Business Context and Reporting Period
Radian Group Inc. is a diversified mortgage and real estate services company with Mortgage Insurance and Services segments. This unaudited Form 10-Q covers the three months ended March 31, 2019; comparisons are with the same 2018 quarter unless otherwise noted.
Financial and Operating Highlights
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $363.6 million | $291.6 million |
| Pretax income | $216.1 million | $142.4 million |
| Net income | $171.0 million | $114.5 million |
| Diluted EPS | $0.78 | $0.52 |
| Adjusted pretax operating income (non-GAAP) | $202.1 million | $164.1 million |
| Operating cash flow | $217.8 million | $118.4 million |
- Revenue growth reflected higher insurance premiums and investment income, and a swing to investment and financial-instrument gains of $21.9 million from losses of $18.9 million. Management attributed much of the investment gain to unrealized valuation changes as interest rates fell.
- Net insurance premiums earned rose to $263.5 million from $242.6 million. Provision for losses declined to $20.8 million from $37.3 million; the loss ratio fell to 8.0% from 15.4%. Prior-period reserve releases contributed $18.2 million in favorable development.
- Mortgage Insurance adjusted pretax operating income increased to $208.2 million from $171.7 million. Services reported an adjusted pretax operating loss of $6.1 million, improved from a $7.6 million loss.
- Mortgage Insurance expense ratio was 23.7% in both periods. Consolidated return on equity was 19.0%, compared with 15.1%; adjusted net operating return on equity was 17.7%, compared with 17.1%.
- Cash and restricted cash totaled $127.8 million at quarter-end. Total assets were $6.60 billion, total liabilities $2.89 billion, and stockholders’ equity $3.71 billion. Operating cash flow benefited in part from a $57.2 million IRS refund and lower claim payments. Investing activities used $185.3 million; financing activities used $11.7 million.
- Senior notes had a carrying value of $1.03 billion; FHLB advances were $108.5 million. The $267.5 million revolving credit facility was undrawn, and the company reported covenant compliance. Holding-company cash and liquid investments were $723.4 million; stated total liquidity, including the facility, was $990.9 million at March 31.
- Mortgage Insurance primary insurance in force was $223.7 billion and primary risk in force $57.4 billion. Twelve-month persistency rose to 83.4% from 81.0%; primary loans in default were 1.95% of insured loans, down from 2.55% a year earlier.
Material Changes and Management Outlook
- Primary new insurance written was $10.9 billion, down 6.6% year over year, mainly due to weaker refinance activity; purchase loans made up 92.2% of new business. Management expected the 2019 private mortgage insurance market to be comparable to 2018 and projected Radian’s 2019 new insurance written to exceed $50 billion.
- Services revenue was $32.8 million, slightly below $33.2 million. Mortgage services weakness was partly offset by real estate services. Acquisitions made in 2018 contributed to operating expenses. Effective January 1, 2019, Radian Group recapitalized Services, enabling repayment of the Clayton intercompany note; Services no longer bears that note’s interest expense.
- PMIERs 2.0 became effective March 31, 2019. Radian Guaranty remained eligible and compliant, with $488 million of excess available assets, or 16%, over its $3.0 billion minimum required assets. The revised requirements reduced the cushion, primarily by eliminating credit for future premiums on policies written through 2008.
- After quarter-end, regulators approved and Radian Guaranty paid a $375 million extraordinary capital distribution to Radian Group on April 30. Also in April, Radian Guaranty entered into reinsurance providing up to $562 million of excess-of-loss coverage on a specified 2018 policy portfolio; management expected it to reduce PMIERs minimum required assets by the same amount.
- The company repurchased 1.55 million shares in Q1 at an average $20.54 per share. It reported additional purchases of 4.13 million shares after quarter-end through the filing date. The board had authorized up to $250 million in total repurchases.
- The $158.6 million principal amount of senior notes due June 2019 was a near-term liquidity demand. Management estimated next-12-month corporate expenses of $90–$100 million and debt interest payments of about $51 million.
Risks, Contingencies, and Unusual Items
- Mortgage insurance performance is exposed to housing and economic conditions, mortgage origination levels, interest rates, competition, defaults, cure rates, claim severity, and loss-reserve estimation. The company also depends on continued PMIERs eligibility, regulatory capital compliance, reinsurance effectiveness, and access to holding-company liquidity.
- Radian disclosed ongoing disputes with Ocwen and Nationstar concerning mortgage insurance claims and coverage. It could not estimate a reasonably possible loss or range for either matter; management stated that it intended to defend the claims. The filing notes that legal outcomes are uncertain.
- Other notable items included a $5.4 million charge primarily related to impairments of other long-lived assets, and adoption of lease accounting that added $70.9 million of lease liabilities at March 31 without affecting equity, earnings, or liquidity.
- Management reported no material changes to the risk factors in its 2018 Form 10-K and stated that disclosure controls were effective as of March 31, 2019. The filing provides no full-year earnings guidance.
Important Facts for Investors to Verify
- Whether the projected 2019 new insurance written above $50 billion and comparable-market outlook are achieved as purchase and refinance activity evolves.
- How lower default inventory and favorable prior-year reserve development compare with subsequent defaults, cures, claim payments, and reserve adjustments.
- The effect of the $375 million capital distribution and $562 million reinsurance transaction on PMIERs headroom, statutory capital, and holding-company liquidity.
- Funding and refinancing of near-term and later senior-note maturities, alongside continued share repurchases and planned capital needs.
- Developments in the Ocwen and Nationstar disputes and any resulting financial or reserve impact.
- How much reported earnings growth is sustained by core operations versus investment fair-value gains and other unusual items.