Radian Announces Third Quarter 2018 Financial Results

-- GAAP net income increases to $142.8 million; Diluted net income per share grows year-over-year to $0.66 --

-- Adjusted diluted net operating income per share increases 54% year-over-year to $0.71 --

-- Writes new MI business of $15.8 billion; MI in force increases 10% year-over-year to $217.1 billion --

-- Book value per share grows 13% year-over-year to $15.69 --

Radian Group Inc. RDN today reported net income for the quarter ended September 30, 2018, of $142.8 million, or $0.66 per diluted share. This compares to 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.

Adjusted pretax operating income for the quarter ended September 30, 2018, was $196.7 million, compared to $155.6 million for the quarter ended September 30, 2017. Adjusted diluted net operating income per share for the quarter ended September 30, 2018, was $0.71, an increase of 54 percent compared to $0.46 for the quarter ended September 30, 2017.

Book value per share at September 30, 2018, was $15.69, an increase of 5 percent compared to $15.01 at June 30, 2018, and an increase of 13 percent compared to $13.88 at September 30, 2017.

"The third quarter was another exceptional one for Radian, with net income of $143 million, adjusted net operating ROE of 19%, 10% growth in mortgage insurance in force and 13% growth in book value," said Radian's Chief Executive Officer Rick Thornberry. "Our performance reflects the quality of our team, the power of our customer relationships, the strength and flexibility of our financial position, and the value of our $217 billion mortgage insurance portfolio."

THIRD QUARTER HIGHLIGHTS

• Mortgage insurance NIW was $15.8 billion for the quarter, representing a decrease of 4 percent compared to $16.4 billion in the second quarter of 2018 as well as an increase of 4 percent compared to $15.1 billion in the prior-year quarter.
  • Of the $15.8 billion in NIW in the third quarter of 2018, 78 percent was written with monthly premiums compared to 76 percent in the second quarter of 2018, and 77 percent a year ago.
  • Borrower-paid originations accounted for 91 percent of total NIW in the third quarter of 2018, compared to 89 percent in the second quarter of 2018, and 78 percent a year ago.
  • Purchase originations accounted for 96 percent of total NIW in the third quarter of 2018, compared to 95 percent in the second quarter of 2018, and 91 percent a year ago.
• Total primary mortgage insurance in force as of September 30, 2018, grew to $217.1 billion, an increase of 3 percent compared to $210.7 billion as of June 30, 2018, and an increase of 10 percent compared to $196.5 billion as of September 30, 2017.
  • The composition of Radian's mortgage insurance portfolio continues to improve, with 94 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 81.4 percent as of September 30, 2018, compared to 80.9 percent as of June 30, 2018, and 80.0 percent as of September 30, 2017.
  • Annualized persistency for the three months ended September 30, 2018, was 83.4 percent, compared to 82.3 percent for the three months ended June 30, 2018, and 80.4 percent for the three months ended September 30, 2017.
• Net mortgage insurance premiums earned were $255.5 million for the quarter ended September 30, 2018, compared to $249.0 million for the quarter ended June 30, 2018, and $236.7 million for the quarter ended September 30, 2017.
  • Mortgage insurance in force premium yield was 48.6 basis points in the third quarter of 2018, a slight increase compared to 48.4 basis points in the second quarter of 2018 and in the third quarter of 2017.
  • Total net mortgage insurance premium yield, which includes the impact of ceded premiums and accrued profit commission, was 47.8 basis points in the third quarter of 2018, compared to 48.0 basis points in the second quarter of 2018, and 48.8 basis points in the third quarter of 2017.
  • Additional details regarding notable variable items impacting premiums earned may be found in Exhibit D.
• The mortgage insurance provision for losses was $20.7 million in the third quarter of 2018, compared to $19.4 million in the second quarter of 2018, and $36.0 million in the prior-year quarter.
  • The number of primary delinquent loans was 20,770 as of September 30, 2018, a decrease of 6 percent compared to 22,088 as of June 30, 2018 and a decrease of 13 percent compared to 23,826 as of September 30, 2017.
  • The primary mortgage insurance delinquency rate decreased to 2.1 percent in the third quarter of 2018, compared to 2.2 percent in the second quarter of 2018, and 2.5 percent in the third quarter of 2017.
  • The loss ratio in the third quarter of 2018 was 8.1 percent, compared to 7.8 percent in the second quarter of 2018, and 15.2 percent in the third quarter of 2017.
  • Mortgage insurance loss reserves were $409.0 million as of September 30, 2018, compared to $448.1 million as of June 30, 2018, and $556.5 million as of September 30, 2017.
• Total mortgage insurance claims paid were $59.8 million in the third quarter of 2018, compared to $56.5 million in the second quarter of 2018, and $131.5 million in the third quarter of 2017. Claims paid in the third quarter of 2017 were elevated due to payments made under the Freddie Mac agreement entered into in August 2013, as the final settlement date was reached during the quarter. In addition, the company's pending claim inventory declined 28 percent from September 30, 2017.
• Total Mortgage and Real Estate Services Segment revenues for the third quarter of 2018 were $40.9 million, compared to $40.5 million for the second quarter of 2018, and $41.1 million for the third quarter of 2017. Beginning in the second quarter of 2018, revenues for the Segment include Radian's national title insurance and settlement services company, which represented $3.6 million in the third quarter of 2018 and $2.8 million in the second quarter of 2018.
• Other operating expenses were $70.1 million in the third quarter of 2018, compared to $70.2 million in the second quarter of 2018, and $64.2 million in the third quarter of 2017. Beginning in the second quarter of 2018, operating expenses include expenses related to Radian's national title insurance and settlement services company acquired in March 2018, which represented $4.2 million in the third quarter of 2018 and $3.7 million in the second quarter of 2018.

CAPITAL AND LIQUIDITY UPDATE

Radian Group maintained $246 million of available liquidity as of September 30, 2018, which excludes the $31 million expected to be submitted to the U.S. Department of the Treasury for the previously disclosed IRS settlement. Total liquidity, which includes the company's $225 million unsecured revolving credit facility entered into in October 2017, was $471 million as of September 30, 2018. The company remains focused on optimizing its capital position, enhancing its return on capital, and increasing its financial flexibility.

• In August 2018, Radian's Board of Directors approved a new share repurchase program that enables the company to repurchase its common stock. The shares may be purchased in the open market or in privately negotiated transactions. The company's previous $50 million share repurchase program was fully utilized and expired on June 30, 2018. The new authorization provides Radian the flexibility to repurchase shares opportunistically from time to time and spend up to $100 million, based on market and business conditions, stock price and other factors. The authorization expires on July 31, 2019.
• At September 30, 2018, Radian Guaranty's Available Assets under the Private Mortgage Insurer Eligibility Requirements (PMIERs) totaled approximately $3.8 billion, resulting in an excess or "cushion" of approximately $530 million, or 16%, over its Minimum Required Assets of approximately $3.3 billion. This compares to a cushion of $480 million at June 30, 2018, and $237 million at September 30, 2017.
• In September 2018, Radian Guaranty received the new PMIERs (PMIERs 2.0) of Fannie Mae and Freddie Mac (GSEs). Radian expects to fully comply with PMIERs 2.0 and to maintain an excess of Available Assets over Minimum Required Assets as of the effective date of March 31, 2019. If applied as of September 30, 2018, the PMIERs 2.0 changes would not have resulted in a material change in Radian's Minimum Required Assets, but would have reduced Radian's Available Assets by approximately $200 million, primarily due to the elimination of any credit for future premiums that is currently allowed for insurance policies written prior to and including 2008. The company expects this impact to be substantially offset by an increase in Available Assets prior to the effective date of March 31, 2019, based on its projections for positive operating results. The company's expectation is based on its strong capital position, its current NIW forecast and the benefits of its existing reinsurance programs, and is not dependent on any additional capital actions.
• The terms of Radian's three-year credit facility, entered into in October 2017, include an option to increase the capacity during the term of the agreement, up to a total of $300 million. Effective October 26, 2018, Radian further increased its financial flexibility by adding another global bank to the existing lender group for its credit facility, thereby increasing total commitments by $42.5 million and bringing the aggregate unsecured revolving credit facility commitment from $225.0 million to $267.5 million. At September 30, 2018, no amounts were outstanding under the credit facility. 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, subject to certain limitations.

CONFERENCE CALL

Radian will discuss third quarter financial results in a conference call today, Wednesday, October 31, 2018, at 9:00 a.m. Eastern time. The conference call will be broadcast live over the Internet at http://www.radian.biz/page?name=Webcasts or at www.radian.biz. The call may also be accessed by dialing 800.230.1085 inside the U.S., or 612.234.9959 for international callers, using passcode 454997 or by referencing Radian.

A replay of the webcast will be available on the Radian website approximately two hours after the live broadcast ends for a period of one year. A replay of the conference call will be available approximately two and a half hours after the call ends for a period of two weeks, using the following dial-in numbers and passcode: 800.475.6701 inside the U.S., or 320.365.3844 for international callers, passcode 454997.

In addition to the information provided in the company's earnings news release, other statistical and financial information, which is expected to be referred to during the conference call, will be available on Radian's website under Investors > Quarterly Results, or by clicking on http://www.radian.biz/page?name=QuarterlyResults.

NON-GAAP FINANCIAL MEASURES

Radian believes that adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity (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. Adjusted pretax operating income adjusts GAAP pretax income 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 acquired intangible assets; and (v) net impairment losses recognized in earnings and losses from the sale of business lines. 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. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the company's statutory tax rate, by average stockholders' equity, based on the average of the beginning and ending balances for each period presented.

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 acquired 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 acquired 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. In addition, the company also has presented a related non-GAAP measure, Services adjusted EBITDA margin, which is calculated by dividing Services adjusted EBITDA by GAAP total revenue for the Services segment. Services adjusted EBITDA and Services adjusted EBITDA margin are presented to facilitate comparisons with other services companies, since they are widely accepted measures of performance in the services industry and are used internally as supplemental measures to evaluate the performance of our Services segment.

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 is ensuring the American dream of homeownership responsibly and sustainably through products and services that include industry-leading mortgage insurance and a comprehensive suite of mortgage, risk, real estate, and title services. We are powered by technology, informed by data and driven to deliver new and better ways to transact and manage risk. Learn more about Radian's financial strength and flexibility at www.radian.biz and visit www.radian.com to see how Radian is shaping the future of mortgage and real estate services.

Use of Non-GAAP Financial Measures

In addition to the traditional GAAP financial measures, we have presented "adjusted pretax operating income," "adjusted diluted net operating income per share" and "adjusted net operating return on equity," non-GAAP financial measures for the consolidated company, among our key performance indicators to evaluate our fundamental financial performance. These non-GAAP financial measures align with the way the Company's business performance is evaluated by both management and the board of directors. These measures have been established in order to increase transparency for the purposes of evaluating our operating trends and enabling more meaningful comparisons with our peers. Although on a consolidated basis "adjusted pretax operating income," "adjusted diluted net operating income per share" and "adjusted net operating return on equity" are non-GAAP financial measures, we believe these measures aid in understanding the underlying performance of our operations. Our senior management, including our Chief Executive Officer (Radian's chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of the Company's business segments and to allocate resources to the segments.

Adjusted pretax operating income is defined as GAAP consolidated pretax income excluding 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 acquired intangible assets; and (v) net impairment losses recognized in earnings and losses from the sale of lines of business. Adjusted diluted net operating income per share is calculated by dividing (i) adjusted pretax operating income attributable to common shareholders, net of taxes computed using the company's statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Interest expense on convertible debt, share dilution from convertible debt and the impact of share-based compensation arrangements have been reflected in the per share calculations consistent with the accounting standard regarding earnings per share, whenever the impact is dilutive. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the company's statutory tax rate, by average stockholders' equity, based on the average of the beginning and ending balances for each period presented.

Although adjusted pretax operating income excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (i) not viewed as part of the operating performance of our primary activities or (ii) not expected to result in an economic impact equal to the amount reflected in pretax income. These adjustments, along with the reasons for their treatment, are described below.

We have 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 acquired intangible assets, net. We use this measure to assess the quality and growth of our capital. Because tangible book value per share is a widely-used financial measure which focuses on the underlying fundamentals of our financial position and operating trends without the impact of goodwill and other acquired intangible assets, we believe that current and prospective investors may find it useful in their analysis of the Company.

In addition to the above non-GAAP measures for the consolidated company, we also have presented as supplemental information a non-GAAP measure for our Services segment, representing a measure of earnings before interest, income tax provision (benefit), depreciation and amortization ("EBITDA"). We calculate Services adjusted EBITDA by using adjusted pretax operating income as described above, further adjusted to remove the impact of depreciation and corporate allocations for interest and operating expenses. In addition, we also have presented a related non-GAAP measure, Services adjusted EBITDA margin, which we calculate by dividing Services adjusted EBITDA by GAAP total revenue for the Services segment. We have presented Services adjusted EBITDA and Services adjusted EBITDA margin to facilitate comparisons with other services companies, since they are widely accepted measures of performance in the services industry and are used internally as supplemental measures to evaluate the performance of our Services segment.

See Exhibit G for the reconciliation of the most comparable GAAP measures, consolidated pretax income, diluted net income per share, return on equity and book value per share, to our non-GAAP financial measures for the consolidated company, adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, and tangible book value per share, respectively. Exhibit G also contains the reconciliation of the most comparable GAAP measure, net income, to Services adjusted EBITDA.

Total adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, tangible book value per share, Services adjusted EBITDA and Services adjusted EBITDA margin should not be considered in isolation or viewed as substitutes for GAAP pretax income, diluted net income per share, return on equity, book value per share or net income. Our definitions of adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, tangible book value per share, Services adjusted EBITDA or Services adjusted EBITDA margin may not be comparable to similarly-named measures reported by other companies.