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Radian Reports Fourth Quarter And Full Year 2013 Financial Results

Radian Group Inc. (NYSE: RDN), headquartered in Philadelphia, provides private mortgage insurance and related risk mitigation products and services to mortgage lenders nationwide through its principal operating subsidiary, Radian Guaranty Inc. These services help promote and preserve homeownership opportunities for homebuyers, while protecting lenders from default-related losses on residential first mortgages and facilitating the sale of low-downpayment mortgages in the secondary market. Additional information may be found at www.radian.biz.

FINANCIAL RESULTS AND SUPPLEMENTAL INFORMATION CONTENTS (Unaudited)

For trend information on all schedules, refer to Radian’s quarterly financial statistics at Financial Reports.

 
Exhibit A: Condensed Consolidated Statements of Income
Exhibit B: Condensed Consolidated Balance Sheets
Exhibit C: Segment Information Quarter Ended December 31, 2013
Exhibit D: Segment Information Quarter Ended December 31, 2012
Exhibit E: Segment Information Year Ended December 31, 2013
Exhibit F: Segment Information Year Ended December 31, 2012
Exhibit G: Financial Guaranty Supplemental Information
Exhibit H: Mortgage Insurance Supplemental Information
New Insurance Written
Exhibit I: Mortgage Insurance Supplemental Information
Insurance in Force and Risk in Force by Product
Exhibit J: Mortgage Insurance Supplemental Information
Risk in Force by FICO, LTV and Policy Year
Exhibit K: Mortgage Insurance Supplemental Information
Pool and Other Risk in Force, Risk-to-Capital
Exhibit L: Mortgage Insurance Supplemental Information
Claims, Reserves and Reserve per Default
Exhibit M: Mortgage Insurance Supplemental Information
Default Statistics
Exhibit N: Mortgage Insurance Supplemental Information
Captives, QSR and Persistency
Exhibit O: Use of Non-GAAP Financial Measures

GAAP to Non-GAAP Reconciliations

 

 
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Exhibit A
   
Quarter Ended Year Ended
December 31 December 31

(In thousands, except per-share data)

2013   2012 2013   2012
 
Revenues:
Net premiums written - insurance $ 231,561   $ 217,743   $ 940,817   $ 686,630  
 
Net premiums earned - insurance $ 213,198 $ 193,875 $ 830,894 $ 738,982
Net investment income 26,868 23,112 108,088 114,337
Net (losses) gains on investments (6,829 ) 6,351 (149,720 ) 184,888
Net impairment losses recognized in earnings (3 ) (3 ) (3 ) (3 )
Change in fair value of derivative instruments 38,586 2,912 (31,771 ) (144,025 )
Net losses on other financial instruments (1,151 ) (1,815 ) (4,736 ) (82,269 )
Gain on sale of affiliate 7,708
Other income 916   1,627   6,235   5,790  
Total revenues 271,585   226,059   758,987   825,408  
 
Expenses:
Provision for losses 137,610 305,797 567,134 959,171
Change in reserve for premium deficiency (198 ) (1,464 ) (1,901 ) 41
Policy acquisition costs 6,505 10,098 41,664 61,876
Other operating expenses 72,473 55,896 284,528 196,672
Interest expense 19,747   12,583   74,618   51,832  
Total expenses 236,137   382,910   966,043   1,269,592  
 
Equity in net income (loss) of affiliates     1   (13 )
 
Pretax income (loss) 35,448 (156,851 ) (207,055 ) (444,197 )
Income tax (benefit) provision (921 ) 20,451   (10,070 ) 7,271  
 
Net income (loss) $ 36,369   $ (177,302 ) $ (196,985 ) $ (451,468 )
 
Diluted net income (loss) per share $ 0.19   $ (1.34 ) $ (1.18 ) $ (3.41 )
 
 

For Trend Information, refer to our Quarterly Financial Statistics on Radian's (RDN) website.

 

   
Radian Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Exhibit B
 
December 31 December 31

(In thousands, except per-share data)

2013 2012
 
Assets:
Cash and investments $ 4,977,542 $ 5,208,199
Deferred policy acquisition costs 66,926 88,202
Deferred income taxes, net 17,902
Reinsurance recoverables 46,846 89,204
Derivative assets 16,642 13,609
Other assets 495,833   503,986  
Total assets $ 5,621,691   $ 5,903,200  
 
Liabilities and stockholders' equity:
Unearned premiums $ 768,871 $ 648,682
Reserve for losses and loss adjustment expenses 2,185,421 3,149,936
Reserve for premium deficiency 1,785 3,685
Long-term debt 930,072 663,571
VIE debt 94,645 108,858
Derivative liabilities 307,185 266,873
Other liabilities 394,067   325,270  
Total liabilities 4,682,046   5,166,875  
 
Common stock 191 151
Additional paid-in capital 1,454,297 1,075,320
Retained deficit (552,226 ) (355,241 )
Accumulated other comprehensive income 37,383   16,095  
Total common stockholders’ equity 939,645   736,325  
Total liabilities and stockholders’ equity $ 5,621,691   $ 5,903,200  
 
Book value per share $ 5.43 $ 5.51
 

     
Radian Group Inc. and Subsidiaries
Segment Information
Quarter Ended December 31, 2013
Exhibit C
 
Mortgage Financial

(In thousands)

Insurance Guaranty Total
Revenues:
Net premiums written - insurance

$

231,754  

$

(193 )

$

231,561  
 
Net premiums earned - insurance

$

200,356

$

12,842

$

213,198

Net investment income 16,379 10,489 26,868
Net losses on investments (2,818 ) (4,011 ) (6,829 )
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments 635 37,951 38,586
Net losses on other financial instruments (869 ) (282 ) (1,151 )
Other income   903     13     916  
Total revenues   214,586     56,999     271,585  
 
Expenses:
Provision for losses 144,270 (6,660 ) 137,610
Change in reserve for premium deficiency (198 ) (198 )
Policy acquisition costs 4,413 2,092 6,505
Other operating expenses 60,294 12,179 72,473
Interest expense   7,175   12,572     19,747  
Total expenses   215,954   20,183     236,137  
 
Pretax (loss) income

$

(1,368 )

$

36,816  

$

35,448
Income tax benefit   (921 )
 
Net income

$

36,369  
 
Cash and investments

$

2,683,467

$

2,294,075

$

4,977,542
Deferred policy acquisition costs 29,741 37,185 66,926
Total assets 3,120,904 2,500,787 5,621,691
Unearned premiums 567,072 201,799 768,871
Reserve for losses and loss adjustment expenses 2,164,353 21,068 2,185,421
VIE Debt 2,845 91,800 94,645
Derivative liabilities 307,185 307,185
 

     
Radian Group Inc. and Subsidiaries
Segment Information
Quarter Ended December 31, 2012
Exhibit D
 
Mortgage Financial

(In thousands)

Insurance Guaranty Total
Revenues:
Net premiums written - insurance

$

217,044  

$

699  

$

217,743  
 
Net premiums earned - insurance

$

179,486

$

14,389

$

193,875

Net investment income 12,814 10,298 23,112
Net gains on investments 1,447 4,904 6,351
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments (298 ) 3,210 2,912
Net losses on other financial instruments (864 ) (951 ) (1,815 )
Other income   1,588     39     1,627  
Total revenues   194,173     31,886     226,059  
 
Expenses:
Provision for losses 306,895 (1,098 ) 305,797
Change in reserve for premium deficiency (1,464 ) (1,464 )
Policy acquisition costs 7,469 2,629 10,098
Other operating expenses 44,661 11,235 55,896
Interest expense   2,099     10,484     12,583  
Total expenses   359,660     23,250     382,910  
 
Pretax (loss) income (165,487 ) 8,636 (156,851 )
Income tax provision   12,279     8,172     20,451  
 
Net (loss) income

$

(177,766 )

$

464  

$

(177,302 )
 
Cash and investments

$

3,118,153

$

2,090,046

$

5,208,199
Deferred policy acquisition costs 38,478 49,724 88,202
Total assets 3,575,427 2,327,773 5,903,200
Unearned premiums 382,413 266,269 648,682
Reserve for losses and loss adjustment expenses 3,083,608 66,328 3,149,936
VIE Debt 9,875 98,983 108,858
Derivative liabilities 266,873 266,873
 

       
Radian Group Inc. and Subsidiaries
Segment Information
Year Ended December 31, 2013
Exhibit E
 
Mortgage Financial

(In thousands)

Insurance Guaranty Total
Revenues:
Net premiums written - insurance

$

950,998  

$

(10,181 ) (1)

$

940,817  
 
Net premiums earned - insurance

$

781,420

$

49,474

(1)

$

830,894

Net investment income 61,615 46,473 108,088
Net losses on investments (93,821 ) (55,899 ) (149,720 )
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments 635 (32,406 ) (31,771 )
Net losses on other financial instruments (2,840 ) (1,896 ) (4,736 )
Other income   6,024     211     6,235  
Total revenues   753,033     5,954     758,987  
 
Expenses:
Provision for losses 564,648 2,486 567,134
Change in reserve for premium deficiency (1,901 ) (1,901 )
Policy acquisition costs 28,485 13,179 41,664
Other operating expenses 236,959 47,569 284,528
Interest expense   17,995     56,623     74,618  
Total expenses   846,186     119,857     966,043  
 
Equity in net income of affiliates       1     1  
 
Pretax loss

$

(93,153 )

$

(113,902 )

$

(207,055 )
Income tax benefit   (10,070 )
 
Net loss

$

(196,985 )
 

(1) Reflects the impact of the commutation of reinsurance business.

 

     
Radian Group Inc. and Subsidiaries
Segment Information
Year Ended December 31, 2012
Exhibit F
 
Mortgage Financial

(In thousands)

Insurance Guaranty Total
Revenues:
Net premiums written - insurance $ 806,305   $ (119,675 ) $ 686,630  
 
Net premiums earned - insurance $ 702,385 $ 36,597 $ 738,982
Net investment income 63,191 51,146 114,337
Net gains on investments 103,666 81,222 184,888
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments (330 ) (143,695 ) (144,025 )
Net losses on other financial instruments (3,491 ) (78,778 ) (82,269 )
Gain on sale of affiliate 7,708 7,708
Other income 5,516   274   5,790  
Total revenues 870,937   (45,529 ) 825,408  
 
Expenses:
Provision for losses 921,507 37,664 959,171
Change in reserve for premium deficiency 41 41
Policy acquisition costs 34,131 27,745 61,876
Other operating expenses 152,448 44,224 196,672
Interest expense 7,454   44,378   51,832  
Total expenses 1,115,581   154,011   1,269,592  
 
Equity in net loss of affiliates   (13 ) (13 )
 
Pretax loss (244,644 ) (199,553 ) (444,197 )
Income tax (benefit) provision (30,045 ) 37,316   7,271  
 
Net loss $ (214,599 ) $ (236,869 ) $ (451,468 )
 

 
Radian Group Inc. and Subsidiaries
Financial Guaranty Supplemental Information
Exhibit G
   
Quarter Ended Year Ended
December 31 December 31

(In thousands)

2013   2012 2013     2012
 
Total Premiums Earned - insurance $ 12,842 $ 14,389 $ 51,921 $ 58,861
Impact of commutations and reinsurance     (2,447 ) (22,264 )
Net Premiums Earned - insurance $ 12,842   $ 14,389   $ 49,474   $ 36,597  
 
Refundings included in earned premium $ 8,573   $ 7,956   $ 30,593   $ 33,985  
 
Net premiums earned - derivatives (1) $ 3,879   $ 5,652   $ 17,898   $ 28,693  
 
Claims paid $ 4,365   $ 5,465   $ 47,745   (2) $ 34,338  
 

   
December 31, December 31,

($ in thousands, except ratios)

2013 2012
 

Statutory Information:

 
Capital and surplus $ 1,198,034 $ 1,144,112
Contingency reserve 263,963   300,138  
Qualified statutory capital 1,461,997 1,444,250
 
Unearned premium reserve 195,303 256,920
Loss and loss expense reserve (180,168 )

(53,441

)

Total statutory policyholders' reserves 1,477,132 1,647,729
 
Present value of installment premiums 90,852   114,292  
Total statutory claims paying resources $ 1,567,984   $ 1,762,021  
 
Net debt service outstanding $ 30,778,401   $ 42,526,289  
 
Capital leverage ratio (3) 21 29
Claims paying leverage ratio (4) 20 24
 
Net par outstanding by product:
Public finance direct $ 8,051,124 $ 9,796,131
Public finance reinsurance 4,383,643 5,542,217
Structured direct 10,872,379 17,615,383
Structured reinsurance 547,733   787,758  
Total (5) $ 23,854,879   $ 33,741,489  
 

(1)

 

Included in change in fair value of derivative instruments.

(2)

Primarily related to commutation of reinsurance business.

(3)

The capital leverage ratio is derived by dividing net debt service outstanding by qualified statutory capital.

(4)

The claims paying leverage ratio is derived by dividing net debt service outstanding by total statutory claims paying resources.

(5)

Included in public finance net par outstanding is $0.9 billion and $1.0 billion at December 31, 2013 and December 31, 2012, respectively, for legally defeased bond issues where our financial guaranty policy has not been extinguished but cash or securities have been deposited in an escrow account for the benefit of bondholders.

 

 
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit H
   
Quarter Ended Year Ended
December 31 December 31
2013   2012 2013   2012
($ in millions) $   % $   % $   % $   %

Primary new insurance written

       
Prime $ 9,252 100.0 % $ 11,657 99.9 % $ 47,251 100.0 % $ 37,041 99.9 %
Alt -A and A minus and below       6     0.1   4       20     0.1  
Total Flow $ 9,252     100.0 % $ 11,663     100.0 % $ 47,255     100.0 % $ 37,061     100.0 %
 

Total primary new insurance written by FICO score

>=740 $ 6,082 65.7 % $ 8,838 75.8 % $ 33,466 70.8 % $ 28,151 75.9 %
680-739 2,675 28.9 2,519 21.6 11,971 25.3 7,994 21.6
620-679 495     5.4   306     2.6   1,818     3.9   916     2.5  
Total Flow $ 9,252     100.0 % $ 11,663     100.0 % $ 47,255     100.0 % $ 37,061     100.0 %

 

Percentage of primary new insurance written

Monthly premiums 70 % 65 % 68 % 65 %
Single premiums 30 % 35 % 32 % 35 %
 
Refinances 17 % 44 % 30 % 40 %
LTV
95.01% and above 3.4 % 1.5 % 2.6 % 1.4 %
90.01% to 95.00% 48.7 % 40.5 % 45.4 % 41.2 %
85.01% to 90.00% 36.0 % 40.5 % 37.3 % 41.0 %
85.00% and below 11.9 % 17.5 % 14.7 % 16.4 %
 

   
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit I
 
December 31 December 31
2013 2012

($ in millions)

$   % $   %

Primary insurance in force (1)

   
Flow $ 151,383 93.9 % $ 129,079 92.0 %
Structured 9,857     6.1   11,284     8.0  
Total Primary $ 161,240     100.0 % $ 140,363     100.0 %
 
Prime $ 147,072 91.2 % $ 123,437 87.9 %
Alt-A 8,634 5.4 10,447 7.5
A minus and below 5,534     3.4   6,479     4.6  
Total Primary $ 161,240     100.0 % $ 140,363     100.0 %
 

Primary risk in force (1)

Flow $ 37,792 94.4 % $ 31,891 92.8 %
Structured 2,225     5.6   2,481     7.2  
Total Primary $ 40,017     100.0 % $ 34,372     100.0 %
 
Flow
Prime $ 35,294 93.4 % $ 28,898 90.6 %
Alt-A 1,541 4.1 1,852 5.8
A minus and below 957     2.5   1,141     3.6  
Total Flow $ 37,792     100.0 % $ 31,891     100.0 %
 
Structured
Prime $ 1,319 59.3 % $ 1,450 58.5 %
Alt-A 476 21.4 552 22.2
A minus and below 430     19.3   479     19.3  
Total Structured $ 2,225     100.0 % $ 2,481     100.0 %
 
Total
Prime $ 36,613 91.5 % $ 30,348 88.3 %
Alt-A 2,017 5.0 2,404 7.0
A minus and below 1,387     3.5   1,620     4.7  
Total Primary $ 40,017     100.0 % $ 34,372     100.0 %
 

(1) Includes amounts related to the Freddie Mac Agreement.

 

 
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit J
   
December 31 December 31
2013 2012

($ in millions)

$     % $   %

Total primary risk in force by FICO score

   
Flow
>=740 $ 21,525 57.0 % $ 16,448 51.6 %
680-739 11,019 29.2 9,686 30.4
620-679 4,555 12.0 4,918 15.4
<=619 693       1.8   839     2.6  
Total Flow $ 37,792       100.0 % $ 31,891     100.0 %
 
Structured
>=740 $ 602 27.0 % $ 661 26.6 %
680-739 640 28.8 716 28.9
620-679 585 26.3 661 26.6
<=619 398       17.9   443     17.9  
Total Structured $ 2,225       100.0 % $ 2,481     100.0 %
 
Total
>=740 $ 22,127 55.3 % $ 17,109 49.8 %
680-739 11,659 29.1 10,402 30.3
620-679 5,140 12.9 5,579 16.2
<=619 1,091       2.7   1,282     3.7  
Total Primary $ 40,017       100.0 % $ 34,372     100.0 %
 

Total primary risk in force by LTV

95.01% and above $ 4,171 10.4 % $ 4,643 13.5 %
90.01% to 95.00% 17,239 43.1 13,303 38.7
85.01% to 90.00% 14,750 36.9 13,134 38.2
85.00% and below 3,857       9.6   3,292     9.6  
Total $ 40,017       100.0 % $ 34,372     100.0 %
 

Total primary risk in force by policy year

2005 and prior $ 4,461 11.1 % $ 5,657 16.5 %
2006 2,326 5.8 2,735 8.0
2007 5,247 13.1 6,059 17.6
2008 3,950 9.9 4,582 13.3
2009 1,448 3.6 2,021 5.9
2010 1,206 3.0 1,726 5.0
2011 2,263 5.7 2,956 8.6
2012 7,710 19.3 8,636 25.1
2013 11,406       28.5        
Total $ 40,017       100.0 % $ 34,372     100.0 %
 
Primary risk in force on defaulted loans $ 2,786

(1)

 

$ 4,320
 

(1) Excludes risk related to loans subject to the Freddie Mac Agreement.

 

   
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit K
 
December 31 December 31
($ in millions) 2013 2012
$       % $   %

Pool risk in force

     
Prime $ 1,252 78.1 % $ 1,411 76.9 %
Alt-A 74 4.6 104 5.7
A minus and below   278         17.3     319   17.4  
Total $ 1,604         100.0 % $ 1,834   100.0 %
 

Total pool risk in force by policy year

2005 and prior

$ 1,503 93.7 % $ 1,663 90.7 %

   2006

31 1.9 76 4.1

   2007

68 4.2 85 4.6

   2008

  2         0.2     10   0.6  
Total pool risk in force $ 1,604         100.0 % $ 1,834   100.0 %
 

Other risk in force

Second-lien
1st loss $ 56 $ 81
2nd loss 17 13
NIMS 5 14
1st loss-Hong Kong primary mortgage insurance   19     40
Total other risk in force $ 97   $ 148
 
Risk to capital ratio-Radian Guaranty only

19.4

:1

(1)

 

 

20.8:1
Risk to capital ratio-Mortgage Insurance combined

23.9

:1

(1)

 

 

29.9:1
 
(1) Preliminary
 

   
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit L
 
Quarter Ended Year Ended
December 31 December 31

($ in thousands)

2013   2012 2013   2012
 
Net claims paid
Prime $ 192,014 $ 171,727 $ 770,500 $ 638,820
Alt-A 42,222 43,806 183,846 165,776
A minus and below 26,286   26,982   111,828   112,216  
Total primary claims paid 260,522 242,515 1,066,174 916,812
Pool 22,451 20,360 115,192 92,206
Second-lien and other 417   555   2,995   8,598  
Subtotal 283,390 263,430 1,184,361 1,017,616
Impact of Freddie Mac Agreement 254,667
Impact of captive terminations       (148 )
Total $ 283,390   $ 263,430   $ 1,439,028   $ 1,017,468  
 
Average claim paid (1)
Prime $ 47.7 $ 48.0 $ 47.4 $ 48.6
Alt-A 56.4 56.3 56.3 57.9
A minus and below 37.8 36.7 37.0 37.7
Total primary average claims paid 47.6 47.6 47.3 47.8
Pool 54.2 73.0 65.6 67.9
Second-lien and other 13.0 11.1 15.9 25.1
Total $ 47.9 $ 48.6 $ 48.4 $ 48.7
 
Average primary claim paid (2) (3) $ 50.0 $ 50.0 $ 49.6 $ 50.4
Average total claim paid (2) (3) $ 50.1 $ 50.8 $ 50.5 $ 51.1
 
Loss ratio - GAAP basis 72.0 % 171.0 % 72.3 % 131.2 %
Expense ratio - GAAP basis 32.3 % 29.0 % 34.0 % 26.6 %
104.3 % 200.0 % 106.3 % 157.8 %
 
Reserve for losses by category
Prime $ 937,307 $ 1,508,140
Alt-A 384,841 490,728
A minus and below 215,545 314,068
IBNR and other 347,698 289,032
LAE 51,245 64,252
Reinsurance recoverable (4) 38,363   83,238  
Total primary reserves 1,974,999   2,749,458  
Pool insurance 169,682 281,937
IBNR and other 8,938 34,000
LAE 5,439   7,466  
Total pool reserves 184,059   323,403  
Total 1st lien reserves 2,159,058   3,072,861  
Second lien and other 5,295   10,747  
Total reserves $ 2,164,353   $ 3,083,608  
 
1st lien reserve per default (5)
Primary reserve per primary default excluding IBNR and other 26,717 26,408
Pool reserve per pool default excluding IBNR and other 14,690 15,948
 

(1)

 

Calculated net of reinsurance recoveries and without giving effect to the impact of the Freddie Mac Agreement and captive terminations.

(2)

Calculated without giving effect to the impact of the Freddie Mac Agreement and captive terminations.

(3)

Before reinsurance recoveries.

(4)

Represents ceded losses on captive transactions, Smart Home and quota share reinsurance transactions.

(5)

If calculated before giving effect to deductibles and stop losses in pool transactions, this would be $24,640 and $28,125 at December 31, 2013 and 2012, respectively.

 

 

Radian Group Inc. and Subsidiaries

Mortgage Insurance Supplemental Information

Exhibit M

   
December 31 December 31
2013 2012

Default Statistics

Primary Insurance:
 

Prime

Number of insured loans 741,554 667,622
Number of loans in default 37,932 60,854
Percentage of loans in default 5.12 % 9.12 %
 

Alt-A

Number of insured loans 44,905 54,069
Number of loans in default 11,209 16,005
Percentage of loans in default 24.96 % 29.60 %
 

A minus and below

Number of insured loans 40,930 49,307
Number of loans in default 11,768 16,310
Percentage of loans in default 28.75 % 33.08 %
 
Total Primary
Number of insured loans 839,249 (1) 770,998
Number of loans in default 60,909 (2) 93,169
Percentage of loans in default 7.26 % 12.08 %
 
Pool insurance
Number of loans in default 11,921 18,147
 

(1)

 

Includes 11,860 insured loans subject to the Freddie Mac Agreement.

(2)

Excludes 7,221 loans subject to the Freddie Mac Agreement that are in default at December 31, 2013, as we no longer have claims exposure on these loans.

 

   
Radian Group Inc. and Subsidiaries
Mortgage Insurance Supplemental Information
Exhibit N
 

Quarter Ended December 31

Year Ended December 31

($ in thousands)

2013   2012 2013   2012
 

1st Lien Captives

Premiums ceded to captives $ 3,801 $ 5,371 $ 17,901 $ 23,416
% of total premiums 1.8 % 2.8 % 2.1 % 3.2 %
IIF included in captives (1) 4.0 % 6.5 %
RIF included in captives (1) 3.8 % 6.3 %
 

Initial Quota Share Reinsurance ("QSR") Transaction

QSR ceded premiums written $ 5,474 $ 10,296 $ 23,047 $ 52,151
% of premiums written 2.2 % 4.3 % 2.2 % 5.9 %
QSR ceded premiums earned $ 7,035 $ 7,700 $ 29,746 $ 16,088
% of premiums earned 3.2 % 4.0 % 3.5 % 2.2 %
Ceding commissions $ 1,369 $ 2,574 $ 5,762 $ 13,038
RIF included in QSR (2) $ 1,329,544 $ 1,525,840
 

Second QSR Transaction

QSR ceded premiums written $ 7,972 $ 9,648 $ 40,225 $ 9,648
% of premiums written 3.2 % 4.0 % 3.9 % 1.1 %
QSR ceded premiums earned $ 6,137 $ 504 $ 18,356 $ 504
% of premiums earned 2.8 % 0.3 % 2.2 % 0.1 %
Ceding commissions $ 2,790 $ 3,377 $ 14,079 $ 3,377
RIF included in QSR (2) $ 1,298,631 $ 368,429
 
Persistency (twelve months ended December 31) 81.1 % 81.8 %
 

(1)

 

Radian reinsures the middle layer risk positions, while retaining a significant portion of the total risk comprising the first loss and most remote risk positions.

(2)

Included in primary risk in force.

 

 

Radian Group Inc. and Subsidiaries

Use of Non-GAAP Financial Measures

Exhibit O (page 1 of 4)

 
In addition to the traditional GAAP financial measures, the Company has begun to include certain non-GAAP financial measures, “adjusted pretax operating income,” “adjusted net operating income” and “adjusted diluted net operating income per share” among its key performance indicators to facilitate evaluation of its fundamental financial performance. These measures have been established in order to increase transparency for the purpose of evaluating our core operating trends and enable more meaningful comparisons with our competitors. We believe these measures aid in understanding the underlying performance of our operations.
 
Adjusted pretax operating income adjusts GAAP pretax income to remove the effects of net gains (losses) on investments and other financial instruments and net impairment losses recognized in earnings. It also excludes gains and losses related to changes in fair value estimates on insured credit derivatives and includes the impact of changes in the present value of insurance claims and recoveries on insured credit derivatives, based on the Company's ongoing insurance loss monitoring, as well as premiums earned on insured credit derivatives.
 
Although this measure 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 the Company’s primary activities, or (2) not expected to result in an economic impact equal to the GAAP measure. 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, the Company’s tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of the Company’s investments that are classified as trading. These valuation adjustments may not necessarily result in economic gains or losses. The Company does not view them to be indicative of its fundamental operating activities. Trends in the profitability of the Company’s fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. Therefore, these items are excluded from the Company’s calculation of adjusted pretax operating income.

 
(2)

Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. The Company does not view them to be indicative of its fundamental operating activities. Therefore, these losses are excluded from the Company’s calculation of adjusted pretax operating income.

 
(3)

Change in fair value of derivative instruments. Gains and losses related to changes in the fair value of insured credit derivatives are subject to significant fluctuation based on changes in interest rates, credit spreads (of both the underlying collateral as well as the Company's credit spread), credit ratings and other market, asset-class and transaction-specific conditions and factors that may be unrelated or only indirectly related to our obligation to pay future claims. With the exception of the change in present value of estimated credit loss payments (recoveries) and net premiums earned on derivatives, discussed in items 4 and 5 below, the Company believes these gains and losses will reverse over time and consequently these changes are not expected to result in economic gains or losses. Therefore, these gains and losses are excluded from the Company’s calculation of adjusted pretax operating income.

 
(4)

Change in present value of estimated credit loss payments (recoveries). The change in present value of insurance claims the Company expects to pay or recover on insured credit derivatives represents the amount of the change in credit derivatives from item 3, above, that the Company expects to result in an economic loss or recovery based on its ongoing loss monitoring analytics. Therefore, this item is expected to have an economic impact and is included in the Company’s calculation of adjusted pretax operating income.

 
(5)

Net premiums earned on derivatives. The net premiums earned on insured credit derivatives are classified as part of the change in fair value of derivative instruments discussed in item 3 above. However, since net premiums earned on derivatives are considered part of the Company’s fundamental operating activities, these premiums are included in the Company’s calculation of adjusted pretax operating income.

 
Adjusted pretax operating income is not a measure of total profitability, and therefore should not be viewed as a substitute for GAAP pretax income. The Company’s definition of adjusted pretax operating income may not be comparable to similarly-named measures reported by other companies.
 
Adjusted net operating income consists of adjusted pretax operating income reduced by income taxes computed at the statutory tax rate of 35%. Adjusted diluted net operating income per share consists of adjusted net operating income divided by the weighted-average number of common and common equivalent shares outstanding on a diluted basis. 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.
 
These non-GAAP financial measures align with the way the Company’s business performance is evaluated by both management and the board of directors. The following tables provide reconciliations of pretax income (loss) to adjusted pretax operating income (loss) for each business segment and the consolidated company, in addition to a reconciliation of net income (loss) to adjusted net operating income (loss) for the consolidated company.

 
Radian Group Inc. and Subsidiaries

GAAP to Non-GAAP Reconciliation by Segment

Exhibit O (page 2 of 4)
 
2013 Quarters

(In thousands)

First   Second   Third   Fourth   Year
Mortgage Insurance:
Pretax loss $ (16,816 ) $ (67,096 ) $ (7,873 ) $ (1,368 ) $ (93,153 )
Less:
Net losses on investments (3,237 ) (83,386 ) (4,380 ) (2,818 ) (93,821 )
Net impairment losses recognized in earnings
Change in fair value of derivative instruments 635 635
Net (losses) gains on other financial instruments (1,877 ) 74   (168 ) (869 ) (2,840 )
Total exclusions (5,114 ) (83,312 ) (4,548 ) (3,052 ) (96,026 )
Plus:
Change in present value of estimated credit loss payments (recoveries) 299 (323 ) 74 (29 ) 21
Net premiums earned on derivatives          
Total additions 299   (323 ) 74   (29 ) 21  
Adjusted pretax operating (loss) income - Mortgage Insurance $ (11,403 ) $ 15,893   $ (3,251 ) $ 1,655   $ 2,894  
 
Financial Guaranty:
Pretax (loss) income $ (185,407 ) $ 35,589   $ (900 ) $ 36,816   $ (113,902 )
Less:
Net losses on investments (2,268 ) (46,868 ) (2,752 ) (4,011 ) (55,899 )
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments (167,670 ) 86,535 10,778 37,951 (32,406 )
Net (losses) gains on other financial instruments (3,798 ) 1,114   1,070   (282 ) (1,896 )
Total exclusions (173,736 ) 40,781   9,096   33,655   (90,204 )
Plus:
Change in present value of estimated credit loss payments (recoveries) 2,845 618 (3,347 ) 393 509
Net premiums earned on derivatives 4,992   4,857   4,170   3,879   17,898  
Total additions 7,837   5,475   823   4,272   18,407  
Adjusted pretax operating (loss) income - Financial Guaranty $ (3,834 ) $ 283   $ (9,173 ) $ 7,433   $ (5,291 )
 

 
Radian Group Inc. and Subsidiaries

GAAP to Non-GAAP Reconciliation Consolidated

Exhibit O (page 3 of 4)
 
2013 Quarters

(In thousands)

First   Second   Third   Fourth   Year
Consolidated:
Pretax (loss) income $ (202,223 ) $ (31,507 ) $ (8,773 ) $ 35,448   $ (207,055 )
Less:
Net losses on investments (5,505 ) (130,254 ) (7,132 ) (6,829 ) (149,720 )
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments (167,670 ) 86,535 10,778 38,586 (31,771 )
Net (losses) gains on other financial instruments (5,675 ) 1,188   902   (1,151 ) (4,736 )
Total exclusions (178,850 ) (42,531 ) 4,548   30,603   (186,230 )
Plus:
Change in present value of estimated credit loss payments (recoveries) 3,144 295 (3,273 ) 364 530
Net premiums earned on derivatives 4,992   4,857   4,170   3,879   17,898  
Total additions 8,136   5,152   897   4,243   18,428  
Adjusted pretax operating (loss) income - Consolidated $ (15,237 ) $ 16,176   $ (12,424 ) $ 9,088   $ (2,397 )
 
Consolidated:
Net (loss) income $ (187,500 ) $ (33,172 ) $ (12,682 ) $ 36,369   $ (196,985 )
Less:
Net losses on investments (5,505 ) (130,254 ) (7,132 ) (6,829 ) (149,720 )
Net impairment losses recognized in earnings (3 ) (3 )
Change in fair value of derivative instruments (167,670 ) 86,535 10,778 38,586 (31,771 )

Net (losses) gains on other financial instruments

(5,675 ) 1,188 902 (1,151 ) (4,736 )
Income tax benefit (provision) 14,723   (1,665 ) (3,909 ) 921   10,070  
Total exclusions (164,127 ) (44,196 ) 639   31,524   (176,160 )
Plus:
Change in present value of estimated credit loss payments (recoveries) 3,144 295 (3,273 ) 364 530
Net premiums earned on derivatives 4,992 4,857 4,170 3,879 17,898
Income tax benefit (provision) computed at the statutory tax rate 5,333   (5,661 ) 4,348   (3,181 ) 839  
Total additions 13,469   (509 ) 5,245   1,062   19,267  
Adjusted net operating (loss) income - Consolidated $ (9,904 ) $ 10,515   $ (8,076 ) $ 5,907   $ (1,558 )
 

 
Radian Group Inc. and Subsidiaries

GAAP to Non-GAAP Reconciliation Consolidated

Exhibit O (page 4 of 4)
 
2013 Quarters
First   Second   Third   Fourth   Year
Consolidated:
Diluted net (loss) income per share $ (1.30 ) $ (0.19 ) $ (0.07 ) $ 0.19 $ (1.18 )
Adjustments:
Total adjustments from net (loss) income to adjusted net operating (loss) income (1) 1.23 0.25 0.02 (0.14 ) 1.17
Change in dilutive impact of convertible debt and stock-based compensation arrangements (2)       (0.02 )  
Adjusted diluted net operating (loss) income per share (2) $ (0.07 ) $ 0.06   $ (0.05 ) $ 0.03   $ (0.01 )
 

(1)

 

EPS impact of adjustments from net (loss) income to adjusted net operating (loss) income as detailed in the previous table.

(2)

“Adjusted diluted net operating (loss) income per share” consists of “Adjusted net operating (loss) income” divided by the weighted-average number of common and common equivalent shares outstanding on a diluted basis. Interest expense, shares issuable on 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. The “Change in dilutive impact of convertible debt and stock-based compensation arrangements” reflects the change in dilution due to the impact of the “Total adjustments from net (loss) income to adjusted net operating (loss) income.”

 




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