Radian Announces Second Quarter 2017 Financial Results

Radian Group Inc. (NYSE: RDN) today reported a net loss for the quarter ended June 30, 2017, of $27.3 million, or $0.13 per diluted share. This compares to net income for the quarter ended June 30, 2016, of $98.1 million, or $0.44 per diluted share. The net loss in the second quarter of 2017 was attributable to after-tax, non-cash impairment charges of $130.9 million associated with an impairment of goodwill and other intangible assets related to its Services segment. While these impairment charges reduced the company’s reported GAAP results, they did not impact cash flows or adjusted pretax operating income and, despite these charges, book value per share increased 3 percent from the prior-year period. Book value per share at June 30, 2017, was $13.54, compared to $13.58 at March 31, 2017, and $13.09 at June 30, 2016. Tangible book value per share at June 30, 2017, was $13.22, compared to $12.31 at March 31, 2017, and $11.77 at June 30, 2016.

The company determined, following a strategic review of the segment’s business lines and in light of recent performance below expectations, that an impairment of goodwill and other intangible assets related to this segment was necessary. This impairment resulted from a decrease in projected future cash flows based on current market trends and changes to the Services segment’s business strategy going forward.

Based on the strategic review of the Services business lines to date, the company has determined to restructure this business and currently expects to incur charges relating to the changes necessary to reposition this business for sustained profitability. While the company’s restructuring plans are not final and therefore the company cannot provide an estimate of its total expected restructuring charges at this time, the company currently expects that such charges would not exceed $25 million on a pretax basis and, depending on the finalization and implementation of its restructuring plans, such charges could be materially less. The company will provide an update during the third quarter, upon completion of its strategic review.

Adjusted pretax operating income for the quarter ended June 30, 2017, was $163.7 million, compared to $131.4 million for the quarter ended June 30, 2016. Adjusted diluted net operating income per share for the quarter ended June 30, 2017, was $0.48, a 26 percent increase compared to $0.38 for the quarter ended June 30, 2016.

“I am pleased to report on our strong operating performance in the second quarter, including a 26% increase in adjusted diluted net operating income per share, 8% growth in our mortgage insurance in force and a 12% increase in tangible book value per share,” said Radian’s Chief Executive Officer Rick Thornberry. “I continue to be excited about the opportunities ahead for Radian. We have a unique opportunity to leverage our market-leading Mortgage Insurance franchise combined with our core capabilities across the Services segment to deliver high-value and relevant products and services. Successfully capturing these opportunities will enable us to further deepen customer relationships, grow sustainable revenues and profitability and increase stockholder value.”

SECOND QUARTER HIGHLIGHTS AND RECENT EVENTS

Mortgage Insurance

• New mortgage insurance written (NIW) grew to $14.3 billion for the quarter, an increase of 43 percent compared to $10.1 billion in the first quarter of 2017 and an increase of 11 percent compared to $12.9 billion in the prior-year quarter.
  • NIW for the month of June 2017 represented record monthly volume written on a flow basis for the company.
  • Of the $14.3 billion in new business written in the second quarter of 2017, 23 percent was written with single premiums. After consideration of the 35 percent ceded under the Single Premium Quota Share Reinsurance Transaction, net single premiums were 15 percent of new business written in the second quarter of 2017.
  • Refinances accounted for 9 percent of total NIW in the second quarter of 2017, compared to 16 percent in the first quarter of 2017, and 18 percent a year ago.
  • NIW continued to consist of loans with excellent risk characteristics.

• Total primary mortgage insurance in force as of June 30, 2017, grew to $191.6 billion, an increase of 3 percent compared to $185.9 billion as of March 31, 2017, and an increase of 8 percent compared to $177.7 billion as of June 30, 2016.
  • The composition of Radian’s mortgage insurance portfolio continues to improve, with 90 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 78.5 percent as of June 30, 2017, compared to 77.1 percent as of March 31, 2017, and 79.9 percent as of June 30, 2016.
  • Annualized persistency for the three-months ended June 30, 2017, was 82.8 percent, compared to 84.4 percent for the three-months ended March 31, 2017, and 78.0 percent for the three-months ended June 30, 2016.

• Total net premiums earned were $229.1 million for the quarter ended June 30, 2017, compared to $221.8 million for the quarter ended March 31, 2017, and $229.1 million for the quarter ended June 30, 2016.
  • Accelerated revenue recognition due to Single Premium Policy cancellations was $13.3 million in the second quarter, compared to $10.4 million in the first quarter of 2017, and $24.0 million in the second quarter of 2016. Net of reinsurance, accelerated revenue recognition due to Single Premium Policy cancellations was $7.4 million in the second quarter, compared to $5.9 million in the first quarter of 2017, and $14.8 million in the second quarter of 2016.
  • Ceded premiums of $14.1 million, $14.3 million and $19.9 million for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016, respectively, are net of accrued profit commission on reinsurance transactions of $6.7 million in the second quarter of 2017, compared to $5.9 million in the first quarter of 2017, and $7.9 million in the second quarter of 2016.
  • Direct mortgage insurance premium yield was 52 basis points in the second quarter, compared to 51 basis points in the first quarter of 2017, and 56 basis points in the second quarter of 2016. The increase in direct premium yield in the second quarter, compared to the first quarter of 2017, is primarily due to the $2.9 million increase in Single Premium Policy cancellations.
  • Total net mortgage insurance premium yield, which includes the impact of ceded premiums and accrued profit commission, was 49 basis points in the second quarter, compared to 48 basis points in the first quarter of 2017, and 52 basis points in the second quarter of 2016.

• The mortgage insurance provision for losses was $17.7 million in the second quarter of 2017, compared to $47.2 million in the first quarter of 2017, and $50.1 million in the prior-year period.
  • The provision for losses in the second quarter benefited from positive reserve development on prior-period defaults as well as a modest reduction in the company’s default to claim rate assumption for new notices of default.
  • The total number of primary delinquent loans decreased by 8 percent in the second quarter from the first quarter of 2017, and by 20 percent from the second quarter of 2016. The total number of primary new notices of default decreased by 7 percent in the second quarter from the first quarter of 2017, and by 10 percent from the second quarter of 2016.
  • The primary mortgage insurance delinquency rate decreased to 2.6 percent in the second quarter of 2017, compared to 2.8 percent in the first quarter of 2017, and 3.4 percent in the second quarter of 2016.
  • The loss ratio in the second quarter was 7.7 percent, compared to 21.3 percent in the first quarter of 2017 and 21.9 percent in the second quarter of 2016.
  • Mortgage insurance loss reserves were $651.6 million as of June 30, 2017, compared to $726.2 million as of March 31, 2017, and $848.4 million as of June 30, 2016.
  • Primary reserve per primary default (excluding IBNR and other reserves) was $23,185 as of June 30, 2017. This compares to primary reserve per primary default of $24,230 as of March 31, 2017, and $24,609 as of June 30, 2016.

• Total mortgage insurance claims paid were $91.3 million in the second quarter, compared to $82.1 million in the first quarter of 2017, and $90.7 million in the second quarter of 2016. Excluding the $21.5 million impact of commutations and captive terminations, claims paid were $69.8 million in the second quarter of 2017. In addition, the company’s pending claim inventory declined 31 percent from the second 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 second quarter were $40.0 million, compared to $40.1 million for the first quarter of 2017, and $42.2 million for the second quarter of 2016.
• The adjusted pretax operating income before corporate allocations for the quarter ended June 30, 2017, was $1.2 million, compared to a loss of $1.2 million for the quarter ended March 31, 2017, and income of $1.5 million for the quarter ended June 30, 2016.
• Services adjusted earnings before interest, income taxes, depreciation and amortization (Services adjusted EBITDA) for the quarter ended June 30, 2017, was $2.0 million, compared to a loss of $0.3 million for the quarter ended March 31, 2017, and income of $2.2 million for the quarter ended June 30, 2016. Additional details regarding the non-GAAP measure Services adjusted EBITDA may be found in Exhibits F and G.

Consolidated Expenses

Other operating expenses were $68.8 million in the second quarter, compared to $68.4 million in the first quarter of 2017, and $63.2 million in the second quarter of last year. Details regarding notable variable items impacting other operating expenses may be found in Exhibit D.

CAPITAL AND LIQUIDITY UPDATE

• Radian Group maintained approximately $360 million of available liquidity as of June 30, 2017.
• During the second quarter, Radian completed negotiated purchases of aggregate principal amounts of approximately $21.6 million of the company’s outstanding 3.00% Convertible Senior Notes due 2017, for cash consideration of $31.6 million. As of June 30, 2017, Radian had only $0.6 million of convertible senior notes outstanding. Radian has provided notice that it will settle all remaining conversions in cash.
• The company purchased a de minimis number of shares in the second quarter under its share repurchase program, which expired on June 30, 2017.
• Radian Group has no material debt maturities prior to June 2019.

CONFERENCE CALL

Radian will discuss second quarter financial results in a conference call today, Tuesday, August 1, 2017, 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 800.230.1766 inside the U.S., or 612.288.0329 for international callers, using passcode 427090 or by referencing Radian.

A replay of the webcast will be available on the Radian website approximately two hours after the live broadcast ends for a period of one year. A replay of the conference call will be available approximately two and a half hours after the call ends for a period of two weeks, using the following dial-in numbers and passcode: 800.475.6701 inside the U.S., or 320.365.3844 for international callers, passcode 427090.

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 considered in isolation or viewed as substitutes for GAAP measures of performance. The measures described below have been established in order to increase transparency for the purpose of evaluating the company’s operating trends and enabling more meaningful comparisons with Radian’s competitors.

Adjusted pretax operating income is defined as earnings excluding the impact of certain items that are not viewed as part of the operating performance of the company’s primary activities, or not expected to result in an economic impact equal to the amount reflected in pretax income (loss). Adjusted pretax operating income adjusts GAAP pretax income (loss) to remove the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on induced conversion and debt extinguishment; (iii) acquisition-related expenses; (iv) amortization or impairment of goodwill and other intangible assets; and (v) net impairment losses recognized in earnings. 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.

The company has also presented a non-GAAP measure for tangible book value per share, which represents book value per share less the per-share impact of goodwill and other intangible assets, net. The company uses this measure to assess the quality and growth of its capital. Because tangible book value per share is a widely used financial measure which focuses on the underlying fundamentals of the company’s financial position and operating trends without the impact of goodwill and other intangible assets, the company believes that current and prospective investors may find it useful in their analysis.

In addition to the above non-GAAP measures for the consolidated company, the company also presents as supplemental information a non-GAAP measure for the Services segment, representing earnings before interest, income tax provision (benefit), depreciation and amortization (EBITDA). Services adjusted EBITDA is calculated by using the Services segment’s adjusted pretax operating income as described above, further adjusted to remove the impact of depreciation and corporate allocations for interest and operating expenses. Services adjusted EBITDA is presented to facilitate comparisons with other services companies, since it is a widely accepted measure of performance in the services industry.

See Exhibit F or Radian’s website for a description of these items, as well as Exhibit G for reconciliations to the most comparable consolidated GAAP measures.

ABOUT RADIAN

Radian 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 helps protect 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 historical trend information, refer to Radian’s quarterly financial statistics at http://www.radian.biz/page?name=FinancialReportsCorporate.

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

Adjusted pretax operating income is defined as GAAP pretax income (loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on induced conversion and debt extinguishment; (iii) acquisition-related expenses; (iv) amortization or impairment of goodwill and other intangible assets; and (v) net impairment losses recognized in earnings. Adjusted diluted net operating income per share is calculated by dividing (i) adjusted pretax operating income attributable to common shareholders, net of taxes computed using the company’s statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Interest expense on convertible debt, share dilution from convertible debt and the impact of share-based compensation arrangements have been reflected in the per share calculations consistent with the accounting standard regarding earnings per share, whenever the impact is dilutive.

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

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

In addition to the above non-GAAP measures for the consolidated company, we also have presented as supplemental information a non-GAAP measure for our Services segment, representing a measure of earnings before interest, income tax provision (benefit), depreciation and amortization (“EBITDA”). We calculate Services adjusted EBITDA by using adjusted pretax operating income as described above, further adjusted to remove the impact of depreciation and corporate allocations for interest and operating expenses. We have presented Services adjusted 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 the most comparable GAAP measures, consolidated pretax income (loss), diluted net income (loss) per share and book value per share, to our non-GAAP financial measures for the consolidated company, adjusted pretax operating income, adjusted diluted net operating income per share and tangible book value per share, respectively. Exhibit G also contains the reconciliation of the most comparable GAAP measure, net income (loss), to Services adjusted EBITDA.

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

On a consolidated basis, “adjusted pretax operating income,” “adjusted diluted net operating income per share” and “tangible book value per share” are measures not determined in accordance with GAAP. “Services adjusted EBITDA” is also a non-GAAP measure. These measures should not be considered in isolation or viewed as substitutes for GAAP pretax income (loss), diluted net income (loss) per share, book value per share or net income (loss). Our definitions of adjusted pretax operating income, adjusted diluted net operating income per share, tangible book value per share or Services adjusted 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.