Radian Group said Tuesday it agreed to buy Clayton Holdings for $305 million in cash, which includes repayment of Clayton’s debt. The seller is Greenfield Partners, which acquired Clayton in 2008 for about $134 million. Shelton, Conn.-based Clayton provides outsourced mortgage services, like loan review and diligence, to financial institutions, investors and government entities. Raymond James’ Technology Services group advised Clayton/Greenfield on the transaction. Goldman Sachs advised Radian.
PHILADELPHIA–(BUSINESS WIRE)–Radian Group Inc. (NYSE: RDN) today announced results for the quarter ended March 31, 2014, and the acquisition of Clayton Holdings LLC.
“We’ve had outstanding success in strengthening our mortgage insurance franchise and returning to profitability. We look forward to continuing down this path, while also taking a step to help diversify our revenue stream and position Radian for new opportunities as the U.S. housing market evolves.”
FIRST QUARTER FINANCIAL RESULTS
Radian Group reported net income for the quarter ended March 31, 2014, of $202.8 million, or $0.94 per diluted share, which included combined gains from the change in fair value of derivatives and other financial instruments of $50.8 million and net gains on investments of $64.5 million. This compares to a net loss for the quarter ended March 31, 2013, of $187.5 million, or $1.30 per diluted share, which included combined losses from the change in fair value of derivatives and other financial instruments of $173.3 million and net losses on investments of $5.5 million. Book value per share at March 31, 2014, was $6.10.
Adjusted pretax operating income for the quarter ended March 31, 2014, was $91.1 million, consisting of $101.3 million of income from the mortgage insurance segment and a loss of $10.2 million from the financial guaranty segment. This compares to an adjusted pretax operating loss for the quarter ended March 31, 2013, of $15.2 million, consisting of a loss of $11.4 million from the mortgage insurance segment and a loss of $3.8 million from the financial guaranty segment.
ACQUISITION OF CLAYTON HOLDINGS
Radian Group also announced today that it has entered into a purchase agreement to acquire Clayton Holdings, a leading provider of outsourced solutions to the mortgage industry. This action is consistent with Radian’s growth and diversification strategy to pursue alternatives for providing credit-based services to the mortgage finance market.
Under the agreement, Radian Group will pay aggregate cash consideration of $305 million, which includes repayment of Clayton’s outstanding debt, to purchase all of the outstanding equity interests in Clayton, subject to customary purchase price adjustments. Radian Group expects to finance the entire purchase price and related expenses, as well as redeem Radian’s $54.5 million principal amount of outstanding debt due in June 2015, through public issuances of both debt and equity.
In 2013, Clayton had annual revenue of $135.0 million and net income of $9.1 million. Included in expenses was the non-cash amortization of intangible assets of $10.8 million. From an accretion/dilution standpoint, the company expects that the transaction will be approximately breakeven in 2014, and will be modestly accretive excluding the non-cash amortization of intangible assets. The acquisition is expected to close during the summer of 2014, subject to satisfaction of customary closing conditions. After the transaction is complete, Clayton will become a subsidiary of Radian Group, therefore cash flows from Clayton are expected to provide an unregulated source of funds to Radian Group.
Following the completion of the transaction, Clayton will serve as a complement to Radian’s existing mortgage-related products and services. Clayton is headquartered in Shelton, Connecticut, and employs approximately 700 people. Clayton Chief Executive Officer Paul Bossidy, President and Chief Operating Officer Joseph D’Urso and the Clayton management team have built a strong, market-leading franchise in each of the mortgage services areas where they participate. As part of Radian, they will focus on serving their clients and growing their business, as well as exploring additional opportunities to market new and existing services to Radian’s established customer base.
“Radian’s strong financial performance in the first quarter along with today’s acquisition announcement represent our team’s success in executing on our strategic vision – to emerge from the downturn as a stronger company and to grow and diversify for future success,” said Radian’s Chief Executive Officer S.A. Ibrahim. “We’ve had outstanding success in strengthening our mortgage insurance franchise and returning to profitability. We look forward to continuing down this path, while also taking a step to help diversify our revenue stream and position Radian for new opportunities as the U.S. housing market evolves.”
“The future looks bright for Clayton and we are delighted to become part of the Radian team,” said Clayton’s Chief Executive Officer Paul T. Bossidy. “Radian and Clayton are leaders in our respective industries, and we look forward to working together to create new opportunities for growth and expansion that we simply could not achieve on our own.”
CAPITAL AND LIQUIDITY UPDATE
As of March 31, 2014, Radian Guaranty’s risk-to-capital ratio was 19.2:1 and Radian Group maintained approximately $615 million of available liquidity.
The improvement in the risk-to-capital ratio from December 31, 2013, was primarily driven by the company’s net income, partially offset by an increase to net risk in force.
As of March 31, 2014, Radian Guaranty’s statutory capital was $1,414 million compared to $1,341 million at December 31, 2013, and $1,106 million 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 these reinsurance agreements on a prospective basis from 20 percent to 5 percent. As of March 31, 2014, a total of $2.7 billion of risk in force had been ceded under those agreements. Radian will have the option to recapture a portion of the ceded risk outstanding on December 31, 2014, and on December 31, 2015.
FIRST QUARTER HIGHLIGHTS
New mortgage insurance written (NIW) was $6.8 billion for the quarter, compared to $9.3 billion in the fourth quarter of 2013 and $10.9 billion in the prior-year quarter. Radian wrote an additional $2.84 billion in NIW in April 2014, compared to $4.1 billion in April 2013.
The Home Affordable Refinance Program (HARP) accounted for $0.6 billion of insurance not included in Radian Guaranty’s NIW total for the quarter. This compares to $0.9 billion in the fourth quarter of 2013 and $2.5 billion in the prior-year quarter. As of March 31, 2014, more than 11 percent of the company’s total primary mortgage insurance risk in force had successfully completed a HARP refinance.
Of the $6.8 billion in new business written in the first quarter of 2014, 73 percent was written with monthly premiums and 27 percent with single premiums. This compares to a mix of 64 percent monthly premiums and 36 percent single premiums in the first quarter of 2013.
NIW continued to consist of loans with excellent risk characteristics.
The mortgage insurance provision for losses was $49.2 million in the first quarter of 2014, compared to $144.3 million in the fourth quarter of 2013, and $132.0 million in the prior-year period.
The loss ratio in the first quarter was 24.7 percent, compared to 72.0 percent in the fourth quarter of 2013 and 72.1 percent in the first quarter of 2013.
Mortgage insurance loss reserves were $1.9 billion as of March 31, 2014, compared to $2.2 billion as of December 31, 2013, and $2.9 billion as of March 31, 2013.
Primary reserves (excluding IBNR and other reserves) per default were $26,509 as of March 31, 2014. This compares to primary reserves per default of $26,717 as of December 31, 2013, and $27,517 as of March 31, 2013.
The total number of primary delinquent loans decreased by 13 percent in the first quarter from the fourth quarter of 2013, and by 38 percent from the first quarter of 2013. In addition, the total number of primary delinquent loans decreased by 4 percent in April 2014. Additional details related to the company’s delinquency inventory in April 2014 may be found on Slide 21 of the first quarter presentation slides. The primary mortgage insurance delinquency rate decreased to 6.3 percent in the first quarter of 2014, compared to 7.3 percent in the fourth quarter of 2013, and 10.9 percent in the first quarter of 2013.
Total mortgage insurance claims paid were $306.9 million in the first quarter, compared to $283.4 million in the fourth quarter of 2013, and $309.9 million in the first quarter of 2013. Claims paid in the first quarter of 2014 exclude $49.5 million of claims processed in the quarter in accordance with the terms of the Freddie Mac Agreement, for which no cash payment was necessary. The company expects mortgage insurance net claims paid in the $900 million to $1.0 billion range for the full-year 2014.
Other operating expenses were $59.9 million in the first quarter, compared to $72.5 million in the fourth quarter of 2013, and $80.1 million in the first quarter of last year. In the quarter, $13.6 million represented long-term incentive compensation, compared to $11.8 million in the fourth quarter of 2013. The compensation expense in both periods was impacted by an increase in the fair value of cash-settled awards. The component of the fair value change that resulted from the stock price increase was $7.8 million in the first quarter of 2014, compared to $1.5 million in the fourth quarter of 2013.
Radian Asset Assurance Inc. continues to serve 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 March 31, 2014, 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 80 percent to $22.7 billion as of March 31, 2014, including large declines in many of the riskier segments of the portfolio.
Radian will discuss first quarter financial results and the strategic acquisition of Clayton in its conference call tomorrow, Wednesday, May 7, 2014, at 10:00 a.m. Eastern time. The conference call will be broadcast live over the Internet at http://www.radian.biz/page?name=Webcasts or at www.radian.biz. The call may also be accessed by dialing 800.230.1096 inside the U.S., or 612.332.0226 for international callers, using passcode 324499 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 324499.
In addition to the information provided in the company’s earnings news release, other statistical and financial information, which is expected to be referred to during the conference call, will be available on Radian’s website under Investors >Quarterly Results, or by clicking on http://www.radian.biz/page?name=QuarterlyResults.
NON-GAAP FINANCIAL MEASURE
Radian believes that adjusted pretax operating income (a non-GAAP measure) facilitates evaluation of the company’s fundamental financial performance and provides relevant and meaningful information to investors about the ongoing operating results of the company. This measure is not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be viewed as an alternative to a GAAP measure of performance. The measure described below has been established in order to increase transparency for the purpose of evaluating the company’s core operating trends and enable 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 GAAP measure. See Exhibit E or Radian’s website for a description of these items, as well as a reconciliation of adjusted pretax operating income (loss) to “pretax income (loss).”
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.
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