RADIAN GROUP INC annual report, FY2017

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Business context and reporting period

Radian Group Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It operates Mortgage Insurance, principally private mortgage insurance, and Services, a fee-based mortgage and real estate services business. The former financial guaranty business was sold in 2015.

Financial and operating performance

  • Revenue: Total revenue was $1.222 billion, down 1.4% from $1.238 billion in 2016. Insurance premiums earned rose 1.2% to $932.8 million; Services revenue fell 8.2% to $155.1 million. Net investment income increased to $127.2 million from $113.5 million.
  • Profit: GAAP pretax income was $346.7 million, down from $483.7 million; net income was $121.1 million, versus $308.3 million. Diluted EPS was $0.55 versus $1.37. Adjusted pretax operating income, a non-GAAP measure, increased 14% to $617.2 million; the filing cautions this is not a substitute for GAAP income.
  • Key charges and taxes: Results included $200.2 million of Services goodwill and intangible-asset impairment, $17.3 million of restructuring and exit costs, and a $102.6 million non-cash tax charge from remeasuring deferred tax assets after the Tax Cuts and Jobs Act (TCJA). The effective tax rate was 65.1%, compared with 36.3% in 2016.
  • Mortgage Insurance: Segment adjusted pretax operating income rose to $651.0 million from $561.9 million. New insurance written (NIW) reached a record $53.9 billion, up 7%; primary insurance in force grew 9% to $200.7 billion. The loss ratio improved to 14.6% from 22.2%, while the expense ratio increased to 24.7% from 22.7%. Loss reserves declined to $507.6 million from $760.3 million.
  • Services: Segment adjusted pretax operating loss widened to $33.8 million from $20.2 million. Revenue declined amid lower loan-review, REO-management and surveillance volumes; gross profit was 35% of segment revenue, unchanged from 2016.
  • Cash flow and balance sheet: Operating cash flow was $360.6 million, versus $381.7 million; investing cash flow was negative $201.5 million and financing cash flow negative $125.1 million. Total assets were $5.901 billion, stockholders’ equity $3.000 billion, and long-term debt $1.027 billion. Debt-to-capital improved to 25.5% from 27.1%.
  • Liquidity and capital: Holding-company cash and liquid investments were approximately $229 million, including an $88.6 million IRS deposit; with an undrawn $225 million revolving facility, reported total liquidity was $454 million. Radian Guaranty had $3.7 billion of PMIERs Available Assets and a $450 million excess over required assets at year-end. Its risk-to-capital ratio was 12.8:1.

Material changes versus 2016

  • Core mortgage insurance indicators strengthened: record NIW, higher insurance in force, a lower loss ratio and lower loss reserves. The portfolio was increasingly weighted to post-2008 business, which represented approximately 92% of primary risk in force.
  • Reported GAAP earnings fell substantially, primarily due to the Services impairment, the TCJA-related deferred-tax remeasurement, lower investment gains and restructuring costs. Adjusted pretax operating income rose, driven chiefly by Mortgage Insurance.
  • Radian restructured Services, discontinued certain initiatives and focused on core services expected to generate more predictable fee revenue. It recorded $17.3 million of 2017 restructuring charges and expected approximately $3.8 million more within 12 months.
  • Capital actions issued $450 million of 2024 notes and used cash to repurchase or settle other debt. The transactions eliminated convertible notes, extended the weighted-average maturity of senior notes by nearly two years and were expected to reduce annual cash interest by about $5.8 million.
  • Reinsurance changes increased ceded single-premium risk. The 2016 quota-share agreement was amended to cede 65% of performing loans for 2015–2017 vintages; a new agreement was set to cede 65% of single-premium NIW in 2018 and 2019, subject to terms and limits.

Outlook, commentary and risks

  • Management expected 2018 NIW of approximately $50 billion. Industry forecasts cited in the filing projected lower overall mortgage originations, with purchase activity increasing and refinancing declining.
  • Management expected 2018 claims paid to be below $300 million, excluding payments under future commutation agreements. It expected the TCJA to reduce the effective tax rate to approximately 21%, excluding discrete items, while noting that tax accounting remained provisional.
  • The proposed PMIERs revisions were expected to take effect in late 2018 and could materially increase capital requirements. Management expected Radian Guaranty to comply, but acknowledged uncertainty; the year-end cushion included the benefit of reinsurance and a $100 million surplus note.
  • Harvey- and Irma-affected areas accounted for approximately $4.6 billion of RIF, or 9% of primary RIF. Delinquencies increased and raised required PMIERs assets by about $100 million versus September 30, 2017. Management expected most related defaults to cure, but outcomes remain uncertain.
  • Material risks include dependence on GSE eligibility and housing-finance policy, competition from private insurers and government programs, changes in mortgage origination and interest rates, reserve-estimation uncertainty, servicing disruption, and the Services segment’s customer concentration and volatile transaction-driven demand.
  • The IRS dispute concerns 2000–2007 tax years. Notices asserted $157 million of taxes and penalties, approximately $149 million of related interest, and potentially about $37 million of state tax, penalties and interest; a separate $105 million amount primarily concerned a disputed 2008 NOL carryback. An agreement in principle was pending review and was not final at filing. Radian also disclosed Ocwen litigation, for which it could not estimate a reasonably possible loss, and an SEC staff investigation involving Green River Capital’s broker price opinions.

Important facts for investors to verify

  1. Whether the IRS settlement was finalized, its cash cost and its effect on tax attributes and liquidity.
  2. Final PMIERs revisions, the resulting required assets, and whether the reported $450 million cushion is maintained.
  3. Mortgage Insurance loss and cure experience, especially hurricane-related defaults, older defaults, claim severity and reserve development.
  4. Whether Services restructuring improves recurring revenue and profitability, and whether further impairments or costs arise.
  5. Actual 2018 NIW, claims paid and tax rate versus management’s stated expectations; also monitor debt maturities, holding-company liquidity and subsidiary dividend restrictions.