Radian : Q1 2021 Radian Group Earnings Conference Call Transcript

Corrected Transcript

05-May-2021

Radian Group Inc. (RDN)

Q1 2021 Earnings Call

	Total Pages: 22
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Radian Group Inc. (RDN)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

CORPORATE PARTICIPANTS

John W. Damian	J. Franklin Hall
Head-Corporate Development & Investor Relations, Radian Group Inc.	Chief Financial Officer & Senior Executive Vice President, Radian Group
Richard G. Thornberry	Inc.
Derek V. Brummer
Chief Executive Officer & Director, Radian Group Inc.
	President-Mortgage, Radian Group Inc.

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OTHER PARTICIPANTS

Mark C. DeVries	Bose George
Analyst, Barclays Capital, Inc.	Analyst, Keefe, Bruyette & Woods, Inc.
Douglas Harter	Ryan Gilbert
Analyst, Credit Suisse Securities (USA) LLC	Analyst, BTIG LLC
Mihir Bhatia	Philip Stefano
Analyst, BofA Securities, Inc.	Analyst, Deutsche Bank Securities, Inc.

Randy Binner

Analyst, B. Riley Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Radian's First Quarter 2021 Earnings Call. My name is Jenny. I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.

I would now turn the call over to John Damian, Senior Vice President of Investor Relations (sic) [Head-Corporate Development & Investor Relations] (00:00:27). Mr. Damian, you may begin.

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John W. Damian

Head-Corporate Development & Investor Relations, Radian Group Inc.

Thank you and welcome to Radian's first quarter 2021 conference call. Our press release, which contains Radian's financial results for the quarter was issued yesterday evening and is posted to the Investors [For Investors] section of our website at www.radian.com. This press release includes certain non-GAAP measures, which will be discussed during today's call including: Adjusted pre-tax operating income; adjusted diluted net operating income per share; adjusted net operating return on equity; and real estate adjusted EBITDA.

A complete description of these measures and the reconciliation to GAAP may be found in press release Exhibits F and G and on the Investors section of our website. In addition, our related non-GAAP measure, real estate adjusted EBITDA margin, is calculated by dividing real estate adjusted EBITDA by GAAP total revenue for the Real Estate segment.

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Radian Group Inc. (RDN)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

This morning, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Frank Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. Due to the current environment, all of our speakers are remote. I would ask that you please excuse any sound quality or technical issues that may arise during the call.

Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2020 Form 10-K and subsequent reports filed with the SEC. These are also available on our website.

Now, I would like to turn the call over to Rick.

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Richard G. Thornberry

Chief Executive Officer & Director, Radian Group Inc.

Thank you, John; and good morning. Thank you, all, for joining us today and for your interest in Radian. While the unprecedented pandemic environment continues in 2021, we are encouraged by the continued signs of improvement of the overall economy, as well as the positive momentum in the housing market and the favorable credit trends within our portfolio. Frank will discuss the details of our financial position shortly.

But let me first share a few highlights and insights from the first quarter. We reported net income of $125.6 million or $0.64 per share. Adjusted diluted net operating income per share was $0.68. We grew our book value per share by 9% year-over-year. We achieved this growth even after accounting for the $100 million of dividends that we returned to stockholders over the past year.

For our Mortgage segment, we remain focused on maximizing the economic value and the future earnings of our mortgage insurance portfolio. During the first quarter, we wrote $20.2 billion of high-quality,high-value, new mortgage insurance business at attracted premium levels. And our primary insurance in force was $238.9 billion at March 31.

I want to discuss a few important factors related to our mortgage insurance business in the first quarter, specifically the credit performance of our portfolio, the mortgage insurance pricing landscape, the changes in our insurance in force portfolio and the overall housing market.

In terms of the credit performance of our portfolio, as we noted last quarter coming into the new year, we remained cautious about the continued economic uncertainty. During the first quarter 2021, and most recently in April, we've seen continuing improvement in the credit performance of our portfolio as evidenced by declining number of new defaults, which in April were below pre-COVID levels. In fact, the number of new defaults reported to us in April was one of the lowest that we've seen on a monthly basis in more than a decade.

And cure activity from the pandemic period defaults also continued. April's cure and new default ratio was 259%, which was the highest we've seen in more than 10 years. The continued improvement in the credit performance of our portfolio is being driven by the improving economic environment, continued strong economic support from the government, support of homeowners through continuing forbearance programs and foreclosure moratoriums, and a strong and healthy housing market which gives us greater confidence in the recovery path forward.

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Radian Group Inc. (RDN)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

In terms of mortgage insurance pricing across the market, it's important to note that over the past three to six months, we've seen increased pricing volatility. We believe this volatility is likely driven by each of the mortgage insurance companies' evolving perspectives related to the economic recovery and competitive environment. This is to be expected as we emerge from a period of significant economic uncertainty and transition to a more normalized competitive environment.

At Radian, we continue to make adjustments to our pricing to reflect the competitive landscape and our improved outlook regarding the economic environment. Overall, we believe the industry is returning to a more consistent and stable pricing environment. And while we expect to see quarter-to-quarter market share volatility, we also expect our future new business volumes to approximate a pro rata share of the overall market over time.

With regards to our insurance in force, although the high volume of refinances over the past 12 months has resulted in a modest decline of our total portfolio year-over-year, it's important to note that the composition of our portfolio has gone through a favorable transition with our monthly premium insurance in force, which is the primary driver of our earned premiums, growing by 9% year-over-year.

The economic value of the projected future earnings of our portfolio include the addition of the high-quality 2020 and 2021 vintages, which represent 47% of our insurance in force as of March 31. Written at historically low interest rates, which should benefit future persistency, we expect these vintages to contribute significant earnings in future periods as our portfolio continues to generate attractive returns. Overall, we believe the improving macroeconomic conditions and strong home purchase market, fueled by first-time homebuyers, provide strong tailwinds for growth in the value of our in force portfolio over the long term.

In terms of the overall housing market, we saw positive momentum continuing in the first quarter. Based on the latest data from our own Radian Home Price Index over the first three months of 2021, continued strong housing demand and relatively limited supply in the market led to an annualized 9% increase in home prices across the country. We expect the rate of home price appreciation to moderate this year. And we believe the combination of an improving economy; strong housing dynamics in terms of demand and supply, home values and mortgage underwriting; relatively low mortgage interest rates; and income growth are well aligned for a healthy and sustainable housing market. Looking ahead, we expect vaccine progress and government support to sustain continued improvement in the economy and US housing market and anticipate continued growth in home purchase activity and gradual reductions in refinances.

Recent market projections for 2021 now estimate total mortgage originations to be approximately $3.5 trillion. While the overall origination market is expected to be smaller as compared to 2020 as a result of the declining refinance volume, there is consensus around a growing purchase market this year, which is positive for our industry, given the higher likelihood that purchase loans will utilize private mortgage insurance as compared to refinance loans.

Based on these most recent origination projections, we've revised our estimates upward and now expect the private mortgage insurance market to be approximately $550 billion to $600 billion, which will be slightly lower than the record volume in 2020, but would still represent the second-highest MI volume year in history.

For our Real Estate segment, despite a challenging pandemic environment, total revenues for the first quarter were $25.8 million, including a 56% year-over-year increase in revenue for our title business. Consistent with recent periods, the operating loss in the Real Estate segment for the first quarter was primarily driven by slowdowns in our valuation and REO businesses resulting from the pandemic environment, as well as our continued strategic investment across our title and digital real estate businesses.

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Radian Group Inc. (RDN)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

In terms of capital strength, at March 31, Radian Group maintains a strong capital position with $1.3 billion of total holding company liquidity. In April, we continued to execute our aggregate manage and distribute mortgage insurance business model focused on lowering the risk profile and the through-the-cycle volatility of the business.

We executed our fifth mortgage-insurance-linked notes reinsurance transaction for $498 million, resulting in 78% of our risk in force being subject to some form of risk distribution. Radian Guaranty's PMIERS excess available assets grew to $1.5 billion. And if we include the April ILN transaction, the pro forma cushion increases to $1.9 billion or 64%. As we announced, we have increased our quarterly dividend to $0.14, a 12% increase over our prior quarterly dividend.

Turning to the regulatory and legislative landscape. We continue to see an unprecedented level of federal support and coordination to ease the economic burden of the pandemic and to jumpstart a return to normalcy through vaccinations, economic stimulus and various COVID relief programs.

With respect to housing, from the onset of the pandemic, the administration, Congress and various regulatory agencies, in partnership with the overall mortgage industry, have been unified in helping to ensure delinquent borrowers are able to remain in their homes and given every possible opportunity to become current on their mortgages. This all-in government support for homeownership throughout the pandemic has been a major factor in softening the impact on homeowners and the housing market.

And based on recent actions, such as the $1.9 trillion American rescue plan, the extension of forbearance periods by the GSEs and the CFPB's heightened focus on smoothing borrower transitions out of forbearance, we expect the support to continue for the foreseeable future. This is good for the economy and for homeownership, and given our strong alignment with borrower interest for the mortgage insurance industry as well.

We are also encouraged by the current administration's clear focus on addressing the issue of housing supply that has emerged as a primary obstacle to affordability and accessibility, especially for first-time homeowners. This is clearly evident in the President's infrastructure proposal. And we believe the housing supply and demand dynamics also likely played into HUD's recent decision not to reduce FHA's premiums at this time.

Finally, it's worth noting that the federal response to housing throughout the pandemic is just another important example of how the housing finance system and our business model have fundamentally evolved and improved. The lessons learned from past downturns that are now translating into unprecedented levels of federal support for homeownership are another important factor that we believe will be a fundamental component for ensuring a sustainable housing finance system, where private mortgage insurance plays an important role.

Now, I would like to turn the call over to Frank for details of our financial position.

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J. Franklin Hall

Chief Financial Officer & Senior Executive Vice President, Radian Group Inc.

Thank you, Rick; and good morning, everyone. To recap our financial results issued last evening, we reported GAAP net income of $125.6 million or $0.64 per diluted share for the first quarter of 2021 as compared to net income of $0.76 per diluted share in the fourth quarter of 2020 and net income of $0.70 per diluted share in the first quarter of 2020. Adjusted diluted net operating income was $0.68 per share in the first quarter of 2021 as compared to adjusted diluted net operating income per share of $0.69 in the fourth quarter of 2020 and adjusted diluted net operating income per share of $0.80 in the first quarter of 2020.

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