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Radian Group Inc. (NYSE: RDN) today reported a net loss for the quarter ended September 30, 2013, of $12.7 million, or $0.07 per diluted share, which included minimal combined net gains from the change in fair value of derivatives and other financial instruments and minimal net losses on investments. Results for the quarter also included a $22.0 million incurred loss initially booked for the Freddie Mac Agreement announced in August and approximately $16.8 million of variable compensation expense directly related to the company’s stock price increase during the quarter. The results for the quarter compare to net income for the quarter ended September 30, 2012, of $14.3 million, or $0.11 per diluted share, which included combined net losses from the change in fair value of derivatives and other financial instruments of $41.8 million and net gains on investments of $84.7 million. Book value per share at September 30, 2013, was $5.17.
“We are pleased with Radian’s improved financial performance this year and the continued stability in the macroeconomic and business environment,” said Chief Executive Officer S.A. Ibrahim. “The $13.7 billion of new flow mortgage insurance business in the third quarter was the second largest amount ever written in Radian’s more than 35 year history. The high-quality business written after 2008, which represents 57% of our primary risk in force, is expected to generate attractive returns and position Radian for a return to sustained profitability.”
CAPITAL AND LIQUIDITY UPDATE
As previously announced in September, Radian Group contributed $115 million of capital to Radian Guaranty in the third quarter, in order to support the company’s risk-to-capital position. Radian Guaranty’s risk-to-capital ratio was 19.8:1 as of September 30, 2013. After the above-mentioned contribution of $115 million to Radian Guaranty, Radian Group maintains approximately $700 million of currently available liquidity.
As of September, 2013, Radian Guaranty’s statutory capital was $1.3 billion compared to $1.2 billion at June 30, 2013, and $1.0 billion a year ago.
In 2012, Radian Guaranty entered into two quota share reinsurance agreements with the same third-party reinsurance provider, in order to proactively manage its risk-to-capital position. On April 1, 2013, Radian reduced the amount of new business ceded under the reinsurance agreements on a prospective basis from 20 percent to 5 percent. As of September 30, 2013, a total of $2.6 billion of risk in force had been ceded under those agreements. On December 31, 2014, and on December 31, 2015, Radian will have the option to recapture a portion of the business that has been reinsured.
THIRD QUARTER HIGHLIGHTS
New mortgage insurance written (NIW) reached $13.7 billion during the quarter, compared to $13.4 billion in the second quarter of 2013 and $10.6 billion in the third quarter of 2012. Radian wrote $3.5 billion in NIW in October 2013, compared to $4.0 billion in October 2012.
The Home Affordable Refinance Program (HARP) accounted for $1.8 billion of insurance not included in Radian Guaranty’s NIW total for the quarter. This compares to $2.4 billion in the second quarter of 2013, and $2.7 billion in the third quarter of 2012.
Of the $13.7 billion of new business written in the third quarter of 2013, 71 percent was written with monthly premiums and 29 percent with single premiums.
NIW continued to consist of loans with excellent risk characteristics.
Primary mortgage insurance risk-in-force at the end of the third quarter consisted of 57 percent of business written after 2008 and, including HARP volume, was 68 percent of the total portfolio.
As previously announced, Radian Guaranty entered into a Master Transaction Agreement with Freddie Mac on August 29, 2013. The Agreement relates to a group of 25,760 first-lien mortgage loans held by Freddie Mac that were insured by Radian Guaranty, and were delinquent as of December 31, 2011.
The Agreement provides for the future treatment of these loans including claim payments, loss mitigation activity and insurance coverage, and eliminates Radian Guaranty’s claim exposure on 9,756 loans that were delinquent and 4,586 loans that were re-performing as of July 31, 2013. The Agreement caps Radian Guaranty’s total exposure on this group of loans, including loans that are currently re-performing, to $840 million. The maximum exposure of $840 million is comprised of $625 million of claim payments (consisting of $370 million claims paid on this population as of July 12, 2013, and $255 million paid at closing) and $215 million related to loss mitigation activity on the loans.
On August 29, 2013, Radian Guaranty paid $255 million to Freddie Mac to cover claim exposure on these loans, and had previously paid $370 million of claims on these loans. Radian Guaranty also deposited $205 million in a collateral account to cover future loss mitigation activity on these loans. The amount deposited in the collateral account represents $215 million, less $10 million of loss mitigation activity that had become final before the collateral account was established. Amounts in the collateral account will be released to Radian Guaranty to the extent that Radian Guaranty rescinds, denies, curtails, or cancels these loans and such amounts become final under the Agreement. If the loss mitigation activity that becomes final after the collateral account was established does not accumulate to $205 million, any remaining funds will be paid to Freddie Mac. Radian Guaranty will continue to administer all claims submitted with respect to these loans in accordance with its insurance policy for these loans and in a manner consistent with its normal claims handling practices.
As of September 30, 2013, $137.3 million of submitted claims had been rescinded, denied or curtailed but were not considered final under the Agreement. As of September 30, 2013, the amount of insurance rescissions, claim denials or claim curtailments that had become final in accordance with the Agreement was $12.4 million, which includes $2.4 million finalized after the collateral account was established.
The mortgage insurance provision for losses was $152.0 million in the third quarter of 2013, compared to $136.4 million in the second quarter of 2013, and $171.8 million in the third quarter of 2012.
The $152.0 million provision for losses includes approximately $22.0 million initially recorded in connection with the Freddie Mac Agreement. This is expected to be fully offset by a reduction of incurred losses in future periods. This future reduction of incurred losses will result from the elimination of exposure to re-performing loans covered by the transaction that we expect to re-default in the future and ultimately become claims.
The loss ratio in the third quarter for Radian Guaranty was 76.0 percent, compared to 68.9 percent in the second quarter of 2013, and 96.1 percent in the third quarter of 2012.
Mortgage insurance loss reserves were approximately $2.3 billion as of September 30, 2013, which decreased from $2.7 billion in the second quarter of 2013, and from $3.0 billion a year ago.
Primary reserves (excluding IBNR and other reserves) per default were $27,202 as of September 30, 2013. This compares to primary reserves per default of $27,293 as of June 30, 2013, and $26,100 as of September 30, 2012.
The total number of primary delinquent loans decreased by 17 percent in the third quarter from the second quarter of 2013, and by 31 percent from the third quarter of 2012. The total number of primary delinquent loans at September 30, 2013, excludes loans related to the Freddie Mac Agreement described above. In addition, the total number of primary delinquent loans decreased by 2 percent in October. The primary mortgage insurance delinquency rate decreased to 7.8 percent in the third quarter of 2013, compared to 9.7 percent in the second quarter of 2013, and 12.6 percent in the third quarter of 2012.
Total mortgage insurance claims paid of $519.3 million consisted of $254.6 million related to the Freddie Mac Agreement and $264.7 million of other claims paid in the quarter, compared to $326.4 million in the second quarter of 2013, and $272.4 million in the third quarter of 2012. The company expects mortgage insurance net claims paid of $1.5 billion for the full-year 2013.
$28.1 million of other operating expenses in the third quarter represented long-term incentive compensation, compared to $19.0 million in the second quarter of 2013. The expense in both periods was impacted by an increase in the fair value of cash-settled awards, which was driven primarily by an increase in the company’s stock price. The component of the fair value change that resulted from the stock price increase was $16.8 million in the third quarter of 2013, compared to $7.0 million in the second quarter of 2013.
Radian Asset Assurance Inc. serves as an important source of capital support for Radian Guaranty and is expected to continue to provide Radian Guaranty with dividends over time.
As of September 30, 2013, Radian Asset had approximately $1.2 billion in statutory surplus with an additional $0.4 billion in claims-paying resources.
Since June 30, 2008, Radian Asset has successfully reduced its total net par exposure by 77 percent to $26.2 billion as of September 30, 2013, including large declines in the riskier segments of the portfolio.
In response to recent questions regarding Radian’s exposure to the Commonwealth of Puerto Rico, the company has posted an overview of its Puerto Rico exposures, which totals $453.4 million as of September 30, 2013, under Company Statements in the Investors section of Radian’s website: http://www.radian.biz/page?name=CompanyStatements.