Business context and reporting period
Radian Group Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company operates Mortgage Insurance, principally private mortgage insurance, and Services, which provides mortgage, real estate, title and related services.
Financial and operating highlights
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $1.273 billion | $1.222 billion |
| Pretax income | $684.2 million | $346.7 million |
| Net income | $606.0 million | $121.1 million |
| Diluted EPS | $2.77 | $0.55 |
| Adjusted pretax operating income (non-GAAP) | $745.5 million | $617.2 million |
| Net cash from operating activities | $677.8 million | $360.6 million |
| Total assets | $6.315 billion | $5.901 billion |
| Stockholders’ equity | $3.489 billion | $3.000 billion |
Revenue increased about 4%, led by higher mortgage insurance premiums and investment income; Services revenue declined. Net income’s substantial year-over-year increase also reflects the absence of 2017’s $184.4 million goodwill impairment and lower tax expense in 2018. In fourth-quarter 2018, net income was $139.8 million and diluted EPS was $0.64.
- Mortgage Insurance: Net premiums earned were $1.007 billion, up from $932.8 million; adjusted pretax operating income was $772.6 million, up from $651.0 million. The loss ratio was 10.4%, versus 14.6%, and the expense ratio was 23.9%, versus 24.7%.
- Services: Revenue was $148.2 million, down from $161.8 million; adjusted pretax operating loss narrowed to $27.1 million from $33.8 million. The segment remained loss-making.
- Mortgage insurance portfolio: Primary new insurance written was $56.5 billion, up 5%; primary insurance in force rose 10% to $221.4 billion. Persistency increased to 83.1% from 81.1%, and the primary default rate declined to 2.1% from 2.9%.
- Claims and reserves: Provision for losses fell to $104.6 million from $135.2 million. Claims paid were $215.9 million versus $390.4 million, partly reflecting the 2017 Freddie Mac settlement payment. The year-end reserve for losses and loss adjustment expenses was $401.4 million, down from $507.6 million.
- Investments and market results: Net investment income rose to $152.5 million from $127.2 million. Net losses on investments and other financial instruments were $42.5 million, compared with $3.6 million of gains, mainly reflecting unrealized losses amid higher interest rates.
- Liquidity and debt: Holding-company unrestricted cash and liquid investments were $714.1 million; including its undrawn $267.5 million revolving credit facility, reported total liquidity was $981.6 million. Senior notes had a $1.040 billion principal balance; $158.6 million was due in 2019. Debt-to-capital was 22.8%, down from 25.5%. Mortgage insurance subsidiaries also had $82.5 million of FHLB advances outstanding.
Material changes versus prior period
- Net income and adjusted operating income improved, while insurance premiums and the mortgage insurance portfolio grew. Operating cash flow increased to $677.8 million from $360.6 million.
- The 2018 statutory federal corporate tax rate fell to 21% from 35%. The 2017 tax provision included a $102.6 million deferred-tax remeasurement charge; 2018 included a $73.6 million tax benefit related to the IRS settlement and certain state and local tax liabilities.
- Radian completed a $50 million share repurchase program, buying 3.0 million shares at an average $16.56. A new $100 million authorization remained unused at year-end and was set to expire July 31, 2019.
- Radian Guaranty distributed $450 million of capital to the holding company with Pennsylvania regulatory approval. The company also entered into a reinsurance-linked excess-of-loss program providing up to $455.4 million of coverage, supporting capital management.
- Services revenue continued to contract as the business was restructured; the company acquired EnTitle Direct, Independent Settlement Services and Five Bridges assets to broaden its title, appraisal and analytics offerings.
Outlook, risks and unusual items
- Management expected 2019 mortgage insurance NIW of approximately $50 billion and a private mortgage insurance market comparable to 2018. These are forecasts, not guarantees.
- PMIERs 2.0 was scheduled to take effect March 31, 2019. The company expected compliance; applying the revised rules to year-end 2018 would have reduced the cushion from $567 million (19% of minimum required assets) to approximately $340 million (12%), mainly due to removal of credit for future premiums on pre-2009 policies.
- Key risks include economic and housing-market deterioration, mortgage defaults and loss-reserve estimation, interest-rate and investment-value volatility, intense competition, dependence on the GSEs and continued PMIERs eligibility, and the ability to fund holding-company and subsidiary needs. State restrictions and negative unassigned surplus at mortgage insurers limit ordinary dividends to the parent; extraordinary distributions require regulatory approval.
- Services revenue is transaction- and customer-dependent: its ten largest customers represented about 42% of segment services revenue, and its largest customer about 15%. Management also identified ongoing restructuring, technology implementation, cyber/privacy, regulatory and litigation risks.
- The IRS matter was settled in July 2018, resolving the dispute; Radian used $31 million of deposits to settle its obligation and expected a $58 million refund. It received $33 million in January 2019 and expected the remaining $25 million.
- Ocwen arbitration and Nationstar litigation remained pending; the filing says potential losses could not be reasonably estimated at that stage. Management believed pending matters would not materially adversely affect consolidated financial condition, but outcomes remained uncertain.
Investor facts to verify
- Track PMIERs 2.0 compliance and the actual cushion, including the effect of changing defaults, portfolio mix and reinsurance credit.
- Assess whether the $50 billion NIW outlook, pricing discipline and portfolio growth translate into sustainable returns as newer, higher-LTV business seasons.
- Monitor reserve assumptions, cure and claim trends, and the resolution of Ocwen and Nationstar disputes.
- Confirm holding-company liquidity after the 2019 debt maturity and expected IRS refund, and whether subsidiary cash flows can support parent expenses.
- Evaluate whether Services restructuring and acquisitions improve segment profitability and reduce customer concentration.
- Separate recurring operating performance from the IRS tax benefit and investment fair-value losses; adjusted operating income is a non-GAAP measure.