%, versus 11.6%. Mortgage Insurance expense ratio was 19.9% in Q2 and 21.7% for the half-year, down from 23.9% and 23.8%, respectively.
- Services reported adjusted pretax operating losses of $3.5 million for Q2 and $9.6 million for the half-year, improving from $6.4 million and $14.0 million. The segment continued to operate at a loss.
- Six-month operating cash flow was $338.1 million, compared with $300.8 million. Investing activities used $144.8 million and financing activities used $221.2 million; cash and restricted cash ended at $79.1 million.
- At June 30, total assets were $6.59 billion, total liabilities $2.81 billion, and stockholders’ equity $3.78 billion. Senior notes totaled $982.9 million and FHLB advances $106.4 million. Holding-company debt-to-capital was 20.6%, down from 22.8% at year-end.
- Holding-company unrestricted cash and liquid investments were $878.6 million, with a further $267.5 million available under an undrawn revolving facility. Subsequent share repurchases and the July debt redemption reduced liquidity after quarter-end.
Material changes and unusual items
- Q2 net income and EPS declined from 2018 despite higher pretax income, mainly because Q2 2018 included a $73.6 million tax benefit related to the IRS settlement. The 2019 quarter also included a $16.8 million debt-extinguishment loss.
- Q2 2019 insurance premium revenue included a $32.9 million cumulative increase from updated recognition estimates for single-premium policies; accelerated ceded commissions reduced operating expenses by $6.2 million. Management said the revised estimate reflected policy mix, expected HPA cancellations and observed and projected loss patterns.
- Radian issued $450 million of 4.875% notes due 2027 and used cash to retire the 2019 notes and tender for 2020 and 2021 notes. The remaining $27.0 million of 2020 notes was redeemed on July 25, 2019.
- The company repurchased 9.0 million shares during the first half for approximately $197.6 million, including commissions. It completed the $250 million authorization after quarter-end; the program repurchased 11.3 million shares, or 5.3% of shares outstanding at its start.
- Radian Guaranty received regulatory approval for a $375 million extraordinary distribution to the holding company, paid April 30. PMIERs 2.0 became effective March 31; at June 30, Radian Guaranty reported $3.2 billion of available assets and a $660 million, or 26%, cushion over minimum required assets.
Outlook, commentary and risks
- Management expected full-year 2019 NIW to exceed 2018’s $56.5 billion. It cited strong origination activity, lower mortgage rates, high-quality new business and positive home-price and employment trends. Industry sources cited by the company projected 2019 mortgage originations up 7% from 2018; this is a market estimate, not company earnings guidance.
- Primary insurance in force rose to $230.8 billion from $221.4 billion at year-end; primary risk in force was $59.1 billion. The 12-month persistency rate was 83.4%. Management noted that refinancing activity can reduce persistency and that more dynamic, granular pricing may increase market-share and premium-rate volatility.
- Servicer disputes involving Ocwen and Nationstar remain unresolved. The company added $19.4 million to IBNR reserves in Q2 for its best estimate of probable losses; ultimate outcomes are uncertain and payments could exceed accruals.
- Risks include mortgage credit and housing-market deterioration, reserve-estimate uncertainty, reinsurance counterparty performance, PMIERs and regulatory changes, pricing competition, market-value fluctuations, and the possible expiration of the QM patch in January 2021 without a suitable replacement. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of premium growth and earnings reflects the $32.9 million cumulative single-premium estimate change, and how the revised assumptions perform in later periods.
- Whether new defaults, cures, claim severity and prior-period reserve development support the loss assumptions; specifically, the $19.4 million legal-related IBNR addition and potential exposure beyond accruals.
- Radian Guaranty’s PMIERs cushion and statutory capital after the $375 million distribution, including the effects of PMIERs 2.0 and reinsurance.
- Holding-company liquidity after post-quarter share repurchases and debt redemption, and the maturity, covenant and refinancing profile of remaining debt.
- Whether Services can improve profitability and whether the QM patch receives a replacement before its scheduled expiration.