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Radian Announces First Quarter 2019 Financial Results

PHILADELPHIA--(BUSINESS WIRE)--

-- GAAP net income increases to $171 million; diluted net income per share grows 50% year-over-year to $0.78 --

-- Adjusted diluted net operating income per share increases 24% year-over-year to $0.73 --

-- MI in force increases 10% year-over-year to $224 billion --

-- Book value per share grows 24% year-over-year to $17.49 --

-- Company purchases shares of its common stock under most recent share repurchase program --

-- In April, company enhances risk profile and improves capital position with closing of $562 million ILN transaction; improves financial flexibility with additional $375 million return of capital from Radian Guaranty to Radian Group --

Radian Group Inc. (RDN) today reported net income for the quarter ended March 31, 2019, of $171.0 million, or $0.78 per diluted share. This compares to net income for the quarter ended March 31, 2018, of $114.5 million, or $0.52 per diluted share.

 

Key Financial Highlights (dollars in millions, except per-share data)

     

Quarter Ended March 31,
2019

   

Quarter Ended March 31,
2018

   

Percent
Change

Net income (1)     $171.0     $114.5     49%
Diluted net income per share     $0.78     $0.52     50%
Consolidated pretax income     $216.1     $142.4     52%
Adjusted pretax operating income (2)     $202.1     $164.1     23%

Adjusted diluted net operating
income per share (2)

    $0.73     $0.59     24%
Net premiums earned - mortgage insurance     $261.8     $242.6     8%
MI New Insurance Written (NIW)     $10,900     $11,664     (7)%
MI primary insurance in force     $223,734     $204,025     10%
Book value per share     $17.49     $14.16     24%
Return on Equity (1)(3)     19.0%     15.1%     26%
Adjusted Net Operating Return on Equity (2)     17.7%     17.1%     4%
           
(1)  

Net income for the first quarter of 2019 includes a $21.9 million pretax net gain on investments and other financial instruments. Net income for the first quarter of 2018 includes a $18.9 million pretax net loss on investments and other financial instruments.

(2)

Adjusted results, including adjusted pretax operating income, adjusted diluted net operating income per share, and adjusted net operating return on equity, are non-GAAP financial measures. For definitions and a reconciliation of these measures to the comparable GAAP measures, see Exhibits F and G.

(3)

Calculated by dividing annualized net income by average stockholders' equity, based on the average of the beginning and ending balances for each period presented.

 

Adjusted pretax operating income for the quarter ended March 31, 2019, was $202.1 million, compared to $164.1 million for the quarter ended March 31, 2018. Adjusted diluted net operating income per share for the quarter ended March 31, 2019, was $0.73, an increase of 24 percent compared to $0.59 for the quarter ended March 31, 2018.

Book value per share at March 31, 2019, was $17.49, an increase of 7 percent compared to $16.34 at December 31, 2018, and an increase of 24 percent compared to $14.16 at March 31, 2018. A $78.4 million after-tax change in accumulated other comprehensive income, due to net unrealized gains on investment securities, increased book value per share by $0.37 during the first quarter of 2019.

“I am pleased to report on another excellent first quarter for Radian, with net income of $171 million, return on equity of 19%, and the fifth consecutive quarter of 10% year-over-year growth in our mortgage insurance in-force portfolio, which grew to $224 billion. These results are driven by the fundamental strength of our business model,” said Radian’s Chief Executive Officer Rick Thornberry. "We continue to enhance our risk profile and improve our financial flexibility, and are pleased that our strong financial position has afforded us the opportunity to return value more quickly to our stockholders through our share repurchases."

FIRST QUARTER HIGHLIGHTS

  • Mortgage insurance NIW was $10.9 billion for the quarter, representing a decrease of 14 percent compared to $12.7 billion in the fourth quarter of 2018 and a decrease of 7 percent compared to $11.7 billion in the prior-year quarter.
    • Of the $10.9 billion in NIW in the first quarter of 2019, 83 percent was written with monthly and other recurring premiums compared to 83 percent in the fourth quarter of 2018, and 79 percent a year ago.
    • Borrower-paid originations accounted for 95 percent of total NIW in the first quarter of 2019, compared to 94 percent in the fourth quarter of 2018, and 83 percent a year ago.
    • Purchase originations accounted for 92 percent of total NIW in the first quarter of 2019, compared to 95 percent in the fourth quarter of 2018, and 89 percent a year ago.
  • Total primary mortgage insurance in force as of March 31, 2019, grew to $223.7 billion, an increase of 1 percent compared to $221.4 billion as of December 31, 2018, and an increase of 10 percent compared to $204.0 billion as of March 31, 2018.
    • Radian’s mortgage insurance portfolio consists of 94 percent 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 12-month period, was 83.4 percent as of March 31, 2019, compared to 83.1 percent as of December 31, 2018, and 81.0 percent as of March 31, 2018.
    • Annualized persistency for the three months ended March 31, 2019, was 85.4 percent, compared to 85.5 percent for the three months ended December 31, 2018, and 84.3 percent for the three months ended March 31, 2018.
  • Net mortgage insurance premiums earned were $261.8 million for the quarter ended March 31, 2019, compared to $259.7 million for the quarter ended December 31, 2018, and $242.6 million for the quarter ended March 31, 2018.
    • Mortgage insurance in force premium yield was 48.6 basis points in the first quarter of 2019, compared to 49.0 basis points in the fourth quarter of 2018 and 48.7 basis points in the first quarter of 2018.
    • Total net mortgage insurance premium yield, which includes the impact of ceded premiums and accrued profit commission, was 47.0 basis points in the first quarter of 2019, compared to 47.4 basis points in the fourth quarter of 2018, and 47.9 basis points in the first quarter of 2018.
    • Additional details regarding notable variable items impacting premiums earned may be found in Exhibit D.
  • The mortgage insurance provision for losses was $20.8 million in the first quarter of 2019, compared to $27.1 million in the fourth quarter of 2018, and $37.4 million in the prior-year quarter.
    • The number of primary delinquent loans was 20,122 as of March 31, 2019, a decrease of 5 percent compared to 21,093 as of December 31, 2018 and a decrease of 18 percent compared to 24,597 as of March 31, 2018.
    • The primary mortgage insurance delinquency rate decreased to 2.0 percent in the first quarter of 2019, compared to 2.1 percent in the fourth quarter of 2018, and 2.5 percent in the first quarter of 2018.
    • The loss ratio in the first quarter of 2019 was 8.0 percent, compared to 10.4 percent in the fourth quarter of 2018, and 15.4 percent in the first quarter of 2018.
    • Mortgage insurance loss reserves were $385.4 million as of March 31, 2019, compared to $397.9 million as of December 31, 2018, and $485.2 million as of March 31, 2018.
  • Total mortgage insurance claims paid were $34.6 million in the first quarter of 2019, compared to $39.7 million in the fourth quarter of 2018, and $59.9 million in the first quarter of 2018. In addition, the company’s pending claim inventory declined 3 percent from March 31, 2018.
  • Total Mortgage and Real Estate Services Segment revenues for the first quarter of 2019 were $36.0 million, compared to $41.5 million for the fourth quarter of 2018, and $34.2 million for the first quarter of 2018. Segment results for the first quarter of 2019 include revenues of approximately $5.1 million and incremental expenses (comprised of approximately $3.6 million of operating expenses and approximately $2.2 million of cost of services), both related to businesses acquired in 2018. Adjusted earnings before interest, income taxes, depreciation and amortization (Services adjusted EBITDA) for the quarter ended March 31, 2019 was a loss of $0.9 million, compared to income of $3.2 million for the quarter ended December 31, 2018, and income of $0.5 million for the quarter ended March 31, 2018. Additional details regarding the non-GAAP measure Services adjusted EBITDA may be found in Exhibits F and G.
  • Other operating expenses were $78.8 million in the first quarter of 2019, compared to $77.3 million in the fourth quarter of 2018, and $63.2 million in the first quarter of 2018. The change in expenses year-over-year is primarily driven by $5.7 million of non-operating items, $3.6 million related to businesses acquired in 2018 as previously mentioned, and an increase in legal and other professional services of $1.6 million.

CAPITAL AND LIQUIDITY UPDATE

The company remains focused on optimizing its capital position, enhancing its return on capital, and increasing its financial flexibility.

Radian Group

  • As of March 31, 2019, Radian Group maintained $718 million of available liquidity. Total liquidity, which includes the company’s $268 million unsecured revolving credit facility entered into in October 2017, was $986 million as of March 31, 2019.
  • In March 2019, the company announced the Board's authorization to increase its existing share repurchase program from $100 million to $250 million and extend the term to July 31, 2020. This program provides Radian the flexibility to repurchase shares opportunistically from time to time and to spend up to $250 million, excluding commissions, based on market and business conditions, stock price and other factors. During the first quarter, Radian repurchased and settled 1,546,674 shares of its common stock. In addition, as of April 26, 2019, the company repurchased an additional 4,131,329 shares. As of April 26, 2019, total shares repurchased in 2019 were 5,678,003, representing a total approximate value of $122.4 million or $21.56 per share inclusive of commissions. At April 26, 2019, purchase authority of up to approximately $128 million remained available under this program, which expires on July 31, 2020.
  • After consideration of the shares repurchased after quarter end and the $375 million return of capital described below, Radian Group's available liquidity would have increased by approximately $284 million relative to the amount as of March 31, 2019.

Radian Guaranty

  • At March 31, 2019, Radian Guaranty’s Available Assets under the Private Mortgage Insurer Eligibility Requirements (PMIERs) totaled approximately $3.5 billion, resulting in an excess or “cushion” of approximately $488 million, or 16 percent over its Minimum Required Assets of approximately $3.0 billion.
  • In April 2019, Radian Guaranty announced the closing of its second mortgage insurance-linked note (ILN) transaction, where the company obtained $562 million of credit risk protection from Eagle Re 2019-1 Ltd. (Eagle Re) through the issuance by Eagle Re of ILNs to eligible third-party capital markets investors in an unregistered private offering. Eagle Re is a special purpose insurer domiciled in Bermuda and is not a subsidiary or affiliate of Radian Guaranty. Eagle Re has funded its reinsurance obligations by issuing four classes of ILNs which have a 10-year maturity with a 7-year call option. The ILNs are non-recourse to Radian Group or its subsidiaries and affiliates.
  • The Pennsylvania Insurance Department approved a $375 million return of capital from Radian Guaranty to Radian Group during the second quarter of 2019, which was paid on April 30, 2019 from Radian Guaranty's gross paid in and contributed statutory surplus. As previously reported, the Pennsylvania Insurance Department approved a $450 million return of capital in the fourth quarter of 2018. These strategic capital actions improve Radian Group's financial flexibility.
  • After consideration of the ILN transaction and the $375 million return of capital described above, Radian Guaranty’s excess of Available Assets over its Minimum Required Assets under PMIERs would have increased by approximately $187 million.

CONFERENCE CALL

Radian will discuss first quarter financial results in a conference call tomorrow, Wednesday, May 1, 2019, at 9:00 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 800.230.1074 inside the U.S., or 612.288.0340 for international callers, using passcode 466411 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 466411.

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.

2019 INVESTOR DAY

Radian will host an Investor Day on Tuesday, May 7, 2019, from 9:30 a.m. to 3:30 p.m. Eastern time in Philadelphia. The company’s senior leaders will provide details on Radian’s business strategy and priorities, key business and product initiatives, and financial objectives. The event will be broadcast live over the Internet at http://www.radian.biz/page?name=Webcasts. The slide presentation will also be available on Radian's website one hour prior to the event and can be accessed by visiting http://www.radian.biz/page?name=Presentations. A replay of the webcast will be available at http://www.radian.biz/page?name=Webcasts following the live broadcast, for a period of one year.

NON-GAAP FINANCIAL MEASURES

Radian believes that adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity (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. Adjusted pretax operating income adjusts GAAP pretax income 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 acquired intangible assets; and (v) net impairment losses recognized in earnings and infrequent or unusual non-operating items. 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. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, 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.

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. In addition, the company also has presented a related non-GAAP measure, Services adjusted EBITDA margin, which is calculated by dividing Services adjusted EBITDA by GAAP total revenue for the Services segment. Services adjusted EBITDA and Services adjusted EBITDA margin are presented to facilitate comparisons with other services companies, since they are widely accepted measures of performance in the services industry and are used internally as supplemental measures to evaluate the performance of our Services segment.

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 is ensuring the American dream of homeownership responsibly and sustainably through products and services that include industry-leading mortgage insurance and a comprehensive suite of mortgage, risk, real estate, and title services. We are powered by technology, informed by data and driven to deliver new and better ways to transact and manage risk. Learn more about Radian’s financial strength and flexibility at www.radian.biz and visit www.radian.com to see how Radian is shaping the future of mortgage and real estate services.

 

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.

 
Exhibit A:   Condensed Consolidated Statements of Operations Trend Schedule
Exhibit B: Net Income Per Share Trend Schedule
Exhibit C: Condensed Consolidated Balance Sheets
Exhibit D: Net Premiums Earned - Insurance
Exhibit E: Segment Information
Exhibit F: Definition of Consolidated Non-GAAP Financial Measures
Exhibit G: Consolidated Non-GAAP Financial Measure Reconciliations
Exhibit H: Mortgage Insurance Supplemental Information
New Insurance Written
Exhibit I: Mortgage Insurance Supplemental Information
Primary Insurance in Force and Risk in Force
Exhibit J: Mortgage Insurance Supplemental Information
Claims and Reserves
Exhibit K: Mortgage Insurance Supplemental Information
Default Statistics
Exhibit L: Mortgage Insurance Supplemental Information
Reinsurance Programs
 
 
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations Trend Schedule
Exhibit A
 
    2019     2018

(In thousands, except per-share amounts)

Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
 
Revenues:
Net premiums earned - insurance $ 263,512 $ 261,682 $ 258,431 $ 251,344 $ 242,550
Services revenue 32,753 38,414 36,566 36,828 33,164
Net investment income 43,847 42,051 38,995 37,473 33,956
Net gains (losses) on investments and other financial instruments 21,913 (11,705 ) (4,480 ) (7,404 ) (18,887 )
Other income   1,604     1,031     1,174     1,016     807  
Total revenues   363,629     331,473     330,686     319,257     291,590  
 
Expenses:
Provision for losses 20,754 27,140 20,881 19,337 37,283
Policy acquisition costs 5,893 6,485 5,667 5,996 7,117
Cost of services 24,157 24,939 25,854 24,205 23,126
Other operating expenses 78,805 77,266 70,125 70,184 63,243
Restructuring and other exit costs 113 4,464 925 551
Interest expense 15,697 15,584 15,535 15,291 15,080
Amortization and impairment of other acquired intangible assets   2,187     3,461     3,472     2,748     2,748  
Total expenses   147,493     154,988     145,998     138,686     149,148  
 
Pretax income 216,136 176,485 184,688 180,571 142,442
Income tax provision (benefit)   45,179     36,706     41,891     (28,378 )   27,956  
Net income $ 170,957   $ 139,779   $ 142,797   $ 208,949   $ 114,486  
 
Diluted net income per share $ 0.78 $ 0.64 $ 0.66 $ 0.96 $ 0.52
 
 
Radian Group Inc. and Subsidiaries
Net Income Per Share Trend Schedule
Exhibit B
 

The calculation of basic and diluted net income per share was as follows:

 
    2019     2018

(In thousands, except per-share amounts)

Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Net income —basic and diluted $ 170,957 $ 139,779 $ 142,797 $ 208,949 $ 114,486
 
Average common shares outstanding—basic 213,537 213,435 213,309 213,976 215,967
Dilutive effect of stock-based compensation arrangements (1)   4,806   4,448   4,593   3,854   3,916
Adjusted average common shares outstanding—diluted   218,343   217,883   217,902   217,830   219,883
 
Basic net income per share $ 0.80 $ 0.65 $ 0.67 $ 0.98 $ 0.53
 
Diluted net income per share $ 0.78 $ 0.64 $ 0.66 $ 0.96 $ 0.52
 

(1)

 

The following number of shares of our common stock equivalents issued under our share-based compensation arrangements were not included in the calculation of diluted net income per share because they were anti-dilutive:

 
          2019     2018

(In thousands)

Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Shares of common stock equivalents 169 337 338 484 170
 
 
Radian Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Exhibit C
 

(In thousands, except per-share amounts)

   

March 31,
2019

  December 31,
2018
    September 30,
2018
    June 30,
2018
    March 31,
2018
 
Assets:
Investments $ 5,475,770 $ 5,153,029 $ 5,028,235 $ 4,873,919 $ 4,668,217
Cash 118,668 95,393 104,413 95,573 122,481
Restricted cash 9,086 11,609 9,925 9,152 7,623
Accounts and notes receivable 89,237 78,652 108,003 94,848 80,068
Deferred income taxes, net 67,697 131,643 134,201 171,293 253,381
Goodwill and other acquired intangible assets, net 56,811 58,998 55,707 59,179 61,465
Prepaid reinsurance premium 408,622 417,628 413,728 405,447 390,241
Other assets   373,678     367,700     415,272     430,077     426,773  
Total assets $ 6,599,569   $ 6,314,652   $ 6,269,484   $ 6,139,488   $ 6,010,249  
 
Liabilities and stockholders’ equity:
Unearned premiums $ 720,159 $ 739,357 $ 747,921 $ 741,296 $ 723,100
Reserve for losses and loss adjustment expense 388,784 401,361 412,460 451,542 488,656
Senior notes 1,031,197 1,030,348 1,029,511 1,028,687 1,027,875
Reinsurance funds withheld 329,868 321,212 352,952 331,776 305,409
Other liabilities   419,470     333,659     379,362     385,051     412,793  
Total liabilities   2,889,478     2,825,937     2,922,206     2,938,352     2,957,833  
 
Common stock 230 231 231 231 233
Treasury stock (895,321 ) (894,870 ) (894,635 ) (894,610 ) (894,191 )
Additional paid-in capital 2,697,724 2,724,733 2,720,626 2,715,426 2,748,233
Retained earnings 1,889,964 1,719,541 1,580,296 1,438,032 1,229,616
Accumulated other comprehensive income (loss)   17,494     (60,920 )   (59,240 )   (57,943 )   (31,475 )
Total stockholders’ equity   3,710,091     3,488,715     3,347,278     3,201,136     3,052,416  
Total liabilities and stockholders’ equity $ 6,599,569   $ 6,314,652   $ 6,269,484   $ 6,139,488   $ 6,010,249  
 
Shares outstanding 212,136 213,473 213,333 213,232 215,543
 
Book value per share $ 17.49 $ 16.34 $ 15.69 $ 15.01 $ 14.16
 
Tangible book value per share (See Exhibit G) $ 17.22 $ 16.06 $ 15.43 $ 14.73 $ 13.88
 
Statutory Capital Ratios
Risk to capital ratio-Radian Guaranty only 13.4 :1 (1) 13.9 :1 12.4 :1 12.5 :1 12.6 :1
Risk to capital ratio-Mortgage Insurance combined 12.4 :1 (1) 12.8 :1 11.7 :1 11.8 :1 11.9 :1
 

(1) Preliminary.

 
 
Radian Group Inc. and Subsidiaries
Net Premiums Earned - Insurance
Exhibit D
 
    2019   2018

(In thousands)

Qtr 1 Qtr 4   Qtr 3     Qtr 2     Qtr 1
 
Premiums earned - insurance:
Direct:
Mortgage Insurance (1) $ 278,453 $ 275,856 $ 269,499 $ 264,078 $ 257,431
Services   1,770     1,995     3,006     2,434      
Total direct   280,223     277,851     272,505     266,512     257,431  
 
Assumed - Mortgage Insurance: (1) (2)   2,450     2,082     1,994     1,510     1,318  
 
Ceded:
Mortgage Insurance (19,125 ) (3) (18,217 ) (3) (16,011 ) (16,620 ) (16,199 )
Services   (36 )   (34 )   (57 )   (58 )    
Total ceded   (19,161 )   (18,251 )   (16,068 )   (16,678 )   (16,199 )
Net premiums earned - insurance $ 263,512   $ 261,682   $ 258,431   $ 251,344   $ 242,550  
 
Notable variable items: (4)
Single Premium Policy cancellations, direct $ 9,957 $ 9,320 $ 11,559 $ 14,776 $ 12,335
Single Premium Policy cancellations, ceded (5)   (2,953 )   (3,091 )   (3,288 )   (4,046 )   (3,301 )
Single Premium Policy cancellations, net $ 7,004   $ 6,229   $ 8,271   $ 10,730   $ 9,034  
 
Profit commission - other (6) $ 8,314   $ 8,447   $ 8,267   $ 7,917   $ 7,405  
 

(1)

 

Certain prior period amounts have been reclassified to conform to current period presentation.

(2)

Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs.

(3)

Amount includes premiums ceded to unaffiliated special purpose insurers in connection with our Excess-of-Loss reinsurance program, entered into in the fourth quarter of 2018. Premiums ceded pursuant to this program totaled $3.3 million and $2.3 million in the three months ended March 31, 2019 and December 31, 2018, respectively.

(4)

These amounts are included in net premiums earned - insurance, in our Mortgage Insurance segment.

(5)

Includes the impact of related profit commissions.

(6)

The amounts represent the profit commission on the Single Premium QSR Program, included in net premiums earned - insurance, and exclude the impact of Single Premium Policy cancellations.

 
 

Radian Group Inc. and Subsidiaries

Segment Information

Exhibit E (page 1 of 2)

 
Summarized financial information concerning our operating segments as of and for the periods indicated is as follows. For a definition of adjusted pretax operating income and Services adjusted EBITDA, along with reconciliations to consolidated GAAP measures, see Exhibits F and G.
 
    Mortgage Insurance
2019     2018

(In thousands)

Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Net premiums written - insurance (1) $ 251,586 $ 247,256 $ 253,827 $ 251,958 $ 237,980
(Increase) decrease in unearned premiums   10,192     12,465     1,655     (2,990 )   4,570
Net premiums earned - insurance 261,778 259,721 255,482 248,968 242,550
Net investment income 43,665 41,875 38,824 37,447 33,956
Other income   1,196     641     725     621     807
Total   306,639     302,237     295,031     287,036     277,313
 
Provision for losses 20,844 27,079 20,715 19,362 37,391
Policy acquisition costs 5,893 6,485 5,667 5,996 7,117
Other operating expenses before corporate allocations (2)   30,410     37,070     33,152     33,262     31,888
Total (3)   57,147     70,634     59,534     58,620     76,396
Adjusted pretax operating income before corporate allocations 249,492 231,603 235,497 228,416 200,917
Allocation of corporate operating expenses 25,625 21,627 19,794 20,136 18,577
Allocation of interest expense   15,697     11,133     11,083     10,840     10,629
Adjusted pretax operating income $ 208,170   $ 198,843   $ 204,620   $ 197,440   $ 171,711
 
    Services
2019   2018

(In thousands)

Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Net premiums earned - insurance $ 1,734 $ 1,961 $ 2,949 $ 2,376 $
Services revenue (3) 33,723 39,006 37,332 37,713 34,166
Net investment income 182 176 171 26
Other income   408     390     449     395      
Total   36,047     41,533     40,901     40,510     34,166  
 
Provision for losses (18 ) 113 242 53
Cost of services 24,559 25,064 26,001 24,357 23,270
Other operating expenses before corporate allocations (2) 13,435 13,719 14,772 14,015 10,744
Restructuring and other exit costs (2)       113     407     1,055     525  
Total   37,976     39,009     41,422     39,480     34,539  
Adjusted pretax operating income (loss) before corporate allocations (4) (1,929 ) 2,524 (521 ) 1,030 (373 )
Allocation of corporate operating expenses 4,171 3,232 2,948 3,010 2,784
Allocation of interest expense     (5)   4,451     4,452     4,451     4,451  
Adjusted pretax operating income (loss) $ (6,100 ) $ (5,159 ) $ (7,921 ) $ (6,431 ) $ (7,608 )
 

(1)

 

Net of ceded premiums written under the QSR Programs and the Excess-of-Loss Program. See Exhibit L for additional information.

 

See notes continued on next page.

 
 

Radian Group Inc. and Subsidiaries

Segment Information

Exhibit E (page 2 of 2)

 

Notes continued from prior page.

 

(2)

Does not include impairment of long-lived assets and infrequent or unusual non-operating items, which are not considered components of adjusted pretax operating income (loss).

(3)

Inter-segment information:

 
          2019     2018
Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Inter-segment expense included in Mortgage Insurance segment $ 970 $ 592 $ 766 $ 885 $ 1,002
Inter-segment revenue included in Services segment 970 592 766 885 1,002
 

(4)

 

Supplemental information for Services adjusted EBITDA (see definition in Exhibit F):

 
          2019     2018
Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
Adjusted pretax operating income (loss) before corporate allocations $ (1,929 ) $ 2,524 $ (521 ) $ 1,030 $ (373 )
Depreciation and amortization   995     700     1,077     920     867  
Services adjusted EBITDA $ (934 ) $ 3,224   $ 556   $ 1,950   $ 494  
 

(5)

 

Effective January 1, 2019, Clayton's holding company repaid to Radian Group the intercompany note (with terms consistent with the original issued amount of $300 million from the Senior Notes due 2019 that were used to fund our purchase of Clayton), using proceeds from an additional capital contribution from Radian Group. As a result of the intercompany note repayment, the Services segment no longer incurs interest expense on the intercompany note.

 
 

Selected Mortgage Insurance Key Ratios

 
    2019     2018
Qtr 1 Qtr 4     Qtr 3     Qtr 2     Qtr 1
 
Loss ratio (1) 8.0 % 10.4 % 8.1 % 7.8 % 15.4 %
Expense ratio (1) 23.7 % 25.1 % 22.9 % 23.9 % 23.7 %
 

(1)

 

Calculated on a GAAP basis using net premiums earned.

 
 

Radian Group Inc. and Subsidiaries

Definition of Consolidated Non-GAAP Financial Measures

Exhibit F (page 1 of 2)

 

Use of Non-GAAP Financial Measures

 
In addition to the traditional GAAP financial measures, we have presented “adjusted pretax operating income,” “adjusted diluted net operating income 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 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,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity” 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 consolidated pretax income 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 acquired intangible assets; and (v) net impairment losses recognized in earnings and infrequent or unusual non-operating items. Adjusted diluted net operating income per share is calculated by dividing (i) adjusted pretax operating income 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. 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. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, 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.
 
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. These adjustments, along with the reasons for their treatment, are described below.
 
(1)  

Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.

 

Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses and changes in fair value of other financial instruments. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

 
(2)

Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

 
(3)

Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis, we do not view acquisition-related expenses as a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).

 
 

Radian Group Inc. and Subsidiaries

Definition of Consolidated Non-GAAP Financial Measures

Exhibit F (page 2 of 2)

 

(4)

Amortization or impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. Acquired intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).

 

(5)

Net impairment losses recognized in earnings and infrequent or unusual non-operating items. The recognition of net impairment losses on investments and the impairment of other long-lived assets can vary significantly in both amount and frequency, depending on market credit cycles and other factors. Infrequent and unusual non-operating items reflect activities that we do not view to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).

 
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 acquired 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 acquired 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. In addition, we also have presented a related non-GAAP measure, Services adjusted EBITDA margin, which we calculate by dividing Services adjusted EBITDA by GAAP total revenue for the Services segment. We have presented Services adjusted EBITDA and Services adjusted EBITDA margin to facilitate comparisons with other services companies, since they are widely accepted measures of performance in the services industry and are used internally as supplemental measures to evaluate the performance of our Services segment.
 
See Exhibit G for the reconciliation of the most comparable GAAP measures, consolidated pretax income, diluted net income per share, return on equity 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, adjusted net operating return on equity, and tangible book value per share, respectively. Exhibit G also contains the reconciliation of the most comparable GAAP measure, net income, to Services adjusted EBITDA.
 
Total adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, tangible book value per share, Services adjusted EBITDA and Services adjusted EBITDA margin should not be considered in isolation or viewed as substitutes for GAAP pretax income, diluted net income per share, return on equity, book value per share or net income. Our definitions of adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, tangible book value per share, Services adjusted EBITDA or Services adjusted EBITDA margin may not be comparable to similarly-named measures reported by other companies.
 
 
Radian Group Inc. and Subsidiaries
Consolidated Non-GAAP Financial Measure Reconciliations
Exhibit G (page 1 of 4)
 
Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income
                   
2019 2018

(In thousands)

Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1
Consolidated pretax income $ 216,136 $ 176,485 $ 184,688 $ 180,571 $ 142,442
Less reconciling income (expense) items:
Net gains (losses) on investments and other financial instruments 21,913 (11,705 ) (4,480 ) (7,404 ) (18,887 )
Acquisition-related expenses (1) (233 ) (463 ) (2 ) (416 )
Amortization and impairment of other acquired intangible assets (2,187 ) (3,461 ) (3,472 ) (2,748 ) (2,748 )
Impairment of other long-lived assets and infrequent or unusual non-operating items (2)   (5,427 )   (1,570 )   (4,057 )   130     (26 )
Total adjusted pretax operating income (3) $ 202,070   $ 193,684   $ 196,699   $ 191,009   $ 164,103  
 

(1)

 

Please see Exhibit F for the definition of this line item. This item is included within other operating expenses on the Condensed Consolidated Statement of Operations in Exhibit A.

(2)

The amounts for the three months ended March 31, 2019 and December 31, 2018 are included in other operating expenses on the Condensed Consolidated Statement of Operations in Exhibit A and primarily relate to impairments of other long-lived assets. The amounts for all other periods are included within restructuring and other exit costs on the Condensed Consolidated Statement of Operations in Exhibit A.

(3)

Total adjusted pretax operating income on a consolidated basis consists of adjusted pretax operating income (loss) for our Mortgage Insurance segment and our Services segment, as further detailed in Exhibit E.

 
 
Radian Group Inc. and Subsidiaries
Consolidated Non-GAAP Financial Measure Reconciliations
Exhibit G (page 2 of 4)
 

Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share

 
    2019     2018
Qtr 1 Qtr 4     Qtr 3     Qtr 2   Qtr 1
Diluted net income per share $ 0.78   $ 0.64   $ 0.66   $ 0.96   $ 0.52  
 
Less per-share impact of reconciling income (expense) items:
Net gains (losses) on investments and other financial instruments 0.10 (0.05 ) (0.02 ) (0.03 ) (0.09 )
Amortization and impairment of other acquired intangible assets (0.01 ) (0.02 ) (0.02 ) (0.01 ) (0.01 )
Impairment of other long-lived assets and infrequent or unusual non-operating items (0.02 ) (0.01 ) (0.02 )
Income tax provision (benefit) on reconciling income (expense) items (1) 0.01 (0.02 ) (0.01 ) (0.01 ) (0.02 )
Difference between statutory and effective tax rate   (0.01 )           0.30   (2)   0.01  
Per-share impact of reconciling income (expense) items   0.05     (0.06 )   (0.05 )   0.27     (0.07 )
Adjusted diluted net operating income per share (1) $ 0.73   $ 0.70   $ 0.71   $ 0.69   $ 0.59  
 

(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.

(2)

Includes $0.34 of tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlem...