Market Overview

Radian Announces Third Quarter 2017 Financial Results

Share:

-- GAAP net income of $65.1 million or $0.30 per diluted share --

-- Adjusted diluted net operating income per share increases 12%
year-over-year to $0.46 --

-- New MI business written increases 5% over second quarter 2017; MI in
force increases 8% year-over-year --

-- Book value per share grows 3% and tangible book value per share grows
12% year-over-year --

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.

 

Key Financial Highlights (dollars in millions, except
per-share data)

   

Quarter Ended
September 30, 2017

 

Quarter Ended
September 30, 2016

 

Percent
Change

Net income (loss) (1)   $65.1   $82.8   (21)%
Diluted net income per share   $0.30   $0.37   (19)%
Consolidated pretax income   $102.8   $126.9   (19)%
Adjusted pretax operating income (2)   $155.6   $139.9   11%
Adjusted diluted net operating

income per share (2) (3)

  $0.46   $0.41   12%
Net premiums earned - insurance   $236.7   $238.1   (1)%
MI New Insurance Written (NIW)   $15,125   $15,656   (3)%
MI insurance in force   $196.5   $181.2   8%
Book value per share   $13.88   $13.47   3%
Tangible book value per share (2)   $13.57   $12.17   12%
     

(1)

 

Net income for the third quarter of 2017 includes $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.

(2)

Adjusted results, including adjusted pretax operating income
and adjusted diluted net operating income per share, as well as
tangible book value per share, are non-GAAP financial measures.
For definitions and a reconciliation of these measures to the
comparable GAAP measures, see Exhibits F and G.

(3)

Adjusted diluted net operating income per share is calculated
using the company's statutory tax rate of 35 percent.

 

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 mi
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