Newswires
RADIAN GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The disclosures in this quarterly report are complementary to those made in our 2022 Form 10-K and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report, as well as our audited financial statements, notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K. The following analysis of our financial condition and results of operations for the three months endedMarch 31, 2023 , provides information that evaluates our financial condition as ofMarch 31, 2023 , compared withDecember 31, 2022 , and our results of operations for the three months endedMarch 31, 2023 , compared to the same period last year. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements-Safe Harbor Provisions" herein, and "Item 1A. Risk Factors" in our 2022 Form 10-K for a discussion of those risks and uncertainties that have the potential to adversely affect our business, financial condition, results of operations, cash flows or prospects. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. See "Overview" below and Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Index to Item 2 Item Page Overview 38 Key Factors Affecting Our Results 40 Mortgage Insurance Portfolio 40 Results of Operations-Consolidated 43 Results of Operations-Mortgage 48 Results of Operations-homegenius 54 Results of Operations-All Other 55 Liquidity and Capital Resources 56 Critical Accounting Estimates 60
Overview
We are a diversified mortgage and real estate business with two reportable
business segments-Mortgage and homegenius.
Our Mortgage segment aggregates, manages and distributesU.S. mortgage credit risk for the benefit of mortgage lending institutions and mortgage credit investors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides contract underwriting and other credit risk management solutions to our customers. Our homegenius segment offers an array of title, real estate and technology products and services to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents.
Current Operating Environment
As a seller of mortgage credit protection and other mortgage and credit risk management solutions and real estate products and services, our business results are subject to macroeconomic conditions and specific events that impact the housing, housing finance and related real estate markets, the credit performance of our mortgage insurance portfolio and our future business opportunities, as well as seasonal fluctuations that specifically affect the mortgage origination and real estate environments. The performance of our Mortgage business is particularly influenced by housing prices, inflationary pressures, interest rate changes, unemployment levels, mortgage originations and the availability of credit, national and regional economic conditions and other events, including legislative and regulatory developments, that impact the housing and real estate markets and the ability of borrowers to remain current on their mortgages, most of which are beyond our control. Annual inflation in theU.S. reached a 40-year high in 2022. While inflation has moderated in 2023, theU.S. economy continues to experience a high rate of inflation, as well as slower economic growth and the risks of a recession and of higher 38
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unemployment rates. Actions taken by the U.S. Federal Reserve to increase
interest rates in response to the inflationary trends that started in 2021
resulted in a sharp and significant increase in mortgage interest rates during
2022, with mortgage rates more than doubling to nearly 7% at the end of 2022.
The U.S. Federal Reserve continued to raise rates in the first quarter of 2023
and most recently in May 2023 , and additional rate increases are possible. These
economic conditions have negatively impacted the U.S. housing market, broadly
reducing refinance activity and new purchase transactions. In addition, these
conditions resulted in decreases in home prices in many markets in 2022 from
what had been record highs. More recently, industry data suggests that home
prices are beginning to stabilize. As further discussed below, we expect that
the current economic environment will continue to negatively impact certain
aspects of our results, including lower NIW, lower homegenius revenues and
higher mortgage insurance defaults. At the same time, we also expect the higher
interest rate environment to benefit us through higher Persistency Rates that
will favorably impact our IIF, as well as through the recognition of higher net
investment income, as further discussed below.
We wrote NIW of $11.3 billion in the first quarter of 2023, a decrease of 40%
compared to our NIW in the first quarter of 2022 due to the reduction in housing
market activity resulting from current economic conditions. We expect the
current economic environment to continue to negatively impact our NIW volumes
for the near future. Longer-term, however, we continue to believe that the
housing market fundamentals and outlook remain favorable, including demographics
supporting growth in the population of first-time homebuyers and a constrained
supply of homes available for sale. While the recent increases in mortgage
interest rates have significantly reduced refinance demand, they have also
resulted in a decrease in policy cancellations, which has increased our
Persistency Rate, and in turn contributed to growth in our IIF. Further, in
response to the current macroeconomic trends, in our mortgage insurance business
we increased pricing in 2022 and the first quarter of 2023. See "Mortgage
Insurance Portfolio" for additional details on our NIW and IIF.
The same inflationary pressures and higher interest rate environment discussed
above are also negatively impacting our homegenius title and real estate
businesses, due to the rapid decline in industry-wide purchase and refinance
volumes. The current macroeconomic trends, and the corresponding softening in
demand for home sales and mortgage refinancings, are also adversely impacting
the market demand for our new proprietary real estate technology products and
services. Despite steps taken since the beginning of 2022 to align our workforce
to the current and expected needs of the business and reduce our operating
expenses, the larger decline in homegenius revenues since the beginning of 2022
has resulted in ongoing losses for that business segment.
The sharp increases in interest rates throughout 2022 also materially affected
the fair value of our investment portfolio, resulting in unrealized losses on
investments in 2022. Although the decline in market interest rates during the
first quarter of 2023 resulted in the reversal of a portion of those unrealized
losses, the fair value of our portfolio continues to be significantly below its
amortized cost. As of March 31, 2023 , we did not expect to realize a loss for
our investments in an unrealized loss position given our intent and ability to
hold these investment securities until recovery of their amortized cost basis.
While the decrease in the fair value of our investments due to higher market
interest rates negatively affected our net income and stockholders' equity
during 2022, this higher interest rate environment has also resulted in the
recognition of higher net investment income, which is expected to continue in
future periods. See Note 6 of Notes to Unaudited Condensed Consolidated
Financial Statements for additional information about our investments.
The onset of the COVID-19 pandemic resulted in a significant increase in
unemployment, which had a negative impact on the economy. As a result, we
experienced a material increase in new defaults beginning in the second quarter
of 2020, substantially all of which related to loans subject to mortgage
forbearance programs implemented in response to the COVID-19 pandemic. This
increase in new defaults had a negative effect on our results of operations and
our reserve for losses for that year. While subsequent trends in Cures have been
more favorable than original expectations, resulting in favorable loss reserve
development on prior period defaults in 2022 and in the three months ended March
31, 2023 , the deteriorating economic conditions discussed above have contributed
to a higher level of overall new default activity, including a higher level of
new defaults from more recent vintages, and increased the likelihood that we
will experience lower levels of Cures in our mortgage insurance portfolio in
future periods. The number, timing and duration of new defaults and, in turn,
the number of defaults that ultimately result in claims will depend on a variety
of factors, including the overall economic environment and on the number and
timing of Cures and the net impact on IIF from our Persistency Rate and future
NIW. See Note 11 of Notes to Unaudited Condensed Consolidated Financial
Statements for additional information on our reserve for losses.
We believe that the range of risk distribution transactions and strategies that
we utilize to mitigate credit risk and financial volatility through varying
economic cycles have increased our financial strength and flexibility. As of
March 31, 2023 , 71% of our primary RIF is subject to a form of risk
distribution. Our use of risk distribution structures has reduced our required
capital and enhanced our projected return on capital, and we expect these
structures to provide a level of credit protection in periods of economic
stress. See "Mortgage Insurance Portfolio-Risk Distribution" for additional
information.
Despite risks and uncertainties, we believe that the steps we have taken in
recent years, including by improving our capital and liquidity positions,
enhancing our financial flexibility, implementing greater risk-based granularity
into our pricing methodologies and increasing our use of risk distribution
strategies to lower the risk profile and financial volatility of our mortgage
insurance portfolio, have helped position the Company to better withstand the
negative effects from the
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macroeconomic stresses discussed above, including those resulting from the high
rate of inflation and higher interest rates discussed above.
For a detailed discussion of the risks and uncertainties discussed above, as well as other risks and uncertainties impacting our business, see "Item 1A. Risk Factors" in our 2022 Form 10-K.
Legislative and Regulatory Developments
We are subject to comprehensive regulation by both federal and state regulatory authorities. For a description of significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses, as well as legislative and regulatory developments affecting the housing finance industry, see "Item 1. Business-Regulation" in our 2022 Form 10-K. Except as discussed below, there were no significant regulatory developments impacting our businesses from those discussed in our 2022 Form 10-K. InMarch 2023 , theFederal Housing Finance Agency announced that the GSEs will enhance their payment deferral policies, to allow borrowers facing eligible financial hardship that has since been resolved to defer up to six months of mortgage payments. The new policies have a voluntary early adoption date ofJuly 1, 2023 , and a mandatory adoption date ofOctober 1, 2023 . Under the enhanced payment deferral policies servicers must defer certain amounts, including past due principal and interest, as a non-interest bearing balance, due and payable at maturity, sale, refinance or payoff of the mortgage loan. This change extends eligibility for the GSEs' payment deferral workout beyond the payment deferral option for borrowers transitioning out of a COVID-19 related forbearance plan. OnApril 10, 2023 ,President Biden signed legislation terminating the COVID-19 national emergency. As previously disclosed in our 2022 Form 10-K, the termination of the COVID-19 national emergency may be interpreted by the GSEs and others to likewise result in the termination of the requirements under the CARES Act to provide COVID-19 related forbearance. Currently, COVID-19 forbearance continues to be available from the GSEs.
Key Factors Affecting Our Results
The key factors affecting our results are discussed in our 2022 Form 10-K. There
have been no material changes to these key factors.
Mortgage Insurance Portfolio
Insurance in Force
IIF by origination vintage (1)
[[Image Removed: 35]]
Insurance in Force as of:
Vintage written in: March 31, December 31, 2022 March 31,
($ in billions) 2023 2022
¢ 2023 $11.2 4.3 % $- - % $- - %
¢ 2022 64.1 24.5 65.2 25.0 18.6 7.5
¢ 2021 75.0 28.7 77.3 29.6 84.9 34.1
¢ 2020 54.2 20.7 57.7 22.1 69.8 28.0
¢ 2019 17.0 6.5 17.9 6.8 21.6 8.7
¢ 2018 8.6 3.3 9.0 3.5 11.1 4.4
¢ 2009 - 2017 22.8 8.7 24.9 9.5 32.3 13.0
¢ 2008 & Prior (2) 8.6 3.3 9.0 3.5 10.7 4.3
Total $261.5 100.0 % $261.0 100.0 % $249.0 100.0 %
(1)Policy years represent the original policy years and have not been adjusted
to reflect subsequent refinancing activity under the Home Affordable Refinance
Program ("HARP").
(2)Includes loans that were subsequently refinanced under HARP.
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New Insurance Written
We wrote $11.3 billion of primary new mortgage insurance in the three months
ended March 31, 2023 , compared to $18.7 billion of NIW in the three months ended
March 31, 2022 . As shown in the chart above, IIF increased slightly to $261.5
billion at March 31, 2023 , from $261.0 billion at December 31, 2022 , reflecting
the impact of our NIW and policy cancellations for the first three months of
2023.
Our NIW decreased by 40% for the three months ended March 31, 2023 , compared to
the same period in 2022 due primarily to a broad decline in U.S. housing market
activity resulting from higher mortgage interest rates. According to industry
estimates, total mortgage origination volume was lower for the three months
ended March 31, 2023 , as compared to the comparable period in 2022 due to a
significant decline in home purchases and mortgage refinance activity.
Although it is difficult to project future volumes, recent market projections
for 2023 estimate total mortgage originations of approximately $1.7 trillion ,
which would represent a decline in the total annual mortgage origination market
of approximately 26% as compared to 2022, with a private mortgage insurance
market of $300 billion to $325 billion . This outlook anticipates a 48% decrease
in refinance originations in 2023 as well as an 16% decline in purchase
originations driven by increases in interest rates and declining home sales
volume. In "Item 1A. Risk Factors" in our 2022 Form 10-K, see "A decrease in the
volume of mortgage originations could result in fewer opportunities for us to
write new mortgage insurance business and conduct our homegenius businesses" for
more information.
The following table provides selected information as of and for the periods
indicated related to our mortgage insurance NIW. For direct Single Premium
Policies, NIW includes policies written on an individual basis (as each loan is
originated) and on an aggregated basis (in which each individual loan in a group
of loans is insured in a single transaction, typically after the loans have been
originated).
NIW
Three Months Ended
March 31,
($ in millions) 2023 2022
NIW $ 11,261 $ 18,655
Primary risk written $ 2,906 $ 4,804
Average coverage percentage 25.8 % 25.8 %
NIW by loan purpose
Purchases 97.6 % 91.4 %
Refinances 2.4 % 8.6 %
Total borrower-paid NIW 99.4 % 99.2 %
NIW by premium type
Direct Monthly and Other Recurring Premiums 94.9 % 94.5 %
Direct single premiums (1) 5.1 % 5.5 %
NIW by FICO score (2)
>=740 60.7 % 57.1 %
680-739 32.8 % 35.7 %
620-679 6.5 % 7.2 %
NIW by LTV
95.01% and above 17.7 % 14.6 %
90.01% to 95.00% 40.2 % 42.0 %
85.01% to 90.00% 28.7 % 29.4 %
85.00% and below 13.4 % 14.0 %
(1)Borrower-paid Single Premium Policies were 4.9% of NIW for the three months
ended
(2)For loans with multiple borrowers, the percentage of NIW by FICO score
represents the lowest of the borrowers' FICO scores.
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Insurance and Risk in Force
Our IIF is the primary driver of the future premiums that we expect to earn over
time. IIF at March 31, 2023 , increased 5% as compared to the same period last
year, reflecting an 8% increase in Monthly Premium Policies in force partially
offset by a 12% decline in Single Premium Policies in force.
Historically, there is a close correlation between interest rates and
Persistency Rates. Higher interest rate environments generally decrease
refinancings, which decrease the cancellation rate of our insurance and
positively affect our Persistency Rates. As shown in the table below, our
12-month Persistency Rate at March 31, 2023 , increased as compared to the same
period in 2022. The increase in our Persistency Rate at March 31, 2023 , was
primarily attributable to decreased refinance activity due to increases in
mortgage interest rates, as compared to the same period in the prior year. As of
March 31, 2023 , 7% of our IIF had a mortgage note interest rate greater than
6.0%, primarily related to mortgage loans originated in 2022 and 2023. Given the
increase in market mortgage interest rates, which, based on reported industry
averages, now exceed that level, we would expect a continued positive impact on
our Persistency Rates.
Throughout this report, unless otherwise noted, RIF is presented on a gross
basis and includes the amount ceded under reinsurance. RIF and IIF for direct
Single Premium Policies include policies written on an individual basis (as each
loan is originated) and on an aggregated basis (in which each individual loan in
a group of loans is insured in a single transaction, typically after the loans
have been originated).
The following table provides selected information as of and for the periods
indicated related to mortgage insurance IIF and RIF.
IIF and RIF
December 31,
($ in millions) March 31, 2023 2022 March 31, 2022
Primary IIF $ 261,450 $ 260,994 $ 248,951
Primary RIF $ 66,580 $ 66,094 $ 62,036
Average coverage percentage 25.5 % 25.3 % 24.9 %
Persistency Rate (12 months ended) 81.6 % 79.6 % 68.0 %
Persistency Rate (quarterly, annualized) (1) 84.4 % 84.1 % 76.9 %
Total borrower-paid RIF 93.7 % 93.3 % 91.6 %
Primary RIF by premium type
Direct Monthly and Other Recurring Premiums 87.6 % 87.1 % 84.9 %
Direct single premiums (2) 12.4 % 12.9 % 15.1 %
Primary RIF by FICO score (3)
>=740 57.4 % 57.4 % 56.9 %
680-739 34.6 % 34.6 % 35.1 %
620-679 7.6 % 7.6 % 7.5 %
<=619 0.4 % 0.4 % 0.5 %
Primary RIF by LTV
95.01% and above 17.5 % 17.1 % 15.5 %
90.01% to 95.00% 48.5 % 48.4 % 48.9 %
85.01% to 90.00% 27.0 % 27.2 % 27.6 %
85.00% and below 7.0 % 7.3 % 8.0 %
(1)The Persistency Rate on a quarterly, annualized basis is calculated based on
loan-level detail for the quarter ending as of the date shown. It may be
impacted by seasonality or other factors, including the level of refinance
activity during the applicable periods, and may not be indicative of full-year
trends.
(2)Borrower-paid Single Premium Policies were 7.5%, 7.7% and 8.4% of primary RIF
for the periods indicated, respectively.
(3)For loans with multiple borrowers, the percentage of primary RIF by FICO
score represents the lowest of the borrowers' FICO scores.
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Risk Distribution
We use third-party reinsurance in our mortgage insurance business as part of our
risk distribution strategy, including to manage our capital position and risk
profile. When we enter into a reinsurance agreement, the reinsurer receives a
premium and, in exchange, insures an agreed-upon portion of incurred losses.
While these arrangements have the impact of reducing our earned premiums, they
also reduce our required capital and are expected to increase our return on
required capital for the related policies.
The impact of these programs on our financial results will vary depending on the
level of ceded RIF, as well as the levels of prepayments and incurred losses on
the reinsured portfolios, among other factors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Key
Factors Affecting Our Results-Mortgage-Risk Distribution" in our 2022 Form 10-K
and Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements in
this report for more information about our reinsurance transactions.
The table below provides information about the amounts by which Radian
Guaranty's reinsurance programs reduced its Minimum Required Assets as of the
dates indicated.
PMIERs benefit from risk distribution
($ in thousands) March 31, 2023 December 31, 2022 March 31, 2022 PMIERs impact - reduction in Minimum Required Assets Excess-of-Loss Program$ 610,567 $ 665,617$ 881,917 Single Premium QSR Program 218,931 231,339 286,706 2022 QSR Agreement 272,489 233,532 - 2012 QSR Agreements 7,395 8,357 11,214 Total PMIERs impact$ 1,109,382 $ 1,138,845 $ 1,179,837 Percentage of gross Minimum Required Assets 22.1 % 22.9 % 25.0 % See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Revenues-Net Premiums Earned" for information about the impact on premiums earned from each of Radian Guaranty's reinsurance programs.
Results of Operations-Consolidated
Three Months Ended
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for the three months endedMarch 31, 2023 , andMarch 31, 2022 , primarily reflect the financial results and performance of our two business segments-Mortgage and homegenius. See "Results of Operations-Mortgage" and "Results of Operations-homegenius" for the operating results of these business segments for the three months endedMarch 31, 2023 , compared to the same period in 2022. In addition to the results of our operating segments, pretax income (loss) is also affected by those factors described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting Our Results" in our 2022 Form 10-K. 43
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The following table summarizes our consolidated results of operations for the
three months ended
Summary results of operations - Consolidated
Change
Three Months Ended Favorable
March 31, (Unfavorable)
($ in thousands, except per-share amounts) 2023 2022 2023 vs. 2022
Revenues
Net premiums earned $ 233,238 $ 254,190 $ (20,952)
Services revenue 10,984 29,348 (18,364)
Net investment income 59,221 38,196 21,025
Net gains (losses) on investments and other financial
instruments 5,585 (29,457) 35,042
Other income 1,592 703 889
Total revenues 310,620 292,980 17,640
Expenses
Provision for losses (16,929) (83,754) (66,825)
Policy acquisition costs 6,293 6,605 312
Cost of services 10,398 24,753 14,355
Other operating expenses 83,269 89,541 6,272
Interest expense 22,207 20,846 (1,361)
Amortization of other acquired intangible assets 1,371 849 (522)
Total expenses 106,609 58,840 (47,769)
Pretax income 204,011 234,140 (30,129)
Income tax provision 46,254 53,009 6,755
Net income $ 157,757 $ 181,131 $ (23,374)
Diluted net income per share $ 0.98 $ 1.01 $ (0.03)
Return on equity 15.7 % 17.2 % (1.5) %
Non-GAAP Financial Measures (1)
Adjusted pretax operating income $ 199,863 $ 264,948 $ (65,085)
Adjusted diluted net operating income per share $ 0.98 $ 1.17 $ (0.19)
Adjusted net operating return on equity 15.7 % 19.9 % (4.2) %
(1)See "Use of Non-GAAP Financial Measures" below.
Revenues
Net Premiums Earned. The decrease in net premiums earned for the three months endedMarch 31, 2023 , as compared to the same period in 2022, is driven by a decrease in net premiums earned in both our mortgage insurance and title insurance businesses in 2023. See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Revenues-Net Premiums Earned" and "Results of Operations-homegenius-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Revenues-Net Premiums Earned" for more information. Services Revenue. Services revenue for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily driven by the general market decline in mortgage origination volume as well as other market and macroeconomic conditions, as further described in "Overview-Current Operating Environment." See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Revenues-Services 44
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Revenue" and "Results of Operations-homegenius-Three Months Ended
2023
for more information.
Net Investment Income. The increase in net investment income for the three months endedMarch 31, 2023 , as compared to the same period in 2022, is primarily attributable to higher market interest rates. See "Overview-Current Operating Environment" and "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Revenues-Net Investment Income" for more information.Net Gains (Losses) on Investments and Other Financial Instruments. The favorable change in net gains (losses) on investments and other financial instruments for the three months endedMarch 31, 2023 , as compared to the same period in 2022, is primarily due to moderate decreases in market interest rates in the first quarter of 2023 compared to the sharp rise in market interest rates in the first quarter of 2022, as further discussed in "Overview-Current Operating Environment." See Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements for additional detail about net gains (losses) on investments and other financial instruments by investment category.
Expenses
Provision for Losses. The reduced benefit of the provision for losses for the three months endedMarch 31, 2023 , as compared to the same period in 2022, is primarily driven by a reduction in favorable development on prior period defaults, which impacted our mortgage insurance reserves. See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Expenses-Provision for Losses" for more information. Cost of Services. Cost of services for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily driven by the decrease in services revenue, as discussed above. See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Expenses-Cost of Services" and "Results of Operations-homegenius-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Expenses-Cost of Services" for more information. Other Operating Expenses. The decrease in other operating expenses for the three months endedMarch 31, 2023 , as compared to the same period in 2022, is primarily due to a decrease in variable and share-based incentive compensation expense. See "Results of Operations-Mortgage-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Expenses-Other Operating Expenses" and "Results of Operations-homegenius-Three Months EndedMarch 31, 2023 , Compared to Three Months EndedMarch 31 , 2022-Expenses-Other Operating Expenses" for more information. Income Tax Provision Variations in our effective tax rates, combined with differences in pretax income, were the drivers of the changes in our income tax provision between periods. Our effective tax rate for the three months endedMarch 31, 2023 , was 22.7%, as compared to 22.6% for the same period in 2022. Our effective tax rates for the three months endedMarch 31, 2023 and 2022, were higher than the statutory rate of 21% primarily due to the impact of state income taxes and the limitation on the deductibility of certain compensation-related expenses.
Use of Non-GAAP Financial Measures
In addition to traditional GAAP financial measures, we have presented "adjusted
pretax operating income (loss)," "adjusted diluted net operating income (loss)
per share" and "adjusted net operating return on equity," which are 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 our business performance is evaluated by
both management and by our 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 (loss),
adjusted diluted net operating income (loss) per share and adjusted net
operating return on equity are non-GAAP financial measures, for the reasons
discussed above we believe these measures aid in understanding the underlying
performance of our operations.
Total adjusted pretax operating income (loss), adjusted diluted net operating
income (loss) per share and adjusted net operating return on equity are not
measures of overall profitability, and therefore should not be considered in
isolation or viewed as substitutes for GAAP pretax income (loss), diluted net
income (loss) per share or return on equity. Our definitions of adjusted pretax
operating income (loss), adjusted diluted net operating income (loss) per share
and adjusted net operating return on equity, as discussed and reconciled below
to the most comparable respective GAAP measures, may not be comparable to
similarly-named measures reported by other companies.
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. See Note
4 of Notes to Consolidated Financial Statements and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-
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Consolidated-Use of Non-GAAP Financial Measures," each in our 2022 Form 10-K,
for detailed information regarding items excluded from adjusted pretax operating
income (loss) and the reasons for their treatment.
Adjusted pretax operating income (loss) is defined as GAAP consolidated pretax
income (loss) excluding the effects of: (i) net gains (losses) on investments
and other financial instruments, except for certain investments and other
financial instruments attributable to our reportable segments and All Other
activities; (ii) gains (losses) on extinguishment of debt; (iii) amortization
and impairment of goodwill and other acquired intangible assets; and (iv)
impairment of other long-lived assets and other non-operating items, such as
impairment of internal-use software, gains (losses) from the sale of lines of
business and acquisition-related income and expenses.
The following table provides a reconciliation of consolidated pretax income to
our non-GAAP financial measure for the consolidated Company of adjusted pretax
operating income.
Reconciliation of consolidated pretax income to consolidated adjusted pretax operating income
Three Months Ended
March 31,
(In thousands) 2023 2022
Consolidated pretax income $ 204,011 $ 234,140
Less: income (expense) items
Net gains (losses) on investments and other financial instruments
(1) 5,505 (29,457)
Amortization of other acquired intangible assets (1,371) (849)
Impairment of other long-lived assets and other non-operating items
14 (502) Total adjusted pretax operating income (2) $
199,863
(1)Excludes certain net gains (losses), if any, on investments and other financial instruments that are attributable to specific operating segments and therefore included in adjusted pretax operating income (loss). (2)Total adjusted pretax operating income on a consolidated basis consists of adjusted pretax operating income (loss) for our Mortgage segment, homegenius segment and All Other activities, as further detailed in Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements. Adjusted diluted net operating income (loss) per share is calculated by dividing (i) adjusted pretax operating income (loss) attributable to common stockholders, 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. The following table provides a reconciliation of diluted net income (loss) per share to our non-GAAP financial measure for the consolidated Company of adjusted diluted net operating income (loss) per share.
Reconciliation of diluted net income per share to adjusted diluted net operating income per share
Three Months Ended
March 31,
2023 2022
Diluted net income per share $ 0.98 $ 1.01
Less: per-share impact of reconciling income (expense) items
Net gains (losses) on investments and other financial instruments
0.03 (0.16) Amortization of other acquired intangible assets (0.01) (0.01)
Impairment of other long-lived assets and other non-operating items
- -
Income tax (provision) benefit on reconciling income (expense) items (1)
(0.01) 0.03 Difference between statutory and effective tax rates (0.01) (0.02) Per-share impact of reconciling income (expense) items - (0.16) Adjusted diluted net operating income per share (1)$ 0.98 $ 1.17
(1)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Adjusted net operating return on equity is calculated by dividing annualized
adjusted pretax operating income (loss), 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
following table provides a reconciliation of return on equity to our non-GAAP
financial measure for the consolidated Company of adjusted net operating return
on equity.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
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Reconciliation of return on equity to adjusted net operating return on equity
Three Months Ended
March 31,
2023 2022
Return on equity (1) 15.7 % 17.2 %
Less: impact of reconciling income (expense) items (2)
Net gains (losses) on investments and other financial instruments
0.5 (2.8) Amortization of other acquired intangible assets (0.1) (0.1)
Impairment of other long-lived assets and other non-operating items
- -
Income tax (provision) benefit on reconciling income (expense) items (3)
(0.1) 0.6
Difference between statutory and effective tax rates (0.3) (0.4)
Impact of reconciling income (expense) items - (2.7)
Adjusted net operating return on equity (3) 15.7 % 19.9 %
(1)Calculated by dividing annualized net income by average stockholders' equity,
based on the average of the beginning and ending balances for each period
presented.
(2)Annualized, as a percentage of average stockholders' equity.
(3)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations-Mortgage
Three Months Ended
The following table summarizes our Mortgage segment's results of operations for
the three months ended
Summary results of operations - Mortgage
Change
Three Months Ended Favorable
March 31, (Unfavorable)
(In thousands) 2023 2022 2023 vs. 2022
Revenues
Net premiums written $
229,419
(Increase) decrease in unearned premiums
2,031 (3,186) 5,217 Net premiums earned 231,450 245,174 (13,724) Services revenue 336 4,552 (4,216) Net investment income 46,497 34,017 12,480 Other income 1,587 703 884 Total revenues 279,870 284,446 (4,576) Expenses Provision for losses (16,864) (84,193) (67,329) Policy acquisition costs 6,293 6,605 312 Cost of services 241 3,383 3,142 Other operating expenses 53,635 59,964 6,329 Interest expense 22,130 20,846 (1,284) Total expenses 65,435 6,605 (58,830) Adjusted pretax operating income (1) $
214,435
(1)Our senior management uses adjusted pretax operating income as our primary
measure to evaluate the fundamental financial performance of our business
segments. See Note 4 of Notes to Unaudited Condensed Consolidated Financial
Statements for more information.
Revenues
Net Premiums Earned. Net premiums earned decreased for the three months endedMarch 31, 2023 , as compared to the same period in 2022, primarily due to: (i) an increase in ceded premiums, including due to a decrease in the profit commission retained by the Company as a result of less favorable reserve development in the three months endedMarch 31, 2023 , as compared to the same period in 2022, and (ii) a decrease in the benefit, net of reinsurance, from Single Premium Policy cancellations due to lower refinance activity. These impacts were partially offset by an increase in direct premiums earned, excluding revenue from cancellations, in the three months endedMarch 31, 2023 , as compared to the same period in 2022, due primarily to higher IIF. 48
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The table below provides additional information about the components of mortgage
insurance net premiums earned for the periods indicated, including the effects
of our reinsurance programs.
Net premiums earned
Change
Three Months Ended Favorable
March 31, (Unfavorable)
($ in thousands, except as otherwise indicated) 2023 2022 2023 vs. 2022
Direct
Premiums earned, excluding revenue from cancellations$ 251,166 $ 243,600 $ 7,566 Single Premium Policy cancellations 5,361 14,696 (9,335) Direct 256,527 258,296 (1,769) Assumed (1) - 1,331 (1,331) Ceded Premiums earned, excluding revenue from cancellations (35,526) (27,339) (8,187) Single Premium Policy cancellations (2) (1,472) (4,192) 2,720 Profit commission-other (3) 11,921 17,078 (5,157) Ceded premiums, net of profit commission (25,077) (14,453) (10,624) Total net premiums earned$ 231,450
In force portfolio premium yield (in basis points) (4) 38.5 39.6 (1.1) Direct premium yield (in basis points) (5) 39.3 42.0 (2.7) Net premium yield (in basis points) (6) 35.4 39.6 (4.2) Average primary IIF (in billions) (7)$ 261.2
(1)Includes premiums earned from our participation in certain credit risk transfer programs. InDecember 2022 , we novated this insured risk to an unrelated third-party reinsurer, which assumed all rights, interests, liabilities and obligations related to our participation in these programs on a prospective basis. See Note 16 of Notes to Consolidated Financial Statements in our 2022 Form 10-K for more information about this novation. (2)Includes the impact of related profit commissions. (3)Represents the profit commission from the Single Premium QSR Program and 2022 QSR Agreement, excluding the impact of Single Premium Policy cancellations. (4)Calculated by dividing annualized direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF. (5)Calculated by dividing annualized direct premiums earned, including assumed revenue, by average primary IIF. (6)Calculated by dividing annualized net premiums earned by average primary IIF. The calculation for all periods presented incorporates the impact of profit commission adjustments related to our reinsurance programs. (7)The average of beginning and ending balances of primary IIF, for each period presented. The level of mortgage prepayments affects the revenue ultimately produced by our mortgage insurance business and is influenced by the mix of business we write. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting Our Results-Mortgage-IIF and Related Drivers" in our 2022 Form 10-K for more information. 49
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table provides information related to the impact of our
reinsurance transactions on premiums earned. See Note 8 of Notes to Unaudited
Condensed Consolidated Financial Statements for more information about our
reinsurance programs.
Ceded premiums earned
Three Months Ended
March 31,
($ in thousands) 2023 2022
Single Premium QSR Program (1) $ 2,070 $ (3,731)
Excess-of-Loss Program 16,159 17,588
2022 QSR Agreement 6,484 -
Other 364 596
Total ceded premiums earned (2) $
25,077
Percentage of total direct and assumed premiums earned 9.7 % 5.3 % (1)Includes the increase in the profit commission retained by the Company due to favorable reserve development. See "Expenses-Provision for Losses" below for additional information on the favorable reserve development. (2)Does not include the benefit from ceding commissions from the reinsurance agreements in our QSR Program, which is primarily included in other operating expenses on the condensed consolidated statements of operations. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Services Revenue. Services revenue for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily driven by the termination of a contract with a large fulfillment customer in the second quarter of 2022, as well as a decrease in demand for our contract underwriting services as a result of the general market decline in mortgage origination volume. For more information on recent macroeconomic stresses see "Overview-Current Operating Environment." Net Investment Income. Increasing yields from higher interest rates were the primary driver of the increases in net investment income for the three months endedMarch 31, 2023 , as compared to the same period in 2022.
The following table provides information related to our Mortgage subsidiaries'
investment balances and investment yields.
Investment balances and yields
Three Months Ended Change
March 31, Favorable (Unfavorable)
($ in thousands) 2023 2022 2023 vs. 2022
Investment income $ 47,809 $ 35,595 $ 12,214
Investment expenses (1,312) (1,578) 266
Net investment income $ 46,497 $ 34,017 $ 12,480
Average investments (1) $ 5,312,512 $ 5,664,575 $ (352,063)
Average investment yield (2) 3.5 % 2.4 % 1.1 %
(1) The average of the beginning and ending amortized cost, for each period
presented, of investments held by our Mortgage subsidiaries.
(2) Calculated by dividing annualized net investment income by average
investments balance.
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of Operations
Expenses
Provision for Losses. The following table details the financial impact of the
significant components of our provision for losses for the periods indicated.
Provision for losses
Change
Three Months Ended Favorable
March 31, (Unfavorable)
($ in thousands, except reserve per new default) 2023 2022 2023 vs. 2022
Current period defaults (1) $ 50,578 $ 40,662 $ (9,916)
Prior period defaults (2) (67,442) (124,855) (57,413)
Total provision for losses $ (16,864) $ (84,193) $ (67,329)
Loss ratio (3) (7.3) % (34.3) % (27.0) %
Reserve per new default (4) $ 4,761 $ 4,329 $ (432)
(1)Related to defaulted loans with the most recent default notice dated in the
period indicated. For example, if a loan had defaulted in a prior period, but
then subsequently cured and later re-defaulted in the current period, the
default would be considered a current period default.
(2)Related to defaulted loans with a default notice dated in a period earlier
than the period indicated, which have been continuously in default since that
time.
(3)Provision for losses as a percentage of net premiums earned. See
"Revenues-Net Premiums Earned" above for additional information on the changes
in net premiums earned.
(4)Calculated by dividing provision for losses for new defaults, net of
reinsurance, by new primary defaults for each period.
Current period new primary defaults increased by 13% for the three months ended
March 31, 2023 , as shown below. Our gross Default to Claim Rate assumption for
new primary defaults was 8.0% at both March 31, 2023 and 2022, as we continue to
closely monitor the trends in Cures and claims paid for our default inventory,
while also weighing the risks and uncertainties associated with the current
economic environment.
Our provision for losses during the three months ended March 31, 2023 , and March
31, 2022 , was positively impacted by favorable reserve development on prior
period defaults, primarily as a result of more favorable trends in Cures than
originally estimated due to favorable outcomes resulting from mortgage
forbearance programs implemented in response to the COVID-19 pandemic as well as
positive trends in home price appreciation. These favorable observed trends
resulted in reductions in our Default to Claim Rate assumptions for prior year
default notices, particularly for those defaults first reported in 2020
following the start of the COVID-19 pandemic. The benefit from this favorable
development on prior period defaults was lower in the first quarter of 2023 as
compared to the first quarter of 2022 due primarily to the reduction in the
beginning primary default inventory between the two periods. See Note 11 of
Notes to Unaudited Condensed Consolidated Financial Statements herein for
additional information, as well as Notes 1 and 11 of Notes to Consolidated
Financial Statements and "Item 1A. Risk Factors" in our 2022 Form 10-K.
Our primary default rate as a percentage of total insured loans at March 31,
2023 , was 2.1% compared to 2.2% at December 31, 2022 . The following table shows
a rollforward of our primary loans in default.
Rollforward of primary loans in default
Three Months Ended
March 31,
2023
2022
Beginning default inventory 21,913 29,061
New defaults 10,624 9,393
Cures (11,686) (12,789)
Claims paid (80) (125)
Rescissions and Claim Denials (1) (23) (30)
Ending default inventory 20,748 25,510
(1)Net of any previous Rescissions and Claim Denials that were reinstated during
the period. Such reinstated Rescissions and Claim Denials may ultimately result
in a paid claim.
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of Operations
The following tables show additional information about our primary loans in
default as of the dates indicated.
Primary loans in default - additional information
March 31, 2023
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 1st Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 8,808 42.5 % 14 41.4 % $ 82,418 21.7 %
Four to eleven payments 7,052 34.0 208 29.9 120,778 31.9
Twelve payments or more 4,527 21.8 827 20.6 157,560 41.6
Pending claims 361 1.7 N/A 20.4 18,236 4.8
Total 20,748 100.0 % 1,049 378,992 100.0 %
LAE 9,535
IBNR 1,772
Total primary reserve (1) $ 390,299
December 31, 2022
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 9,584 43.7 % 8 35.5 % $ 77,987 19.5 %
Four to eleven payments 6,842 31.2 189 27.4 114,537 28.7
Twelve payments or more 5,158 23.6 750 22.9 190,148 47.7
Pending claims 329 1.5 N/A 23.5 16,202 4.1
Total 21,913 100.0 % 947 398,874 100.0 %
LAE 10,041
IBNR 2,128
Total primary reserve (1) $ 411,043
N/A - Not applicable
(1) Excludes pool and other reserves. See Note 11 of Notes to Unaudited
Condensed Consolidated Financial Statements for additional information.
We develop our Default to Claim Rate estimates based primarily on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. See Note 11 of Notes to Consolidated Financial Statements in our 2022 Form 10-K for additional details about our Default to Claim Rate assumptions. Our aggregate weighted average net Default to Claim Rate assumption for our primary loans used in estimating our reserve for losses, which is net of estimated Claim Denials and Rescissions, was approximately 30% at bothMarch 31, 2023 , andDecember 31, 2022 . See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements for information regarding our reserves for losses and a reconciliation of our Mortgage segment's beginning and ending reserves for losses and LAE. Although expected claims are included in our reserve for losses, the timing of claims paid is subject to fluctuation from quarter to quarter based on the rate that defaults cure and other factors, including the impact of foreclosure moratoriums (as described in "Item 1. Business-Mortgage-Defaults and Claims" in our 2022 Form 10-K) that make the timing of paid claims difficult to predict. 52
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of Operations
The following table shows net claims paid by product and the average claim paid
by product for the periods indicated.
Claims paid
Three Months Ended
March 31,
(In thousands) 2023 2022
Net claims paid (1)
Primary $ 3,019 $ 5,153
Pool and other (3) (415)
Total net claims paid $ 3,016 $ 4,738
Total average net primary claim paid (1)
Average direct primary claim paid (2)
$ 36.1 $ 42.1 (1)Net of reinsurance recoveries. (2)Before reinsurance recoveries.
For additional information about our reserve for losses, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Estimates" in our 2022 Form 10-K.
Cost of Services. Cost of services for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily due to the decrease in services revenue, as discussed above. Our cost of services is primarily affected by our level of services revenue.
Other Operating Expenses. The decrease in other operating expenses for the three
months ended
primarily related to a decrease in variable and share-based incentive
compensation expense, including as part of allocated corporate operating
expenses.
The following table shows additional information about Mortgage other operating
expenses.
Other operating expenses
Change
Three Months Ended Favorable
March 31, (Unfavorable)
($ in thousands) 2023 2022 2023 vs. 2022
Direct
Salaries and other base employee expenses $ 11,546 $ 10,859 $ (687)
Variable and share-based incentive compensation 4,167 5,644 1,477
Other general operating expenses 7,722 11,201 3,479
Ceding commissions (4,628) (3,949) 679
Total direct 18,807 23,755 4,948
Allocated (1)
Salaries and other base employee expenses 10,831 11,330 499
Variable and share-based incentive compensation 9,139 11,053 1,914
Other general operating expenses 14,858 13,826 (1,032)
Total allocated 34,828 36,209 1,381
Total other operating expenses $ 53,635 $ 59,964 $ 6,329
Expense ratio (2) 25.9 % 27.2 % 1.3 %
(1)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements
for more information about our allocation of corporate operating expenses.
(2)Operating expenses (which consist of policy acquisition costs and other
operating expenses, as well as allocated corporate operating expenses),
expressed as a percentage of net premiums earned. See "Revenues-Net Premiums
Earned" above for additional information on the changes in net premiums earned.
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of Operations
Results of Operations-homegenius
Three Months Ended
The following table summarizes our homegenius segment's results of operations for the three months endedMarch 31, 2023 and 2022. As discussed in "Overview-Current Operating Environment," the macroeconomic stresses beginning in the second quarter of 2022 have continued to adversely affect our homegenius business, including in particular a decrease in our title revenues due to the rapid decline in industrywide refinance volumes. We expect this trend to continue to impact the results of our homegenius segment in at least the near-term based on current market conditions and our expectation that overall refinance volumes will remain low.
Summary results of operations - homegenius
Change
Three Months Ended Favorable
March 31, (Unfavorable)
(In thousands) 2023 2022 2023 vs. 2022
Revenues
Net premiums earned $ 1,788 $ 9,016 $ (7,228)
Services revenue 10,743 24,878 (14,135)
Net investment income 430 18 412
Total revenues 12,961 33,912 (20,951)
Expenses
Provision for losses (65) 481 546
Cost of services 10,157 21,370 11,213
Other operating expenses 25,910 25,567 (343)
Total expenses 36,002 47,418 11,416
Adjusted pretax operating income (loss) (1) $ (23,041)
(1)Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of our business segments. See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements.
Revenues
Net Premiums Earned. Net premiums earned for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily due to a decrease in new title policies written in our title insurance business given the decline in industrywide refinance volumes. Services Revenue. Services revenue for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily due to a decrease in real estate and title services revenues resulting from the recent macroeconomic stresses, as described above. See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for the disaggregation of services revenue by revenue type. Expenses Cost of Services. Cost of services for the three months endedMarch 31, 2023 , decreased as compared to the same period in 2022, primarily due to the decrease in services revenue. Our cost of services is primarily affected by our level of services revenue and the number of employees providing those services. As further discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview-Current Operating Environment" in our 2022 Form 10-K, the number of employees was reduced for the three months endedMarch 31, 2023 , as compared to the same period in 2022, as a result of the steps taken in 2022 to better align our workforce with the current and expected needs of our business. 54
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other Operating Expenses. The following table shows additional information about
homegenius other operating expenses.
Other operating expenses
Change
Three Months Ended Favorable
March 31, (Unfavorable)
(In thousands) 2023 2022 2023 vs. 2022
Direct
Salaries and other base employee expenses $ 9,040 $ 8,707 $ (333)
Variable and share-based incentive compensation 3,460 3,916 456
Other general operating expenses 8,054 6,565 (1,489)
Title agent commissions 697 1,099 402
Total direct 21,251 20,287 (964)
Allocated (1)
Salaries and other base employee expenses 1,454 1,668 214
Variable and share-based incentive compensation 1,240 1,606 366
Other general operating expenses 1,965 2,006 41
Total allocated 4,659 5,280 621
Total other operating expenses $ 25,910
(1)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements
for more information about our allocation of corporate operating expenses.
Results of Operations-All Other
Three Months Ended
The following table summarizes our All Other results of operations for the three
months ended
Summary results of operations - All Other
Change
Three Months Ended Favorable
March 31, (Unfavorable)
(In thousands) 2023 2022 2023 vs. 2022
Revenues
Net investment income $ 12,294 $ 4,161 $ 8,133
Net gains (losses) on investments and other financial
instruments 80 - 80
Other income 5 - 5
Total revenues 12,379 4,161 8,218
Expenses
Other operating expenses 3,833 3,548 (285)
Interest expense 77 - (77)
Total expenses 3,910 3,548 (362)
Adjusted pretax operating income (1) $
8,469
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of our
business segments. See Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements.
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Our All Other results include income from investments held at Radian Group ,
which have benefited from rising interest rates over the past year. All Other
also includes the financial results of Radian Mortgage Capital . As of March 31,
2023 , in light of the challenging market conditions in the secondary mortgage
market, Radian Mortgage Capital had purchased only a limited number of loans,
which were acquired in the fourth quarter of 2022 and first quarter of 2023, and
has not yet conducted any securitizations.
Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating,
investing and financing activities.
Summary cash flows - Consolidated
Three Months Ended
March 31,
(In thousands) 2023 2022
Net cash provided by (used in):
Operating activities $ 116,778 $ 116,675
Investing activities (30,542) (71,795)
Financing activities (92,052) (63,996)
Increase (decrease) in cash and restricted cash
Operating Activities. Our most significant source of operating cash flows is from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are typically for our operating expenses and claims paid on our mortgage insurance policies. Cash provided by operating activities was consistent for the three months endedMarch 31, 2023 , as compared to the same period in 2022, due primarily to lower payments for operating expenses being offset by lower direct premiums written, due primarily to lower Single Premium Policy NIW resulting from reduced refinancing activity. Investing Activities. Net cash used by investing activities decreased for the three months endedMarch 31, 2023 , as compared to the same period in 2022, primarily as a result of a decrease in purchases of fixed-maturity investments available for sale, partially offset by: (i) a decrease in redemptions of fixed-maturity investments available for sale and trading securities and (ii) a decrease in purchases, net of sales and redemptions, of short-term investments. Financing Activities. For the three months endedMarch 31, 2023 , our primary financing activities impacting cash included: (i) net changes in secured borrowings; (ii) payment of dividends; and (iii) repurchases of our common stock. See Notes 12 and 14 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our borrowings and share repurchases, respectively.
See "Item 1. Financial Statements (Unaudited)-Condensed Consolidated Statements
of Cash Flows (Unaudited)" for additional information.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. AtMarch 31, 2023 ,Radian Group had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of$956 million . Available liquidity atMarch 31, 2023 , excludes certain additional cash and liquid investments that have been advanced toRadian Group from its subsidiaries to pay for corporate expenses and interest payments. Total liquidity, which includes our undrawn$275 million unsecured revolving credit facility, as described below, was$1.2 billion as ofMarch 31, 2023 . During the three months endedMarch 31, 2023 ,Radian Group's available liquidity increased by$53 million , due primarily to a$100 million ordinary dividend received from Radian Guaranty inMarch 2023 , partially offset by payments for dividends and share repurchases, as described below. In addition to available cash and marketable securities,Radian Group's principal sources of cash to fund future liquidity needs include: (i) payments made toRadian Group by its subsidiaries under expense- and tax-sharing arrangements; (ii) net investment income earned on its cash and marketable securities; and (iii) to the extent available, dividends or other distributions from its subsidiaries.Radian Group has in place a$275 million unsecured revolving credit facility with a syndicate of bank lenders. Subject to certain limitations, borrowings under the credit facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to our insurance subsidiaries as well as growth initiatives. AtMarch 31, 2023 , 56
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the full
12 of Notes to Consolidated Financial Statements in our 2022 Form 10-K for
additional information on the unsecured revolving credit facility.
In connection with our mortgage conduit initiative, in 2022,Radian Mortgage Capital entered into the Master Repurchase Agreements. At that time,Radian Group entered into two separate Parent Guarantees to guaranty the obligations under the Master Repurchase Agreements. Under these Parent Guarantees,Radian Group is subject to negative and affirmative covenants customary for this type of financing transaction, including compliance with financial covenants that are generally consistent with the comparable covenants in the Company's revolving credit facility. See Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. In addition to financing the acquisition of mortgage loan assets under the Master Repurchase Agreements,Radian Mortgage Capital may fund such purchases directly using capital contributed fromRadian Group . We expectRadian Group's principal liquidity demands for the next 12 months to be: (i) the payment of corporate expenses, including taxes; (ii) interest payments on our outstanding debt obligations; (iii) the payment of quarterly dividends on our common stock, which were$0.20 per share in 2022 and subsequently increased to$0.225 per share for the first quarterly dividend in 2023, and which remain subject to approval by our board of directors and our ongoing assessment of our financial condition and potential needs related to the execution and implementation of our business plans and strategies; (iv) the potential continued repurchases of shares of our common stock pursuant to share repurchase authorizations, as described below; (v) investments to support our business strategy, including capital contributions to our subsidiaries; and (vi) potential payments pursuant to the Parent Guarantees. In addition to our ongoing short-term liquidity needs discussed above, our most significant need for liquidity beyond the next 12 months is the repayment of$1.4 billion aggregate principal amount of our senior debt due in future years. See "Capitalization-Holding Company " below for details of our debt maturity profile.Radian Group's liquidity demands for the next 12 months or in future periods could also include: (i) early repurchases or redemptions of portions of our debt obligations and (ii) additional investments to support our business strategy, including additional capital contributions to its subsidiaries. For additional information about related risks and uncertainties, see "Our sources of liquidity may be insufficient to fund our obligations" and "Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty's eligibility could reduce our available liquidity" under "Item 1A. Risk Factors" in our 2022 Form 10-K. See also "Overview-Current Operating Environment" above for further information. We believe thatRadian Group has sufficient current sources of liquidity to fund its obligations. If we otherwise decide to increase our liquidity position,Radian Group may seek additional capital, including by incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on favorable terms, if at all. Share Repurchases. During the three months endedMarch 31, 2023 , the Company repurchased 716 thousand shares ofRadian Group common stock under programs authorized byRadian Group's board of directors, at a total cost of$15 million , including commissions. See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details on our share repurchase programs. Dividends and Dividend Equivalents. InFebruary 2023 ,Radian Group's board of directors authorized an increase to the Company's quarterly dividend from$0.20 to$0.225 per share. Based on our current outstanding shares of common stock and restricted stock units, we expect to require approximately$141 million in the aggregate to pay dividends and dividend equivalents for the next 12 months. So long as no default or event of default exists under our revolving credit facility or the Parent Guarantees,Radian Group is not subject to any legal or contractual limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated inDelaware . See Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements for additional details. The declaration and payment of future quarterly dividends remains subject to the board of directors' discretion and determination. Corporate Expenses and Interest Expense.Radian Group has expense-sharing arrangements in place with its principal operating subsidiaries that require those subsidiaries to pay their allocated share of certain holding-company-level expenses, including interest payments onRadian Group's outstanding debt obligations. Corporate expenses and interest expense onRadian Group's debt obligations allocated under these arrangements during the three months endedMarch 31, 2023 , of$43 million and$21 million , respectively, were substantially all reimbursed by its subsidiaries. We expect substantially all of our holding company expenses to continue to be reimbursed by our subsidiaries under our expense-sharing arrangements. The expense-sharing arrangements betweenRadian Group and its mortgage insurance subsidiaries, as amended, have been approved by thePennsylvania Insurance Department , but such approval may be modified or revoked at any time. Taxes. Pursuant to our tax-sharing agreements, our operating subsidiaries payRadian Group an amount equal to any federal income tax the subsidiary would have paid on a standalone basis if they were not part of our consolidated tax return. As a result, from time to time, under the provisions of our tax-sharing agreements,Radian Group may pay to or receive from its operating subsidiaries amounts that differ fromRadian Group's consolidated federal tax payment obligation. There were no tax-sharing agreement payments received byRadian Group from its subsidiaries during the three months endedMarch 31, 2023 . 57
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The following table presents our holding company capital structure.
Capital structure
March 31, December 31,
(In thousands, except per-share amounts and ratios) 2023 2022
Debt
Senior Notes due 2024 $ 450,000 $ 450,000
Senior Notes due 2025 525,000 525,000
Senior Notes due 2027 450,000 450,000
Deferred debt costs on senior notes (10,451) (11,496)
Revolving credit facility - -
Total 1,414,549 1,413,504
Stockholders' equity 4,106,478 3,919,327
Total capitalization $ 5,521,027 $ 5,332,831
Debt-to-capital ratio 25.6 % 26.5 %
Shares outstanding 156,547 157,056
Book value per share $ 26.23 $ 24.95
Stockholders' equity increased by $187 million from December 31, 2022 , to
March 31, 2023 . The net increase in stockholders' equity for the three months
ended March 31, 2023 , resulted primarily from our net income of $158 million and
a net reduction in unrealized losses on investment securities of $70 million as
a result of a decrease in market interest rates during the period, partially
offset by dividends of $36 million and share repurchases of $15 million . As of
March 31, 2023 , we did not expect to realize a loss for our investments in an
unrealized loss position given our intent and ability to hold these investment
securities until recovery of their amortized cost basis.
The increase in book value per share from $24.95 at December 31, 2022 , to $26.23
at March 31, 2023 , is primarily due to: (i) an increase of $1.00 per share
attributable to our net income for the three months ended March 31, 2023 , and
(ii) an increase of $0.45 per share due to a net reduction in unrealized losses
in our available for sale securities, recorded in accumulated other
comprehensive income. Partially offsetting these items was a decrease of $0.23
per share attributable to dividends and dividend equivalents.
We regularly evaluate opportunities, based on market conditions, to finance our
operations by accessing the capital markets or entering into other types of
financing arrangements with institutional and other lenders. We also regularly
consider various measures to improve our capital and liquidity positions, as
well as to strengthen our balance sheet, improve Radian Group's debt maturity
profile and maintain adequate liquidity for our operations. Among other things,
these measures may include borrowing agreements or arrangements, such as
securities or other master repurchase agreements and revolving credit
facilities. In the past we have repurchased and exchanged, prior to maturity,
some of our outstanding debt, and in the future, we may from time to time seek
to redeem, repurchase or exchange for other securities, or otherwise restructure
or refinance some or all of our outstanding debt prior to maturity in the open
market through other public or private transactions, including pursuant to one
or more tender offers or through any combination of the foregoing, as
circumstances may allow. The timing or amount of any potential transactions will
depend on a number of factors, including market opportunities and our views
regarding our capital and liquidity positions and potential future needs. There
can be no assurance that any such transactions will be completed on favorable
terms, or at all.
Mortgage
Historically, one of the primary demands for liquidity in our Mortgage business
is the payment of claims, net of reinsurance, including from commutations and
settlements. See Note 11 of Notes to Unaudited Condensed Consolidated Financial
Statements for information on our mortgage insurance reserve for losses and LAE,
which represents our best estimate for the costs of settling future claims on
currently defaulted mortgage loans. Other principal demands for liquidity in our
Mortgage business include: (i) expenses (including those allocated from Radian
Group ); (ii) repayments of FHLB advances; and (iii) taxes, including potential
additional purchases of U.S. Mortgage Guaranty Tax and Loss Bonds. See Notes 10
and 16 of Notes to Consolidated Financial Statements in our 2022 Form 10-K for
additional information related to these non-interest bearing instruments. In
addition to the foregoing liquidity demands, other payments have included, and
in the
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future could include, distributions from Radian Guaranty to
including returns of capital or recurring ordinary dividends, as discussed
below.
The principal sources of liquidity in our Mortgage business currently include insurance premiums, net investment income and cash flows from: (i) investment sales and maturities; (ii) FHLB advances; and (iii) if necessary, capital contributions fromRadian Group . We believe that the operating cash flows generated by each of our mortgage subsidiaries will provide these subsidiaries with the funds necessary to satisfy their needs for the foreseeable future. As ofMarch 31, 2023 , our mortgage insurance subsidiaries maintained claims paying resources of$5.8 billion on a statutory basis, which consist of contingency reserves, statutory policyholders' surplus, premiums received but not yet earned and loss reserves. In addition, our reinsurance programs are designed to provide additional claims-paying resources during times of economic stress and elevated losses. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Radian Guaranty's Risk-to-capital as ofMarch 31, 2023 , was 10.6 to 1. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form. AtMarch 31, 2023 , Radian Guaranty had statutory policyholders' surplus of$721 million . This balance includes a$596 million benefit fromU.S. Mortgage Guaranty Tax and Loss Bonds issued by theU.S. Department of the Treasury , which mortgage guaranty insurers such as Radian Guaranty may purchase in order to be eligible for a tax deduction, subject to certain limitations, related to amounts required to be set aside in statutory contingency reserves. See Note 16 of Notes to Consolidated Financial Statements and "Item 1A. Risk Factors" in our 2022 Form 10-K for more information. Radian Guaranty currently is an approved mortgage insurer under the PMIERs. Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. AtMarch 31, 2023 , Radian Guaranty's Available Assets under the PMIERs financial requirements totaled approximately$5.7 billion , resulting in a PMIERs Cushion of$1.7 billion , or 44%, over its Minimum Required Assets. Those amounts compare to Available Assets of$5.6 billion and a PMIERs cushion of$1.7 billion , or 45%, atDecember 31, 2022 . Our PMIERs Cushion atMarch 31, 2023 , also includes a benefit from the current broad-based application of the Disaster Related Capital Charge that has reduced the total amount of Minimum Required Assets that Radian Guaranty otherwise would have been required to hold against pandemic-related defaults by approximately$150 million and$200 million as ofMarch 31, 2023 , andDecember 31, 2022 , respectively, taking into consideration our risk distribution structures in effect as of those dates. The application of the Disaster Related Capital Charge has reduced Radian Guaranty's PMIERs Minimum Required Assets, but we expect this impact will continue to diminish over time. See "Item 1. Business-Regulation-Federal Regulation-GSE Requirements forMortgage Insurance Eligibility" in our 2022 Form 10-K for more information about the Disaster Related Capital Charge. Despite holding assets above the minimum statutory capital thresholds and PMIERs financial requirements, the ability of Radian's mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws ofPennsylvania , their state of domicile. UnderPennsylvania's insurance laws, ordinary dividends and other distributions may only be paid out of an insurer's positive unassigned surplus unless thePennsylvania Insurance Department approves the payment of dividends or other distributions from another source. Aided by the positive impacts of its merger with Radian Reinsurance inDecember 2022 , Radian Guaranty had positive unassigned surplus of$258 million as ofDecember 31, 2022 , providing Radian Guaranty with the ability to pay ordinary dividends beginning in the first quarter of 2023, subject to the preceding year's statutory net income and other limitations underPennsylvania's insurance laws. As a result, Radian Guaranty paid an ordinary dividend of$100 million toRadian Group inMarch 2023 and maintains the ability to pay additional ordinary dividends during the remainder of 2023. Subsequent to the payment of this dividend, as ofMarch 31, 2023 , Radian Guaranty had positive unassigned surplus of$221 million . See Note 16 of Notes to Consolidated Financial Statements in our 2022 Form 10-K for additional information on our statutory dividend restrictions and contingency reserve requirements. Radian Guaranty is a member of the FHLB. As a member, it may borrow from the FHLB, subject to certain conditions, which include requirements to post collateral and to maintain a minimum investment in FHLB stock. Advances from the FHLB may be used to provide low-cost, supplemental liquidity for various purposes, including to fund incremental investments. Radian's current strategy includes using FHLB advances as financing for general cash management and liquidity purposes. As ofMarch 31, 2023 , there were$113 million of FHLB advances outstanding. See Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
homegenius
As of
investments totaling
Insurance
Title insurance companies, including
comprehensive state regulations, including minimum net worth requirements.
requirements at
the homegenius segment are not adequate to fund all of its
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needs, including the regulatory capital needs of Radian Title Insurance , Radian
Group may provide additional funds to the homegenius segment in the form of an
intercompany note or other capital contribution, and if needed for Radian Title
Insurance , subject to the approval of the Ohio Department of Insurance .
Additional capital support may also be required for potential investments in new
business initiatives to support our strategy of growing our businesses. During
the three months ended March 31, 2023 , Radian Group contributed $32 million in
capital support to its homegenius subsidiaries.
Liquidity levels may fluctuate depending on the levels and contractual timing of
our invoicing and the payment practices of our homegenius clients, in
combination with the timing of our homegenius segment's payments for employee
compensation and to external vendors. The amount, if any, and timing of the
homegenius segment's dividend paying capacity will depend primarily on the
amount of excess cash flow generated by the segment.
Ratings
We believe that ratings independently assigned by third-party statistical rating organizations often are considered by others in assessing our credit strength and the financial strength of our primary insurance subsidiaries.Radian Group ,Radian Guaranty and Radian Title Insurance are currently assigned the financial strength ratings set forth in the chart below, which are provided for informational purposes only and are subject to change. See "The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position and potential downgrades by rating agencies to these ratings and the ratings assigned toRadian Group could adversely affect the Company" under "Item 1A. Risk Factors" in our 2022 Form 10-K. Ratings Subsidiary Moody's (1) S&P (1) Fitch (1) Demotech Radian Group Baa3 BB+ BBB- N/A Radian Guaranty A3 BBB+ A- N/A Radian Title Insurance N/A N/A N/A A
(1)Moody's, S&P and Fitch each currently rate the outlook for both
and Radian Guaranty as Stable.
Critical Accounting Estimates
As of the filing date of this report, there were no significant changes in our critical accounting estimates from those discussed in our 2022 Form 10-K. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for accounting pronouncements issued but not yet adopted that may impact the Company's consolidated financial position, earnings, cash flows or disclosures. 60
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BIGLARI HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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