Radian Announces Third Quarter 2017 Financial Results

10/26/17

Radian Group Inc. (NYSE: RDN) today reported net income for the quarter ended September 30, 2017, of $65.1 million, or $0.30 per diluted share. Results for the third quarter of 2017 include $45.8 million of pretax loss on induced conversion and debt extinguishment as well as $12.0 million of pretax restructuring and other exit costs related to the Mortgage and Real Estate Services segment. This compares to net income for the quarter ended September 30, 2016, of $82.8 million, or $0.37 per diluted share.

Adjusted pretax operating income for the quarter ended September 30, 2017, was $155.6 million, compared to $139.9 million for the quarter ended September 30, 2016. Adjusted diluted net operating income per share for the quarter ended September 30, 2017, was $0.46, an increase of 12 percent compared to $0.41 for the quarter ended September 30, 2016.

Book value per share at September 30, 2017, was $13.88, an increase of 3% compared to $13.54 at June 30, 2017, and $13.47 at September 30, 2016. Tangible book value per share at September 30, 2017, was $13.57, an increase of 3% compared to $13.22 at June 30, 2017, and an increase of 12% compared to $12.17 at September 30, 2016.

“We reported another quarter of excellent operating results for Radian and took several actions that strengthened our financial position and improved our capital structure,” said Radian’s Chief Executive Officer Rick Thornberry. “We also completed a strategic review of our Services business and finalized our restructuring plan, which is focused on re-positioning the segment for sustained profitability. We believe the changes we have made across our Services business will drive future growth and profitability for Radian, and deliver even greater value to our customers and stockholders.”

THIRD QUARTER HIGHLIGHTS AND RECENT EVENTS

Mortgage Insurance

  • MI new insurance written (NIW) grew to $15.1 billion for the quarter, an increase of 5 percent compared to $14.3 billion in the second quarter of 2017 and a decrease of 3 percent compared to $15.7 billion in the prior-year quarter.
    • NIW for the month of August 2017 represented record monthly volume written on a flow basis for the company.
    • Of the $15.1 billion in NIW in the third quarter of 2017, 23 percent was written with single premiums. After consideration of the 35 percent ceded under the Single Premium Quota Share Reinsurance Transaction, net single premiums were 15 percent of new business written in the third quarter of 2017.
    • Refinances accounted for 9 percent of total NIW in the third quarter of 2017, the same as the second quarter of 2017, and a decrease compared to 22 percent a year ago.
  • Total primary mortgage insurance in force as of September 30, 2017, grew to $196.5 billion, an increase of 3 percent compared to $191.6 billion as of June 30, 2017, and an increase of 8 percent compared to $181.2 billion as of September 30, 2016.
    • The composition of Radian’s mortgage insurance portfolio continues to improve, with 91 percent consisting of new business written after 2008, including those loans that successfully completed the Home Affordable Refinance Program (HARP).
    • Persistency, which is the percentage of mortgage insurance that remains in force after a 12-month period, was 80.0 percent as of September 30, 2017, compared to 78.5 percent as of June 30, 2017, and 78.4 percent as of September 30, 2016.
    • Annualized persistency for the three-months ended September 30, 2017, was 80.4 percent, compared to 82.8 percent for the three-months ended June 30, 2017, and 75.3 percent for the three-months ended September 30, 2016.
  • Total net premiums earned were $236.7 million for the quarter ended September 30, 2017, compared to $229.1 million for the quarter ended June 30, 2017, and $238.1 million for the quarter ended September 30, 2016.
    • Accelerated revenue recognition due to single premium policy cancellations was $15.4 million in the third quarter, compared to $13.3 million in the second quarter of 2017, and $30.6 million in the third quarter of 2016. Net of reinsurance, accelerated revenue recognition due to single premium policy cancellations was $8.3 million in the third quarter, compared to $7.4 million in the second quarter of 2017, and $18.4 million in the third quarter of 2016.
    • Ceded premiums of $13.8 million, $14.1 million and $19.9 million for the quarters ended September 30, 2017, June 30, 2017, and September 30, 2016, respectively, are net of accrued profit commission on reinsurance transactions of $7.4 million in the third quarter of 2017, compared to $6.7 million in the second quarter of 2017, and $8.9 million in the third quarter of 2016.
    • Direct mortgage insurance premium yield was 52 basis points in the third quarter, the same as the second quarter of 2017, and a decrease compared to 58 basis points in the third quarter of 2016.
    • Total net mortgage insurance premium yield, which includes the impact of ceded premiums and accrued profit commission, was 49 basis points in the third quarter, compared to 49 basis points in the second quarter of 2017, and 53 basis points in the third quarter of 2016.
  • The mortgage insurance provision for losses was $36.0 million in the third quarter of 2017, compared to $17.7 million in the second quarter of 2017, and $56.2 million in the prior-year period.
    • The total number of primary delinquent loans was flat in the third quarter compared to the second quarter of 2017, and decreased by 19 percent from the third quarter of 2016. The total number of primary new notices of default increased by 18 percent in the third quarter from the second quarter of 2017, and decreased by 4 percent from the third quarter of 2016.
    • The primary mortgage insurance delinquency rate decreased to 2.5 percent in the third quarter of 2017, compared to 2.6 percent in the second quarter of 2017, and 3.3 percent in the third quarter of 2016.
    • The loss ratio in the third quarter was 15.2 percent, compared to 7.7 percent in the second quarter of 2017 and 23.6 percent in the third quarter of 2016.
    • Mortgage insurance loss reserves were $556.5 million as of September 30, 2017, compared to $651.6 million as of June 30, 2017, and $821.9 million as of September 30, 2016.
    • Primary reserve per primary default (excluding IBNR and other reserves) was $21,367 as of September 30, 2017. This compares to primary reserve per primary default of $23,185 as of June 30, 2017, and $24,049 as of September 30, 2016.
  • Total mortgage insurance claims paid were $131.5 million in the third quarter, compared to $91.3 million in the second quarter of 2017, and $82.7 million in the third quarter of 2016. Excluding the $55.0 million impact of commutations and captive terminations (which includes payments that, as expected, were made during the third quarter in connection with the final settlement of the Freddie Mac agreement entered into in August 2013), claims paid were $76.5 million in the third quarter of 2017. In addition, the company’s pending claim inventory declined 56 percent from the third quarter of 2016.
  • The company continues to focus on effectively managing its capital position in a cost-efficient manner, improving its return on capital and proactively managing the retained mix of single-premium business in its total MI portfolio. In October 2017, Radian Guaranty Inc., the MI subsidiary of Radian Group, agreed to terms for a new quota share reinsurance arrangement for single-premium MI business (Single Premium QSR) with a panel of eight third-party reinsurance providers in order to cede new single-premium MI business. The terms of the new Single Premium QSR include a 65 percent cession of business written in 2018 and 2019. Other terms of the new arrangement are substantially the same as our existing single premium reinsurance transaction. The company's existing single premium reinsurance transaction, which was entered into in 2016, provides for a 35 percent cession of single-premium NIW through 2017. The new Single Premium QSR and the company's related PMIERs credit under the program remain subject to GSE approval.

Mortgage and Real Estate Services

  • As previously announced, based on recent performance below expectations for its Services segment, the company committed to a restructuring plan and incurred related charges in the third quarter of $12 million. Additional pretax charges of approximately $8 million, including approximately $6 million in cash, are expected to be recognized within the next 12 months. The total charges of approximately $20 million are expected to consist of approximately $8 million in asset impairments, approximately $7 million in employee severance and benefit costs, approximately $3 million in facility and lease termination costs, and approximately $2 million in contract termination and other restructuring costs.
  • Total revenues for the third quarter were $41.1 million, compared to $40.0 million for the second quarter of 2017, and $48.0 million for the third quarter of 2016.
  • The adjusted pretax operating loss before corporate allocations for the quarter ended September 30, 2017, was $4.7 million, compared to income of $1.2 million for the quarter ended June 30, 2017, and income of $4.8 million for the quarter ended September 30, 2016.
  • Adjusted earnings before interest, income taxes, depreciation and amortization (Services adjusted EBITDA) for the quarter ended September 30, 2017, was a loss of $3.6 million, compared to income of $2.0 million for the quarter ended June 30, 2017, and income of $5.7 million for the quarter ended September 30, 2016. Additional details regarding the non-GAAP measure Services adjusted EBITDA may be found in Exhibits F and G.

Consolidated Expenses

Other operating expenses were $64.2 million in the third quarter, compared to $68.8 million in the second quarter of 2017, and $62.1 million in the third quarter of last year. Details regarding notable variable items impacting other operating expenses may be found in Exhibit D.

CAPITAL AND LIQUIDITY UPDATE

  • Radian Group maintained approximately $300 million of available liquidity as of September 30, 2017.
  • On September 26, 2017, Radian completed its public offering of $450 million principal amount of 4.500% Senior Notes due 2024, and announced the early tender results and upsizing of its tender offers to purchase for cash a portion of its 5.500% Senior Notes due 2019, its 5.250% Senior Notes due 2020, and its 7.000% Senior Notes due 2021. These transactions will reduce the company’s annual cash interest by approximately $4.3 million and extend the weighted average maturity of its outstanding debt by nearly two years. The company has no material debt maturities prior to June 2019.
  • As of September 30, 2017, Radian had only $0.5 million of convertible senior notes outstanding. Radian has provided notice that it will settle all remaining conversions in cash. The remaining outstanding convertible senior notes mature in November 2017.
  • On October 16, 2017, Radian entered into a three-year, $225 million unsecured revolving credit facility with a panel of seven banks. Borrowings under the credit facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to Radian’s insurance and reinsurance subsidiaries as well as growth initiatives. Terms of the credit facility include an option to increase the capacity during the term of the agreement, up to a total of $300 million.

NON-GAAP FINANCIAL MEASURES

Radian believes that adjusted pretax operating income and adjusted diluted net operating income per share (non-GAAP measures) facilitate evaluation of the company’s fundamental financial performance and provide relevant and meaningful information to investors about the ongoing operating results of the company. On a consolidated basis, these measures are not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be considered in isolation or viewed as substitutes for GAAP measures of performance. The measures described below have been established in order to increase transparency for the purpose of evaluating the company’s operating trends and enabling more meaningful comparisons with Radian’s competitors.

Adjusted pretax operating income is defined as earnings excluding the impact of certain items that are not viewed as part of the operating performance of the company’s primary activities, or not expected to result in an economic impact equal to the amount reflected in pretax income (loss). Adjusted pretax operating income adjusts GAAP pretax income (loss) to remove the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on induced conversion and debt extinguishment; (iii) acquisition-related expenses; (iv) amortization or impairment of goodwill and other intangible assets; and (v) net impairment losses recognized in earnings. Adjusted diluted net operating income per share represents a diluted net income per share calculation using as its basis adjusted pretax operating income, net of taxes at the company’s statutory tax rate for the period.

The company has also presented a non-GAAP measure for tangible book value per share, which represents book value per share less the per-share impact of goodwill and other intangible assets, net. The company uses this measure to assess the quality and growth of its capital. Because tangible book value per share is a widely used financial measure which focuses on the underlying fundamentals of the company’s financial position and operating trends without the impact of goodwill and other intangible assets, the company believes that current and prospective investors may find it useful in their analysis.

In addition to the above non-GAAP measures for the consolidated company, the company also presents as supplemental information a non-GAAP measure for the Services segment, representing earnings before interest, income tax provision (benefit), depreciation and amortization (EBITDA). Services adjusted EBITDA is calculated by using the Services segment’s adjusted pretax operating income as described above, further adjusted to remove the impact of depreciation and corporate allocations for interest and operating expenses. Services adjusted EBITDA is presented to facilitate comparisons with other services companies, since it is a widely accepted measure of performance in the services industry.

See Exhibit F or Radian’s website for a description of these items, as well as Exhibit G for reconciliations to the most comparable consolidated GAAP measures.

ABOUT RADIAN

Radian Group Inc. (NYSE: RDN), headquartered in Philadelphia, provides private mortgage insurance, risk management products and real estate services to financial institutions. Radian offers products and services through two business segments:

  • Mortgage Insurance, through its principal mortgage insurance subsidiary Radian Guaranty Inc. This private mortgage insurance helps protect lenders from default-related losses, facilitates the sale of low-downpayment mortgages in the secondary market and enables homebuyers to purchase homes more quickly with downpayments less than 20%.
  • Mortgage and Real Estate Services, through its principal services subsidiary Clayton Holdings LLC, as well as Green River Capital, Red Bell Real Estate and ValuAmerica. These solutions include information and services that financial institutions, investors and government entities use to evaluate, acquire, securitize, service and monitor loans and asset-backed securities.

Additional information may be found at www.radian.biz.

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