Radian : Announces Fourth Quarter and Full Year 2015 Financial Results

Radian Group Inc. (NYSE: RDN) today reported net income for the quarter ended December 31, 2015, of $74.5 million, or $0.32 per diluted share. Net income for the full year 2015 was $286.9 million, or $1.22 per diluted share. GAAP net income for 2015 and 2014 are not directly comparable due to the significant impact in 2014 of the sale of Radian Asset Assurance Inc., Radian’s former financial guaranty subsidiary, and the reversal of the company’s deferred tax asset (DTA) valuation allowance.

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

Adjusted pretax operating income for the quarter ended December 31, 2015, was $124.1 million, compared to $58.4 million for the same period of 2014. Adjusted diluted net operating income per share for the quarter ended December 31, 2015, was $0.34, compared to $0.17 for the same period of 2014. Adjusted pretax operating income for the year ended December 31, 2015, was $510.9 million, compared to $342.4 million for the same period of 2014. Adjusted diluted net operating income per share for the twelve months ended December 31, 2015, was $1.40, compared to $1.01 for the same period of 2014. See “Non-GAAP Financial Measures” below.

Book value per share at December 31, 2015, was $12.07, compared to $11.77 at September 30, 2015, and $10.98 at December 31, 2014.

“Radian’s fourth quarter was a strong finish to an equally strong full-year 2015,” said Radian’s Chief Executive Officer S.A. Ibrahim. “We successfully grew adjusted pretax operating income by 49% year-over-year, wrote an amount of high-quality and profitable flow MI business that was among the highest in our company history, and improved the credit profile of our MI portfolio. I am pleased to say that we strongly believe Radian is better positioned today than ever before to drive long-term stockholder value.”

FOURTH QUARTER AND FULL YEAR HIGHLIGHTS

Mortgage Insurance

• New mortgage insurance written (NIW) was $41.4 billion for the full year 2015, compared to $37.3 billion for the prior-year period. NIW was $9.1 billion for the quarter, compared to $11.2 billion in the third quarter of 2015 and $10.0 billion in the prior-year quarter.
  • Of the $9.1 billion in new business written in the fourth quarter of 2015, 29 percent was written with single premiums, compared to 27 percent in the third quarter of 2015.
  • Refinances accounted for 17 percent of total NIW in the fourth quarter of 2015, compared to 13 percent in the third quarter of 2015, and 22 percent a year ago.
  • NIW continued to consist of loans with excellent risk characteristics.
• Total primary mortgage insurance in force as of December 31, 2015, grew to $175.6 billion, compared to $174.9 billion as of September 30, 2015, and $171.8 billion as of December 31, 2014.
  • Persistency, which is the percentage of mortgage insurance in force that remains on the company’s books after a twelve-month period, was 78.8 percent as of December 31, 2015, compared to 79.2 percent as of September 30, 2015, and 84.2 percent as of December 31, 2014.
  • Annualized persistency for the three-months ended December 31, 2015, was 81.8 percent, compared to 80.5 percent for the three-months ended September 30, 2015, and 83.3 percent for the three-months ended December 31, 2014.
• Total net premiums earned were $226.4 million for the quarter ended December 31, 2015, compared to $227.4 million for the quarter ended September 30, 2015, and $224.3 million for the quarter ended December 31, 2014.
• The mortgage insurance provision for losses was $56.8 million in the fourth quarter of 2015, compared to $64.1 million in the third quarter of 2015, and $83.6 million in the prior-year period.
  • The provision for losses in the fourth quarter included the positive impact of a reduction in the company’s default to claim rate assumption for new notices of default.
  • The loss ratio in the fourth quarter was 25.1 percent, compared to 28.2 percent in the third quarter of 2015 and 36.9 percent in the fourth quarter of 2014.
  • Mortgage insurance loss reserves were $976.4 million as of December 31, 2015, compared to $1,098.6 million as of September 30, 2015, and $1,560.0 million as of December 31, 2014.
  • Primary reserve per primary default (excluding IBNR and other reserves) was $24,019 as of December 31, 2015. This compares to primary reserve per primary default of $26,237 as of September 30, 2015, and $27,683 as of December 31, 2014. In addition to the reduction in the company's default to claim rate assumption, the decrease in the primary reserve per primary default was the result of a change in the mix of defaults from aged defaults to less aged defaults, which require a comparatively smaller reserve.
• The total number of primary delinquent loans decreased by 2 percent in the fourth quarter from the third quarter of 2015, and by 22 percent from the fourth quarter of 2014. The primary mortgage insurance delinquency rate decreased to 4.0 percent in the fourth quarter of 2015, compared to 4.1 percent in the third quarter of 2015, and 5.2 percent in the fourth quarter of 2014.
• Total mortgage insurance claims paid were $176.5 million in the fourth quarter, compared to $169.1 million in the third quarter, and $117.2 million in the fourth quarter of 2014. For the full-year 2015, total claims paid were $764.7 million, compared to $838.3 million for the full-year 2014. Claims paid in 2015 included claims related to the September 2014 BofA Settlement Agreement. The company continues to expect claims paid for the full-year 2016 of approximately $400–450 million.

Mortgage and Real Estate Services

• On June 30, 2014, Radian completed the acquisition of Clayton Holdings LLC, a leading provider of risk-based analytics, residential loan due diligence, consulting, surveillance and staffing solutions. The company also provides
  • customized Real Estate Owned (REO) asset management and single-family rental services through its Green River Capital subsidiary;
  • advanced Automated Valuation Models, Broker Price Opinions and technology solutions to monitor loan portfolio performance, acquire and track non-performing loans, and value and sell residential real estate through its Red Bell Real Estate subsidiary;
  • valuation, title closing and settlement services as well as technology solutions for vendor management through its ValuAmerica subsidiary; and
  • a global reach through its Clayton EuroRisk subsidiary.
• Total revenues were $157.4 million for the full year 2015, its first full year of operations as a subsidiary of Radian. Total revenues for the fourth quarter were $38.2 million, compared to $43.1 million for the third quarter of 2015, and $35.4 million for the fourth quarter of 2014.
• Adjusted pretax operating income before corporate allocations for the quarter ended December 31, 2015, was $3.6 million, compared to $5.7 million for the quarter ended September 30, 2015, and $7.3 million for the quarter ended December 31, 2014. Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the quarter ended December 31, 2015 was $4.2 million, compared to $6.3 million for the quarter ended September 30, 2015, and $7.7 million for the quarter ended December 31, 2014. You may find details regarding these non-GAAP measures and their definition in Exhibits E, F and G.
• In October 2015, Clayton announced that it had acquired ValuAmerica, Inc., a national title agency and appraisal management company with coverage across all 3,143 counties in the U.S. In addition, the company's award-winning technology platform, ValuNet xsp, helps mortgage lenders and their vendors streamline and manage their supply chains and operational workflow. The acquisition expands the scope of title and valuation services Clayton offers to its mortgage clients and is consistent with the company’s strategy of being a complete solution provider to the mortgage and real estate industries.

Consolidated Expenses

Other operating expenses were $59.6 million in the fourth quarter, compared to $65.1 million in the third quarter of 2015, and $85.8 million in the fourth quarter of last year.

• Operating expenses for the fourth quarter of 2015 were comprised of $46.7 million for the Mortgage Insurance segment, compared to $51.5 million in the third quarter of 2015, and $76.3 million in the fourth quarter of last year.
• Operating expenses for the fourth quarter of 2015 were comprised of $12.7 million for the Services segment, compared to $13.1 million in the third quarter of 2015, and $9.1 million in the fourth quarter of last year.
• In the fourth quarter of 2014, other operating expenses of $85.8 million included $24.4 million related to long-term compensation expenses and other year-end bonus accruals, a significant portion of which was driven by the variable compensation expense related to an increase in the company’s stock price.

CAPITAL AND LIQUIDITY UPDATE

Radian Group has approximately $340 million of currently available liquidity.

• As previously announced, Radian Guaranty met the Private Mortgage Insurer Eligibility Requirements (PMIERs) as of the December 31, 2015, effective date by taking the following actions:
  • Radian Group transferred $325 million of cash and marketable securities to Radian Guaranty in exchange for a surplus note issued by Radian Guaranty. The surplus note has a 0 percent interest rate and is scheduled to mature on December 31, 2025. Based on positive trends reflected in its capital projections, Radian Guaranty expects to seek to redeem a portion and possibly all of the surplus note in 2016, and any remaining amounts in 2017. Any redemption of the surplus note increases holding company liquidity by the corresponding amount of the redemption.
  • Radian Group contributed $50 million to an exclusive affiliated reinsurer of Radian Guaranty. The combination of the surplus note and capital contribution provides Radian Guaranty with an initial cushion above the projected amount required to satisfy the PMIERs’ financial requirements. This cushion is expected to increase based in part on expected future financial performance at Radian Guaranty; as a result, Radian Guaranty is not expected to require any additional capital contributions in order to remain compliant.
  • In order to reduce the company’s required capital under PMIERs, Radian Guaranty is pursuing a reinsurance transaction that is intended to reduce the exposure on its single premium policies. The company has made substantial progress toward a potential transaction and may enter into such a program as early as the first quarter of 2016.
• As of December 31, 2015, a total of $2.1 billion of risk in force outstanding had been ceded under quota share reinsurance agreements in order to proactively manage Radian Guaranty’s risk-to-capital position. Radian has ceded the maximum amount of NIW under these agreements and did not cede any premium on new business in 2015. On December 31, 2015, Radian Guaranty had the option to recapture a portion of the risk ceded under its existing Second Quota Share Reinsurance Transaction. The company chose not to recapture that risk and received a profit commission of approximately $8 million in 2015 based on performance to date. In addition, Radian Guaranty received an $8.5 million prepaid supplemental ceding commission, the recognition of which has been deferred and will be amortized over approximately the next five years.
• As previously announced on January 15, 2016, Radian’s Board of Directors approved a share repurchase program that authorizes the company to purchase up to $100 million of its common stock through the end of 2016. The shares may be purchased in the open market or in privately negotiated transactions. The authorization provides Radian the flexibility to repurchase shares opportunistically from time to time, based on market and business conditions, stock price and other factors. Radian may utilize a Rule 10b5-1 plan, which would permit the company to purchase shares, at pre-determined price targets, when it may otherwise be precluded from doing so.

CONFERENCE CALL

Radian will discuss fourth quarter and year-end 2015 results in a conference call today, Thursday, January 28, 2016, 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 800.288.8961 inside the U.S., or 612.332.0226 for international callers, using passcode 383877 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 383877.

In addition to the information provided in the company's earnings news release, other statistical and financial information, which is expected to be referred to during the conference call, will be available on Radian's website under Investors >Quarterly Results, or by clicking on http://www.radian.biz/page?name=QuarterlyResults.

NON-GAAP FINANCIAL MEASURES

Radian believes that adjusted pretax operating income and adjusted diluted net operating income per share (non-GAAP measures) facilitate evaluation of the company’s fundamental financial performance and provide relevant and meaningful information to investors about the ongoing operating results of the company. On a consolidated basis, these measures are not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be viewed as alternatives to GAAP measures of performance. The measures described below have been established in order to increase transparency for the purpose of evaluating the company’s core operating trends and enabling more meaningful comparisons with Radian’s competitors.

Adjusted pretax operating income is defined as earnings excluding the impact of certain items that are not viewed as part of the operating performance of the company’s primary activities, or not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. Adjusted pretax operating income adjusts GAAP pretax income from continuing operations 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 and impairment of 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.

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 taxes, depreciation and amortization (EBITDA). Services EBITDA is calculated 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. Services 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 protects lenders from default-related losses, facilitates the sale of low-downpayment mortgages in the secondary market and enables homebuyers to purchase homes more quickly with downpayments less than 20%.
• Mortgage and Real Estate Services, through its principal services subsidiary Clayton, as well as Green River Capital, Red Bell Real Estate and ValuAmerica. These solutions include information and services that financial institutions, investors and government entities use to evaluate, acquire, securitize, service and monitor loans and asset-backed securities.

Additional information may be found at www.radian.biz.

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

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

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

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

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

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

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

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