Radian(US:RDN)2024-02-23 21:17PART I Business Radian Group Inc. provides mortgage insurance and real estate services, strategically growing its businesses, diversifying revenue, and optimizing capital across the U.S. housing market - Radian operates through two main business segments: Mortgage Insurance, which manages and distributes U.S. mortgage credit risk, and homegenius, which provides title, real estate, and technology products and services3233 - The company's business strategy is centered on supporting homeownership by growing its businesses, diversifying revenue streams, optimizing capital, and leveraging data and technology as a key differentiator404142 2023 Financial and Operational Highlights | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Consolidated Pretax Income | $767 million | $953 million | | Net Income | $603 million | $743 million | | Net Income per Diluted Share | $3.77 | $4.35 | | New Insurance Written (NIW) | $52.7 billion | $68.0 billion | | Insurance in Force (IIF) | $270.0 billion | $261.0 billion | | PMIERs Cushion | $2.3 billion | $1.7 billion | | Holding Company Liquidity | $992 million | $903 million | | Shares Repurchased | 5.3 million | - | | Quarterly Dividend Increase | 13% (to $0.225/share) | - | Mortgage Insurance The Mortgage Insurance segment provides primary mortgage insurance for residential first-lien loans, protecting lenders from default-related losses, with performance influenced by macroeconomic factors and managed through risk-based pricing and reinsurance strategies - The company's primary product is first-lien Primary Mortgage Insurance, with $52.7 billion of NIW in 2023, resulting in a total Insurance in Force (IIF) of $270.0 billion at year-end53 - Pricing has shifted from standard rate-cards to more granular, risk-based "black box" frameworks, making price the predominant competitive factor in the industry6364 Underwriting Methods by IIF (as of Dec 31, 2023) | Underwriting Method | Percentage of IIF | | :--- | :--- | | Delegated Underwriting | 71% | | Non-Delegated Underwriting | 25% | | Contract Underwriting | 4% | - The company utilizes reinsurance as a key capital and risk management tool to lower the risk profile and financial volatility of its mortgage insurance portfolio, distributing risk through quota share and excess-of-loss arrangements159 homegenius The homegenius segment offers title, real estate, and technology services, with transactional revenues highly dependent on mortgage and real estate market activity, which has been negatively impacted by higher interest rates - The homegenius segment offers title insurance, real estate asset management, valuation products, and a proprietary real estate technology platform102104107109 - Revenues are primarily transactional and are subject to fluctuations based on overall activity in the mortgage and real estate markets. The higher interest rate environment led to a significant decrease in new title policies, particularly from refinance transactions104111 Competition Radian faces intense competition in the mortgage insurance industry from private insurers and government agencies, with price being the primary competitive factor and the FHA's market share increasing - The company competes with five other active private mortgage insurers: Arch, Enact, Essent, MGIC, and NMI Holdings118124 - Radian's estimated market share of new insurance written (NIW) in the private mortgage insurance market was approximately 19% for 2023121 - Competition also comes from government entities. The FHA's share of the total insured mortgage market grew to 34% in 2023 from 27% in 2022, while the VA's share was 22% in 2023124126 Regulation Radian is subject to comprehensive state and federal regulations, including state capital requirements and the critical PMIERs set by GSEs, along with other consumer protection laws - Radian Guaranty must comply with state-level statutory capital requirements. As of December 31, 2023, its Risk-to-capital ratio was 10.4 to 1, compliant with the common maximum of 25 to 1198 - The ability of insurance subsidiaries to pay dividends to the holding company is restricted. Radian Guaranty paid $400 million in ordinary dividends to Radian Group in 2023 after its unassigned surplus became positive200 - Compliance with the GSEs' Private Mortgage Insurer Eligibility Requirements (PMIERs) is crucial. The PMIERs set extensive financial and operational standards that Radian Guaranty must meet to insure loans purchased by the GSEs219 - The Dodd-Frank Act's Qualified Mortgage (QM) Rule impacts the mortgage market. The rule provides a safe harbor for lenders originating low-risk mortgages, and most loans insured by Radian are expected to meet QM standards247248249 Risk Factors The company faces material risks from regulatory compliance, intense market competition, macroeconomic conditions impacting its portfolio, liquidity constraints, and cybersecurity threats - A primary regulatory risk is Radian Guaranty's ability to remain eligible under the PMIERs to insure loans for the GSEs, as failure to do so would have a material adverse impact on the business285292 - The mortgage insurance business faces intense competition, primarily on price, from other private insurers and government entities like the FHA and VA, which could negatively impact NIW and profitability327329 - The credit performance of the mortgage insurance portfolio is highly sensitive to macroeconomic conditions, including home prices, interest rates, and unemployment levels, which are beyond the company's control356 - The company's holding company liquidity could be insufficient to fund obligations, which include debt service, dividends, share repurchases, and potential capital contributions to subsidiaries to maintain PMIERs compliance367369 - Cybersecurity threats pose a significant risk. A breach of the company's or its vendors' IT systems could result in significant liability, reputational harm, and the loss of confidential information382388 Cybersecurity Radian maintains a comprehensive Information Security Program based on the NIST Cybersecurity Framework, with no material cybersecurity incidents reported during the period - The company's Information Security Program is managed by a Chief Information Security Officer, with oversight from the Board of Directors' Risk Committee400403 - Radian uses the National Institute of Standards and Technology (NIST) Cybersecurity Framework as a guideline for managing its cybersecurity-related risks401 - During the reporting period, the company was not impacted by any cybersecurity incidents deemed reasonably likely to have a material effect on its business strategy, results of operations, or financial condition405 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Radian Group Inc.'s common stock trades on the NYSE, with the company increasing its quarterly dividend and repurchasing shares under its authorization program - The company's common stock is listed on the NYSE under the ticker symbol RDN414 - In February 2024, the quarterly cash dividend was increased from $0.225 to $0.245 per share415 Share Repurchase Activity (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 2023 | 2,447,222 | $25.86 | $166,739,000 | | Nov 2023 | 0 | - | $166,739,000 | | Dec 2023 | 0 | - | $166,739,000 | | Total Q4 | 2,447,222 | $25.86 | $166,739,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of macroeconomic conditions on its segments, highlighting growth in Mortgage Insurance IIF, a benefit from loss provision, homegenius revenue declines, and strong liquidity and capital positions - The current operating environment is characterized by inflationary pressures and elevated interest rates, which have reduced mortgage transaction volumes but increased persistency rates for existing mortgage insurance policies429430 - Strong home price appreciation and a favorable credit environment have positively impacted default and cure trends, with an estimated 82% of defaulted loans having at least 20% embedded equity as of year-end 2023431432 Consolidated Results of Operations Summary | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenues | $1,240.6M | $1,190.7M | | Provision for Losses (Benefit) | $(42.5)M | $(338.2)M | | Pretax Income | $767.5M | $952.8M | | Net Income | $603.1M | $742.9M | | Diluted Net Income per Share | $3.77 | $4.35 | - The company uses non-GAAP measures like 'adjusted pretax operating income' to evaluate performance, which excludes items like net gains/losses on investments and goodwill impairment. For 2023, adjusted pretax operating income was $786.4 million510513516 Mortgage Insurance Portfolio The mortgage insurance portfolio grew in 2023, driven by high persistency and strong credit quality, despite lower new insurance written, with risk actively managed through reinsurance programs New Insurance Written (NIW) Summary | Metric | 2023 | 2022 | | :--- | :--- | :--- | | NIW | $52.7B | $68.0B | | NIW by Loan Purpose (Purchases) | 98.5% | 96.1% | | NIW by FICO >=740 | 65.4% | 59.8% | | NIW by LTV >95% | 16.9% | 16.6% | Insurance in Force (IIF) and Risk in Force (RIF) Summary | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Primary IIF | $270.0B | $261.0B | | Primary RIF | $69.7B | $66.1B | | 12-month Persistency Rate | 84.0% | 79.6% | | Primary RIF by FICO >=740 | 58.5% | 57.4% | - The 12-month persistency rate increased to 84.0% at year-end 2023 from 79.6% in 2022, primarily due to decreased refinance activity in the higher mortgage interest rate environment478 - Risk distribution programs, including XOL and QSR reinsurance, provided a total PMIERs benefit by reducing Minimum Required Assets by $1.60 billion as of December 31, 2023498 Results of Operations—Mortgage Insurance The Mortgage Insurance segment's adjusted pretax operating income decreased in 2023 due to a smaller benefit from the provision for losses and lower net premiums earned, while primary loans in default remained stable Mortgage Insurance Segment Financial Summary | (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net Premiums Earned | $909,363 | $957,213 | | Provision for Losses (Benefit) | $(42,136) | $(339,374) | | Adjusted Pretax Operating Income | $829,824 | $1,131,943 | - The provision for losses was a benefit of $42.1 million in 2023, a significant reduction from the $339.4 million benefit in 2022. This was driven by a smaller favorable development on prior year defaults ($220.8 million in 2023 vs. $499.4 million in 2022)543 Primary Loans in Default Rollforward | (Number of loans) | 2023 | 2022 | | :--- | :--- | :--- | | Beginning Inventory | 21,913 | 29,061 | | New Defaults | 44,007 | 37,738 | | Cures | (43,354) | (44,136) | | Ending Inventory | 22,021 | 21,913 | Results of Operations—homegenius The homegenius segment reported an adjusted pretax operating loss in 2023, with significant revenue declines due to reduced mortgage transaction volumes, partially offset by cost management efforts homegenius Segment Financial Summary | (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net Premiums Earned (Title) | $10,215 | $23,918 | | Services Revenue | $45,394 | $85,158 | | Total Revenues | $57,640 | $109,975 | | Total Expenses | $143,910 | $198,173 | | Adjusted Pretax Operating Loss | $(86,270) | $(88,198) | - The significant decline in revenues was primarily caused by a decrease in new title policies and lower real estate and title services volume, resulting from the macroeconomic environment and reduced mortgage originations566567 - Operating expenses decreased due to cost-saving measures, including reductions in headcount, to better align the workforce with business needs. Severance expenses of $2 million were recorded in 2023, compared to $6 million in 2022569 Liquidity and Capital Resources Radian maintained strong liquidity and capital in 2023, with increased holding company liquidity and a robust PMIERs cushion, while returning capital to shareholders and managing a high-quality investment portfolio - Radian Group (holding company) had available liquidity of $992 million as of December 31, 2023, an increase from $903 million at year-end 2022589590 - Radian Guaranty's PMIERs cushion increased to $2.3 billion (62% over minimum required assets) at year-end 2023, up from $1.7 billion at year-end 2022614 - The investment portfolio had a fair value of $6.3 billion as of December 31, 2023, with 95% rated investment grade and a weighted-average duration of 4.1 years583646649 Holding Company Capital Structure | (In thousands, except ratios) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Debt | $1,417,781 | $1,413,504 | | Stockholders' Equity | $4,397,805 | $3,919,327 | | Total Capitalization | $5,815,586 | $5,332,831 | | Debt-to-Capital Ratio | 24.4% | 26.5% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest-rate and credit-spread risks within its fixed income investment portfolio, with sensitivity analysis indicating potential fair value decreases from hypothetical market changes - The primary market risks are interest-rate risk and credit-spread risk for the company's fixed income securities portfolio645 - The average duration of the total fixed income portfolio was 4.1 years as of December 31, 2023646 Market Risk Sensitivity Analysis (as of Dec 31, 2023) | Risk Factor | Hypothetical Change | Estimated Decrease in Fair Value | | :--- | :--- | :--- | | Interest Rates | +100 basis points | $244 million | | Credit Spreads | +100 basis points | $205 million | Financial Statements and Supplementary Data This section presents Radian's audited consolidated financial statements for 2023, including balance sheets, income statements, and cash flows, with an unqualified opinion from PricewaterhouseCoopers LLP - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023657658 - The critical audit matter identified was the valuation of first-lien primary case reserves for mortgage insurance policies, due to the significant management judgment involved in estimating Default to Claim Rates and Claim Severity665 Consolidated Financial Statements The consolidated financial statements detail Radian's financial position with total assets of $7.6 billion and stockholders' equity of $4.4 billion, reporting $1.24 billion in revenues and $603.1 million in net income for 2023 Key Balance Sheet Items (as of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Investments | $6,085,654 | | Total Assets | $7,593,933 | | Total Liabilities | $3,196,128 | | Total Stockholders' Equity | $4,397,805 | Key Income Statement Items (Year Ended Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenues | $1,240,588 | | Pretax Income | $767,487 | | Net Income | $603,119 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on segment reporting, fair value measurements, investment portfolio, reinsurance programs, loss reserves, debt, and statutory capital for insurance subsidiaries - The company's reinsurance programs include Quota Share (QSR) and Excess-of-Loss (XOL) arrangements. The 2023 QSR agreement cedes 22.5% of NIW from July 2023 to June 2024. The XOL program utilizes mortgage insurance-linked notes issued by Eagle Re entities841847856 - The reserve for mortgage insurance losses and LAE was $364.9 million at year-end 2023, down from $421.0 million at year-end 2022. The decrease was driven by favorable development on prior-year defaults897899 - Radian Guaranty's statutory policyholders' surplus was $619.6 million as of December 31, 2023. It maintained a positive unassigned surplus of $120 million, enabling it to pay ordinary dividends977986 - The company's outstanding senior notes total $1.42 billion in carrying value, with maturities in 2024 ($450M), 2025 ($525M), and 2027 ($450M)920