Radian Group Inc. reported net income for the first quarter of 2017 of $76.5 million, or $0.34 per diluted share, the company recently announced. This compares to net income for the quarter ended March 31, 2016, of $66.2 million, or $0.29 per diluted share. Consolidated pretax income for the quarter ended March 31, 2017, was $114.7 million, which compares to consolidated pretax income of $102.4 million for the quarter ended March 31, 2016.
“I am pleased to report strong first quarter results for Radian, including year-over-year growth in net income, book value and new MI business written,” says Radian CEO Rick Thornberry. “As persistency rises, we expect our large, high-quality MI in-force portfolio to grow and generate future premium revenue. This is the primary driver of future earnings for Radian.”
Book value per share at March 31, 2017, was $13.58, compared to $13.39 at December 31, 2016, and an increase of 9 percent from $12.42 at March 31, 2016. Adjusted pretax operating income for the quarter ended March 31, 2017, was $125.3 million, compared to $130.2 million for the quarter ended March 31, 2016. Adjusted diluted net operating income per share for the quarter ended March 31, 2017, was $0.37, flat to $0.37 for the quarter ended March 31, 2016.
“After nearly two months with Radian as CEO, my excitement about the prospects ahead continues to grow,” says Thornberry. “I decided to join the company based on the excellent businesses, great team, diversified set of products and services, high quality portfolio, and the institutional commitment to serve customers. Those qualities, along with a strong capital base, solid profitability and excellent market opportunity, are a winning combination.”
Q1 2017 Highlights
Mortgage Insurance
New mortgage insurance written (NIW) was $10.1 billion for the quarter, compared to $13.9 billion in the fourth quarter of 2016 and $8.1 billion in the prior-year quarter.
For the first quarter of 2017, NIW grew 25 percent compared to the first quarter of 2016.
Of the $10.1 billion in new business written in the first quarter of 2017, 25 percent was written with single premiums. Net single premiums written, after consideration of the 35 percent ceded under the Single Premium Quota Share Reinsurance Transaction, was 16 percent in the first quarter of 2017.
Refinances accounted for 16 percent of total NIW in the first quarter of 2017, compared to 27 percent in the fourth quarter of 2016, and 19 percent a year ago.
NIW continued to consist of loans with excellent risk characteristics.
Total primary mortgage insurance in force as of March 31, 2017, grew to $185.9 billion, compared to $183.5 billion as of December 31, 2016, and $175.4 billion as of March 31, 2016.
The composition of Radian’s mortgage insurance portfolio continues to improve, with 89 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 twelve-month period, was 77.1 percent as of March 31, 2017, compared to 76.7 percent as of December 31, 2016, and 79.4 percent as of March 31, 2016.
Annualized persistency for the three-months ended March 31, 2017, was 84.4 percent, compared to 76.8 percent for the three-months ended December 31, 2016, and 82.3 percent for the three-months ended March 31, 2016.
Total net premiums earned were $221.8 million for the quarter ended March 31, 2017, compared to $233.6 million for the quarter ended December 31, 2016, and $221.0 million for the quarter ended March 31, 2016.
Accelerated revenue recognition due to Single Premium Policy cancellations, which are net of reinsurance, were $5.9 million in the first quarter, compared to $15.7 million in the fourth quarter of 2016, and $9.8 million in the first quarter of 2016.
Ceded premiums of $14.3 million, $18.2 million and $19.4 million for the quarters ended March 31, 2017, December 31, 2016, and March 31, 2016, respectively, are net of accrued profit commission on reinsurance transactions of $5.9 million in the first quarter of 2017, compared to $8.5 million in the fourth quarter of 2016, and $6.1 million in the first quarter of 2016.
The decrease in the level of refinancing activity in the first quarter contributed to the decrease in acceleration of premiums related to Single Premium Policy cancellations as well as the decrease in ceded premiums and profit commission related to the company’s Single Premium Quota Share Reinsurance transaction.
The mortgage insurance provision for losses was $47.2 million in the first quarter of 2017, compared to $54.7 million in the fourth quarter of 2016, and $43.3 million in the prior-year period.
The provision for losses in the first quarter included the positive impact of a modest reduction in the company’s default to claim rate assumption for new notices of default.
The loss ratio in the first quarter was 21.3 percent, compared to 23.4 percent in the fourth quarter of 2016 and 19.6 percent in the first quarter of 2016.
Mortgage insurance loss reserves were $726.2 million as of March 31, 2017, compared to $760.3 million as of December 31, 2016, and $891.3 million as of March 31, 2016.
Primary reserve per primary default (excluding IBNR and other reserves) was $24,230 as of March 31, 2017. This compares to primary reserve per primary default of $22,503 as of December 31, 2016, and $24,959 as of March 31, 2016.
The total number of primary delinquent loans decreased by 11.4 percent in the first quarter from the fourth quarter of 2016, and by 16.4 percent from the first quarter of 2016. The primary mortgage insurance delinquency rate decreased to 2.8 percent in the first quarter of 2017, compared to 3.2 percent in the fourth quarter of 2016, and 3.5 percent in the first quarter of 2016.
Total net mortgage insurance claims paid were $82.1 million in the first quarter, compared to $116.5 million in the fourth quarter of 2016, and $127.7 million in the first quarter of 2016. In addition, the company’s pending claim inventory declined 37 percent from the first quarter of 2016.
Mortgage and Real Estate Services
The Services segment provides analytics and outsourced services, including residential loan due diligence and underwriting, valuations, servicing surveillance, title and escrow, and consulting services for buyers and sellers of, and investors in, mortgage- and real-estate related loans and securities. These services and solutions are provided primarily through Clayton and its subsidiaries, including Green River Capital, Red Bell Real Estate and ValuAmerica.
Total revenues for the first quarter were $40.1 million, compared to $52.6 million for the fourth quarter of 2016, and $34.5 million for the first quarter of 2016.
The adjusted pretax operating loss before corporate allocations for the quarter ended March 31, 2017, was $1.2 million, compared to income of $3.6 million for the quarter ended December 31, 2016, and a loss of $3.8 million for the quarter ended March 31, 2016.
Services adjusted earnings before interest, income taxes, depreciation and amortization (Services adjusted EBITDA) for the quarter ended March 31, 2017, was a loss of $0.3 million, compared to income of $4.4 million for the quarter ended December 31, 2016, and a loss of $3.1 million for the quarter ended March 31, 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 $68.4 million in the first quarter, compared to $62.4 million in the fourth quarter of 2016, and $57.2 million in the first quarter of last year.
Notable increases to items impacting other operating expenses in the first quarter of 2017 compared to the first quarter of 2016 include:
- $3.6 million associated with retirement and consulting agreements entered into in February 2017 with the company’s former CEO. Additional expenses are expected to be recognized throughout the year. A portion of both the current and future expenses are subject to change, based on the company’s and former CEO’s future performance. Details may be found in the company’s recent proxy statement.
- $3.7 million related to variable and incentive-based compensation expenses, including an increase in the first quarter 2017 for year-end bonus accruals related to the company’s 2016 performance, compared to a decrease in year-end bonus accruals in the first quarter of 2016.
- $2.4 million associated with various items including periodic non-capitalized costs associated with recently deployed technology systems as well as consulting services, including those related to the company’s CEO search.
- $1.2 million in expense, driven primarily by depreciation, related to the company’s investment to significantly upgrade its technology systems.
Details regarding notable variable items impacting other operating expenses may be found in Exhibit D.
Capital and Liquidity Update
Radian Group maintained approximately $360 million of available liquidity as of March 31, 2017. The company initiated a series of capital actions two years ago, in order to strengthen its capital and liquidity position, improve its debt maturity profile and reduce the impact of dilution from its convertible bonds. The combination of these capital actions decreased the company’s total number of diluted shares outstanding by 27.1 million from March 31, 2015, to March 31, 2017. During the same time period, the company’s debt to capital ratio decreased from 34.6 percent to 25.7 percent. Radian Group has no material debt maturities prior to June 2019.
The company’s most recent capital action was executed in January 2017, in which Radian settled it obligations with respect to the remaining $68.0 million aggregate principal amount of its obligations Convertible Senior Notes due 2019. While the transaction had a negative impact of $0.20 to book value per share during the first quarter of 2017, it also reduced the company’s diluted shares by 6.4 million at the time of the settlement, or approximately 3 percent of diluted shares outstanding as of December 31, 2016.
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