Radian Announces Third Quarter 2015 Financial Results

PHILADELPHIA--(BUSINESS WIRE)--Radian Group Inc. (NYSE: RDN) today reported net income for the quarter ended September 30, 2015, of $70.1 million, or $0.29 per diluted share. This compares to net income for the quarter ended September 30, 2014, of $153.6 million, or $0.67 per diluted share.

Adjusted pretax operating income for the quarter ended September 30, 2015, was $115.6 million, compared to adjusted pretax operating income for the quarter ended September 30, 2014, of $125.8 million. Adjusted diluted net operating income per share for the quarter ended September 30, 2015, was $0.31. See “Non-GAAP Financial Measures” below.

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

* Adjusted diluted net operating income per share is calculated using the company’s statutory tax rate.

“We were successful in growing our mortgage insurance in force with high-quality business and in further expanding the scope of services we offer through our fee-based businesses,” said Radian’s Chief Executive Officer S.A. Ibrahim. “We are excited about the growth and opportunities ahead for our mortgage insurance and mortgage and real estate services segments, as we continue to enhance and seek new opportunities for our existing products and services.”

THIRD QUARTER HIGHLIGHTS AND RECENT EVENTS

Mortgage Insurance

• New mortgage insurance written (NIW) was $11.2 billion for the quarter, compared to $11.8 billion in the second quarter of 2015 and $11.2 billion in the prior-year quarter.
  • Of the $11.2 billion in new business written in the third quarter of 2015, 73 percent was written with monthly premiums and 27 percent with single premiums. This compares to a mix of 68 percent monthly premiums and 32 percent single premiums in the second quarter of 2015.
  • Refinances accounted for 13 percent of total NIW in the third quarter of 2015, compared to 23 percent in the second quarter of 2015, and 16 percent a year ago.
  • NIW continued to consist of loans with excellent risk characteristics.
• Total primary mortgage insurance in force as of September 30, 2015, was $174.9 billion, compared to $172.7 billion as of June 30, 2015, and $169.2 billion as of September 30, 2014. Persistency, which is the percentage of mortgage insurance in force that remains on the company’s books after a twelve-month period, was 79.2 percent as of September 30, 2015, compared to 80.1 percent as of June 30, 2015, and 84.3 percent as of September 30, 2014. Annualized persistency for the three-months ended September 30, 2015, was 80.5 percent, compared to 76.2 percent for the three-months ended June 30, 2015, and 84.0 percent for the three-months ended September 30, 2014.
• Total net premiums earned were $227.4 million for the quarter ended September 30, 2015, which included the favorable impact of an approximate $5 million reduction to the company’s accrual for rescission-related premium refunds, resulting from a reduction in rescission estimates. This compares to $237.4 million for the quarter ended June 30, 2015, which included the favorable impact of two significant items totaling $15.6 million, and $217.8 million for the quarter ended September 30, 2014.
• The mortgage insurance provision for losses was $64.1 million in the third quarter of 2015, compared to $31.6 million in the second quarter of 2015, and $48.9 million in the prior-year period.
  • As compared to the third quarter of 2015, results in the second quarter of 2015 significantly benefited from a reduction in the company’s estimated claim rate on new defaults.
  • The loss ratio in the third quarter was 28.2 percent, compared to 13.3 percent in the second quarter of 2015 and 22.5 percent in the third quarter of 2014.
  • Mortgage insurance loss reserves were $1.1 billion as of September 30, 2015, compared to $1.2 billion as of June 30, 2015, and $1.6 billion as of September 30, 2014.
  • Primary reserve per primary default (excluding IBNR and other reserves) was $26,237 as of September 30, 2015. This compares to primary reserve per primary default of $27,279 as of June 30, 2015, and $27,477 as of September 30, 2014.
• The total number of primary delinquent loans decreased by 5 percent in the third quarter from the second quarter of 2015, and by 23 percent from the third quarter of 2014. The primary mortgage insurance delinquency rate decreased to 4.1 percent in the third quarter of 2015, compared to 4.3 percent in the second quarter of 2015, and 5.4 percent in the third quarter of 2014.
• Total mortgage insurance claims paid were $169.1 million in the third quarter, compared to $212.0 million in the second quarter, and $173.9 million in the third quarter of 2014. Claims paid in the third quarter of 2015 include $62.0 million of claims paid relating to the September 2014 BofA Settlement Agreement. The company expects mortgage insurance net claims paid for the full-year 2015 of approximately $700 million. Claims paid for the full-year 2016 are expected to be approximately $400–450 million.
• Radian Guaranty expects to be able to immediately comply with the financial requirements of the Private Mortgage Insurer Eligibility Requirements (PMIERs) developed by Fannie Mae and Freddie Mac that come into effect on December 31, 2015, by utilizing approximately $320 million of existing holding company liquidity.

Mortgage and Real Estate Services

• On June 30, 2014, Radian completed the acquisition of Clayton Holdings LLC, a leading provider of risk-based analytics, residential loan due diligence, consulting, surveillance and staffing solutions. The company also provides customized Real Estate Owned (REO) asset management and single-family rental services through its Green River Capital subsidiary; advanced Automated Valuation Models, Broker Price Opinions and technology solutions to monitor loan portfolio performance, acquire and track non-performing loans, and value and sell residential real estate through its Red Bell Real Estate subsidiary; and a global reach through its Clayton EuroRisk subsidiary.
• Total revenues for the quarter were $43.1 million, compared to $44.6 for the second quarter of 2015, and $42.2 million for the third quarter of 2014. Gross profit for the quarter was $17.2 million, compared to $19.1 million for the second quarter of 2015, and $18.3 million for the third quarter of 2014.
• Adjusted pretax operating income before corporate allocations for the quarter ended September 30, 2015, was $5.7 million, compared to $7.6 million for the quarter ended June 30, 2015, and $9.4 million for the quarter ended September 30, 2014.
• In order to help facilitate the evaluation of its Services segment, the company has introduced an additional non-GAAP financial measure representing earnings before interest, income taxes, depreciation and amortization (EBITDA). You may find details regarding this measure and its definition in press release Exhibits E, F and G.
• In October, Clayton announced that it had acquired ValuAmerica, Inc., a national title agency and a fully-compliant appraisal management company with coverage across all 3,143 counties in the U.S. In addition, the company's award-winning technology platform, ValuNet xsp, helps mortgage lenders and their vendors streamline and manage their supply chains and operational workflow. The acquisition expands the scope of title and valuation services Clayton offers to its mortgage clients and is consistent with the company’s strategy of being a complete solution provider to the mortgage and real estate industries.

Expenses

Other operating expenses were $65.1 million in the third quarter, compared to $67.7 million in the second quarter of 2015, and $51.2 million in the third quarter of last year.

• Operating expenses for the third quarter of 2015 were comprised of $51.5 million for the Mortgage Insurance segment, compared to $54.4 million in the second quarter of 2015, and $42.2 million in the third quarter of last year.
• Operating expenses for the third quarter of 2015 were comprised of $13.1 million for the Services segment, compared to $12.8 million in the second quarter of 2015, and $9.5 million in the third quarter of last year.

CAPITAL AND LIQUIDITY UPDATE

Radian Group maintains approximately $710 million of currently available liquidity.

• Currently available holding company liquidity of approximately $710 million reflects the following fourth quarter 2015 transactions:
  • A cash payment to repurchase $8.5 million principal amount of the company’s convertible senior notes due 2017 in a negotiated transaction
  • The expected settlement of a holder’s conversion of $10.0 million principal amount of the company’s convertible senior notes due 2019
  • Cash utilized for the Clayton acquisition of ValuAmerica
• Book value per share at September 30, 2015, was $11.77, compared to $11.28 at June 30, 2015.
• As of September 30, 2015, Radian Guaranty’s risk-to-capital ratio was 16.5:1 and statutory capital was $2.0 billion. The Mortgage Insurance segment’s combined risk-to-capital ratio was 17.9:1 and statutory capital was $2.3 billion.
• As of September 30, 2015, a total of $2.3 billion of risk in force outstanding had been ceded under quota share reinsurance agreements in order to proactively manage Radian Guaranty’s risk-to-capital position. Radian has ceded the maximum amount of NIW under these agreements and has not ceded any premium on new business in 2015. Radian expects to exercise its option to recapture 50 percent of the ceded risk under the Second Quota Share Reinsurance Transaction on December 31, 2015.

CONFERENCE CALL

Radian will discuss third quarter financial results in a conference call today, Tuesday, October 27, 2015, at 10:00 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 800.230.1096 inside the U.S., or 612.332.0228 for international callers, using passcode 371396 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, using passcode 371396 or by referencing Radian.

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 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 viewed as alternatives to GAAP measures of performance. The measures described below have been established in order to increase transparency for the purpose of evaluating the company’s core 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) from continuing operations. 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.

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 earnings before interest, income taxes, depreciation and amortization (EBITDA). We calculate Services 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. We have presented Services EBITDA to facilitate comparisons with other services companies, since it is a widely accepted measure of performance in the services industry.

See press release 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 protects 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, 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.

FINANCIAL RESULTS AND SUPPLEMENTAL INFORMATION CONTENTS (Unaudited)

For trend information on all schedules, refer to Radian’s quarterly financial statistics at http://www.radian.biz/page?name=FinancialReportsCorporate.

On April 1, 2015, Radian Guaranty completed the previously disclosed sale of 100% of the issued and outstanding shares of Radian Asset Assurance to Assured, pursuant to the Radian Asset Assurance Stock Purchase Agreement dated as of December 22, 2014. As a result, the operating results of Radian Asset Assurance are classified as discontinued operations for all periods presented in our condensed consolidated statements of operations. See Exhibit D for additional information on discontinued operations.

Use of Non-GAAP Financial Measure

In addition to the traditional GAAP financial measures, we have presented non-GAAP financial measures for the consolidated company, “adjusted pretax operating income (loss)” and “adjusted diluted net operating income (loss) per share,” 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 core operating trends and enabling more meaningful comparisons with our peers. Although on a consolidated basis “adjusted pretax operating income (loss)” and “adjusted diluted net operating income (loss) per share” 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 (the Company’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 (loss) is defined as GAAP pretax income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, loss on induced conversion and debt extinguishment, acquisition-related expenses, amortization and impairment of intangible assets and net impairment losses recognized in earnings. Adjusted diluted net operating income (loss) per share is calculated by dividing (i) adjusted pretax operating income (loss) 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 stock-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.

Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. These adjustments, along with the reasons for their treatment, are described below.

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 earnings before interest, income taxes, depreciation and amortization (“EBITDA”). We calculate Services 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. We have presented Services EBITDA to facilitate comparisons with other services companies, since it is a widely accepted measure of performance in the services industry.

See Exhibit G for the reconciliation of our non-GAAP financial measures for the consolidated company, adjusted pretax operating income and adjusted diluted net operating income per share, to the most comparable GAAP measures, pretax income from continuing operations and net income per share from continuing operations, respectively. Exhibit G also contains the reconciliation of Services EBITDA to the most comparable GAAP measure, pretax income from continuing operations.

Total adjusted pretax operating income (loss), adjusted diluted net operating income (loss) per share and Services EBITDA are not measures of total profitability, and therefore should not be viewed as substitutes for GAAP pretax income (loss) from continuing operations or net income (loss) per share from continuing operations. Our definitions of adjusted pretax operating income (loss), adjusted diluted net operating income (loss) per share or EBITDA may not be comparable to similarly-named measures reported by other companies.

On a consolidated basis, “adjusted pretax operating income” and “adjusted diluted net operating income per share” are measures not determined in accordance with GAAP. “Services EBITDA” is also a non-GAAP measure. These measures are not representative of total profitability, and therefore should not be viewed as substitutes for GAAP pretax income from continuing operations or net income per share from continuing operations. Our definitions of adjusted pretax operating income, adjusted diluted net operating income per share or EBITDA may not be comparable to similarly-named measures reported by other companies. See Exhibit F for additional information on our consolidated non-GAAP financial measures.

FORWARD-LOOKING STATEMENTS

All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the U.S. Private Securities Litigation Reform Act of 1995. In most cases, forward-looking statements may be identified by words such as "anticipate," "may," "will," "could," "should," "would," "expect," "intend," "plan," "goal," "contemplate," "believe," "estimate," "predict," "project," "potential," "continue," "seek," "strategy," "future," "likely" or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management's current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements including:

• changes in general economic and political conditions, including unemployment rates, changes in the U.S. housing and mortgage credit markets, declines in home prices and property values, the performance of the U.S. or global economies, the amount of liquidity in the capital or credit markets, changes or volatility in interest rates or consumer confidence and changes in credit spreads, all of which may be impacted by, among other things, legislative activity or inactivity, actual or threatened downgrades of U.S. government credit ratings, or actual or threatened defaults on U.S. government obligations;
• changes in the way customers, investors, regulators or legislators perceive the strength of private mortgage insurers;
• catastrophic events, increased unemployment, home price depreciation or other negative economic changes in geographic regions where our mortgage insurance exposure is more concentrated;
• Radian Guaranty's ability to remain eligible under applicable requirements imposed by the FHFA and the GSEs to insure loans purchased by the GSEs;
• our ability to maintain sufficient holding company liquidity to meet our short- and long-term liquidity needs. We expect to distribute to Radian Guaranty a significant amount of our holding company liquidity to support Radian Guaranty's compliance with the PMIERs Financial Requirements, which become effective for existing mortgage insurers on December 31, 2015. Our projections regarding the amount of holding company liquidity that we may distribute to Radian Guaranty to comply with the PMIERs Financial Requirements are based on our estimates of Radian Guaranty's Minimum Required Assets and Available Assets, which may not prove to be accurate, and which could be impacted by: (1) our ability to receive, as expected, GSE approval for the amendments to our existing reinsurance arrangements and to receive the full PMIERs benefit for these arrangements; (2) whether we elect to convert certain holding company assets into PMIERs-compliant Available Assets; (3) factors affecting the performance of our mortgage insurance business, including our level of defaults, prepayments, the losses we incur on new or existing defaults and the credit characteristics of our mortgage insurance; and (4) how much capital we expect to maintain at our mortgage insurance subsidiaries in excess of the amount required to satisfy the PMIERs Financial Requirements. Contributions of holding company cash and investments from Radian Group will leave less liquidity to satisfy Radian Group's future obligations. Depending on the amount of holding company contributions that we make, we may be required or may decide to seek additional capital by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all;
• our ability to maintain an adequate level of capital in our insurance subsidiaries to satisfy existing and future state regulatory requirements, including new capital adequacy standards that currently are being developed by the NAIC and that could be adopted by states in which we write business;
• changes in the charters or business practices of, or rules or regulations imposed by or applicable to the GSEs, including: (1) the implementation of the final PMIERs (including as updated on June 30, 2015 to increase the amount of Available Assets that must be held against risk in force associated with lender paid mortgage insurance originated on or after January 1, 2016), which (a) will increase the amount of capital that Radian Guaranty is required to hold, and therefore, reduce our current returns on subsidiary capital, (b) potentially impact the type of business that Radian Guaranty is willing to write, which could reduce our NIW and market share, (c) impose extensive and more stringent operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others, that may result in additional costs to achieve and maintain compliance, and (d) require the consent of the GSEs for Radian Guaranty to take certain actions such as paying dividends, entering into various inter-company agreements, and commuting or reinsuring risk, among others; (2) changes that could limit the type of business that Radian Guaranty is willing to write, which could reduce our NIW and market share; (3) changes that could increase the cost of private mortgage insurance, including as compared to the FHA's pricing, or result in the emergence of other forms of credit enhancement; and (4) changes that could require us to alter our business practices and which may result in substantial additional costs;
• our ability to continue to effectively mitigate our mortgage insurance losses, including a decrease in net Rescissions, Claim Denials or Claim Curtailments resulting from an increase in the number of successful challenges to previous Rescissions, Claim Denials or Claim Curtailments (including as part of one or more settlements of disputed Rescissions or Claim Denials), or as a result of the GSEs intervening in or otherwise limiting our loss mitigation practices, including settlements of disputes regarding Loss Mitigation Activities;
• the negative impact that our Loss Mitigation Activities may have on our relationships with our customers and potential customers, including the potential loss of current or future business and the heightened risk of disputes and litigation;
• any disruption in the servicing of mortgages covered by our insurance policies, as well as poor servicer performance;
• a substantial decrease in the persistency rates of our mortgage insurance policies, which has the effect of reducing our premium income on our mortgage insurance products paid on a monthly installment basis and could decrease the profitability of our mortgage insurance business;
• heightened competition for our mortgage insurance business from others such as the FHA, the U.S. Department of Veterans Affairs and other private mortgage insurers (including with respect to other private mortgage insurers, those that have been assigned higher ratings than we have, that may have access to greater amounts of capital than we do, or that are new entrants to the industry, and therefore, are not burdened by legacy obligations and may be more willing to aggressively price their mortgage insurance offerings to gain market share from more established mortgage insurers) and the impact such heightened competition may have on our returns and our NIW;
• the increased demand from lenders for customized (reduced) rates on mortgage insurance products, which could further reduce our overall average premium rates and returns and, to the extent we decide to limit certain types of business, could adversely impact our NIW and market share;
• changes to the current system of housing finance, including the possibility of a new system in which private mortgage insurers are not required or their products are significantly limited in effect or scope;
• the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the financial services industry in general, and on our businesses in particular;
• the adoption of new laws and regulations, or changes in existing laws and regulations, or the way they are interpreted or applied, including, without limitation: (1) the resolution of existing, or the possibility of additional, lawsuits, inquiries or investigations (including an inquiry from the Wisconsin Office of the Commissioner of Insurance to all private mortgage insurers pertaining to customized insurance rates and terms offered to mortgage insurance customers); (2) changes to the Model Act being considered by the NAIC that could include more stringent requirements for Radian Guaranty in states that adopt the new Model Act in the future; and (3) other legislative and regulatory changes (a) impacting the demand for our products, (b) limiting or restricting the products we may offer or increasing the amount of capital we are required to hold, (c) affecting the form in which we execute credit protection, or (d) otherwise impacting our existing businesses or future prospects;
• the amount and timing of potential payments or adjustments associated with federal or other tax examinations, including deficiencies assessed by the IRS resulting from the examination of our 2000 through 2007 tax years, which we are currently contesting;
• the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance business;
• volatility in our results of operations caused by changes in the fair value of our assets and liabilities, including a significant portion of our investment portfolio;
• changes in GAAP or SAP rules and guidance, or their interpretation;
• legal and other limitations on amounts we may receive from our subsidiaries as dividends or through our tax- and expense-sharing arrangements with our subsidiaries; and
• the possibility that we may need to impair the estimated fair value of goodwill established in connection with our acquisition of Clayton, the valuation of which requires the use of significant estimates and assumptions with respect to the estimated future economic benefits arising from certain assets acquired in the transaction such as the value of expected future cash flows of Clayton, Clayton's workforce, expected synergies with our other affiliates and other unidentifiable intangible assets.

For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 and in our subsequent reports and registration statements filed from time to time with the U.S. Securities and Exchange Commission. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we issued this press release. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason.