Radian : Q3 2020 Radian Group Earnings Conference Call Transcript

corrected transcript

Radian Group Inc.	RDN	Q3 2020 Earnings Call	Nov. 5, 2020
Company▲	Ticker▲	Event Type▲	Date▲

PARTICIPANTS

Corporate Participants

John W. Damian - Head-Corporate Development & Investor Relations, Radian Group Inc. Richard G. Thornberry - Chief Executive Officer & Director, Radian Group Inc.

J. Franklin Hall - Chief Financial Officer & Senior Executive Vice President, Radian Group Inc. Derek V. Brummer - President-Mortgage, Radian Group Inc.

Other Participants

Douglas Harter - Analyst, Credit Suisse Securities (USA) LLC

Randy Binner - Analyst, B. Riley Securities, Inc.

Mark C. DeVries - Analyst, Barclays Capital, Inc.

Jack Micenko - Analyst, Susquehanna International Group, LLP

Bose George - Analyst, Keefe, Bruyette & Woods, Inc.

Mihir Bhatia - Analyst, BofA Securities, Inc.

Phil Stefano - Analyst, Deutsche Bank Securities, Inc.

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Radian Third Quarter 2020 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 will now turn the call over to John Damian, Senior Vice President of Investor Relations. Mr. Damian, you may begin.

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

Thank you, and welcome to Radian's third quarter 2020 conference call. Our press release, which contains Radian's financial results for the quarter, was issued yesterday evening and is posted to the 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 Investor section of our website. In addition, we have also included a related non-GAAP measure, real estate adjusted EBITDA margin, which we calculate by dividing real estate adjusted EBITDA by GAAP total revenue for the Real Estate segment.

This afternoon, 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 this afternoon 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,

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corrected transcript

Radian Group Inc.	RDN	Q3 2020 Earnings Call	Nov. 5, 2020
Company▲	Ticker▲	Event Type▲	Date▲

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 2019 Form 10-K as updated in our quarterly report on Form 10-Q for the second quarter of 2020 and subsequent reports filed with the SEC. These reports are also available on our website.

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

Richard G. Thornberry, Chief Executive Officer & Director, Radian Group Inc.

Thank you, John, and good afternoon. Thank you, all, for joining us today and for your interest in Radian. Our quarterly results were again impacted by the pandemic economic environment. However, we are encouraged by signs of improvement in the economy, the strength of the overall housing market, and continued positive default trends within our portfolio. I'm proud to say that our team and our businesses continue to operate well with strong momentum during this unprecedented time.

Let me provide a few highlights of our financial results from the third quarter. We reported net income of $135 million or $0.70 per diluted share and adjusted diluted net operating income per share of $0.59. Book value grew 11% year-over-year to $21.52 per share. We wrote record volume of new primary mortgage insurance business of $33 billion. We saw a 67.5% decline in our number of new defaults quarter-over-quarter and a decline in the default rate to 5.9%. Revenues and our Real Estate segment increased 28% from the second quarter of 2020 to $33 million.

Turning to a couple highlights for October. We executed our fourth mortgage insurance-linked- notes reinsurance transaction for $390 million which further enhanced our capital efficiency and strengthened our risk profile, resulting in 74% of our risk in force being subject to some form of risk distribution. In terms of default trends, while economic uncertainty continues to persist, I'm pleased to report that we saw a decline in the number of new defaults and an increase in the number of cures reported to us in October, resulting in a net decline of outstanding defaults of 5%, ending with 59,604 total defaults on October 31.

Moving now to the broader mortgage real estate market. During last quarter's earnings call, we had noted some rebound in the US housing market following a slowdown in purchase on volume due to the economic strain of COVID-19. Positive momentum continued in the third quarter with September existing home sales increasing 9% from the prior month, representing the fourth consecutive month of growth. And based on the latest data from our own Radian Home Price Index, over the last 12 months, there's been a strong housing demand and relatively limited supply in the market which has helped lead to an 8% increase in home prices across the country.

The increased purchase loan demand combined with the strong refinance volume from continued lower interest rates drove our record volume of new primary mortgage insurance business in the third quarter. While the high volume of refinances during the quarter did drive persistency lower, it is important to note that our high quality $245 billion insurance portfolio grew approximately 4% year-over-year and 2% quarter-over-quarter, and our monthly premium insurance in force grew 10% year-over-year.

It's also worth noting that, in September, we set another monthly NIW record, the fifth of the year, with nearly 70% of our volume coming from purchase loans. In fact, the $23 billion of new purchase loan business we wrote in the quarter represented a 32% increase from our previous quarterly purchase loan record set in the third quarter of last year. Given the current environment, the strong NIW during the third quarter and a significant commitment pipeline heading into the fourth quarter, we now expect to write new MI business in 2020 of more than $100 billion.

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corrected transcript

Radian Group Inc.	RDN	Q3 2020 Earnings Call	Nov. 5, 2020
Company▲	Ticker▲	Event Type▲	Date▲

In our real estate business, as we reported, segment revenues of $33 million compared to $26 million for the second quarter of 2020 and $30 million from the third quarter of 2019. We continue to see growth in our title business with a strong sales pipeline of large customers. However, as I mentioned last quarter, our traditional appraisal and REO businesses are experiencing slowdowns as a result of the COVID-19 environment.

Despite the growth in our Real Estate segment revenues, we experienced an operating loss which is the result of staffing up for our growing title business where we have 157% increase year-over- year in open orders and our continued investment in data, analytics, and technology across our real estate businesses. Strategically, we see growing market demand for technology-driven solutions, and we believe we are well-positioned to participate and lead the market's digital transformation.

Turning to our capital position, there continues to be a level of uncertainty in the overall economic recovery gap. With $1.1 billion of available liquidity at Radian Group and a strong PMIERs position, we believe we are well positioned - well prepared to leverage our strong capital position and navigate this environment through the cycle. Frank will provide more details on capital including our PMIERs position. As part of our overall capital management process, we continue to monitor and access the reinsurance and capital markets when economically attractive to our company.

The strength of our capital position, combined with our ability to effectively aggregate, manage and distribute risk, has enabled us to continue writing significant levels of high-quality mortgage insurance business through the cycle. As we've said in the past, we remain focused on leveraging our strong risk management discipline and a loan and customer level to deploy our capital on business that we believe will generate the most economic value for our shareholders and achieve our targeted risk-adjusted returns in the mid-teens.

Now, I would like to turn the call over to Frank for details of our financial position. Following Frank's remarks, I will provide a regulatory and legislative update.

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

Thank you, Rick, and good afternoon, everyone. To recap our financial results issued last evening, we reported GAAP net income of $135.1 million or $0.70 per diluted share for the third quarter of 2020 as compared to a net loss of $0.15 per diluted share in the second quarter of 2020 and net income of $0.83 per diluted share in the third quarter of 2019.

Adjusted diluted net operating income was $0.59 per share in the third quarter of 2020 as compared to adjusted diluted net operating loss per share of $0.36 in the second quarter of 2020 and adjusted diluted net operating income per share of $0.81 in the third quarter of 2019.

I'll now turn to the key drivers of our revenue. As Rick mentioned earlier, our new insurance written was $33.3 billion during the quarter compared to $25.5 billion last quarter and $22 billion in the third quarter of 2019. Our third quarter 2020 volume is our highest level of quarterly new insurance written on a flow basis.

Primary new insurance written for refinances was 30% of total new insurance written for the third quarter of 2020 compared to 44% in the second quarter of 2020 and 19% for the third quarter of the prior year. Direct monthly and other recurring premium policies were 90% of our new insurance written this quarter, an increase from 85% for the second quarter of 2020 and 85% for the third quarter a year ago, which also means that single premium policies were down significantly to only 10% of our third quarter 2020 new business. In total, borrower paid policies were 99% of our new business for the third quarter.

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corrected transcript

Radian Group Inc.	RDN	Q3 2020 Earnings Call	Nov. 5, 2020
Company▲	Ticker▲	Event Type▲	Date▲

Primary insurance in force increased to $245.5 billion at the end of the quarter as compared to $241.3 billion in the second quarter of 2020, with year-over-year insurance in force growth of approximately 4%. In addition to the elevated policy cancellations due to the current low interest rate environment, we also experienced an increase in single premium policy cancellations during the third quarter as part of our ongoing servicer monitoring and reconciliation process. These additional cancellations represented approximately $2.9 billion of insurance in force.

Our 12-month persistency rate of 65.6% decreased from 70.2% in the prior quarter and 81.5% in the third quarter of 2019. Our quarterly annualized persistency rate was 60% this quarter, a decrease from 63.8% in the second quarter of 2020 and 75.5% in the third quarter of 2019. The quarterly annualized persistency rate of 60% was materially affected by the single premium reconciliation mentioned earlier and would have been approximately 65% absent that activity, which would have been a small increase from the 63.8% reported in the second quarter of this year. The year-over-year decline in quarterly annualized persistency is driven by the continued high level of refinance activity given continued low mortgage rates. Given the current mortgage rate environment, it is expected that near-term persistency will remain below long-term trends.

Moving now to our earned premiums. Net premiums earned were $286.5 million in the third quarter of 2020 compared to $249.3 million in the second quarter of 2020 and $281.2 million in the third quarter of 2019. The increase of 15% on a linked-quarter basis is primarily driven by the impact of the adjustment to accrued profit commission recognized in the second quarter of 2020 due to the increased loss provision in that quarter, as well as an increase in single premium policy cancelations in the third quarter of 2020. Our net premiums earned increased 2% as compared to the third quarter in 2019. This increase is primarily driven by higher single premium acceleration.

Our direct in force premium yield, as noted on slide 10, was 43.2 basis points this quarter compared to 44.3 basis points last quarter and 47.4 basis points in the third quarter of 2019. As noted in previous quarters, we expect our in force portfolio yield [to continue to decline due to the difference in credit mix and associated premium rates of today's new insurance] written relative to prior vintages. Recent trends of lower persistency and higher levels of new insurance written have also contributed to a faster rate of change in the yield of our mortgage insurance portfolio as the portfolio has turned over.

The timing and magnitude of future portfolio yield changes will continue to depend on several factors including the volume, mix and pricing of new business relative to the volume and mix of cancellations and prepayments in our portfolio and the pace of future refinance activity. Our level of premium yield driven by single premium cancellations increased to 10.7 basis points compared to

8.2 basis points in the second quarter of 2020 and 4.6 basis points of yield in the same quarter a year ago.

The continued high level of single premium cancellations is primarily due to higher refinance activity driven by the low interest rate environment. Approximately 3 basis points of the yield related to cancellations was due to the previously mentioned servicer reconciliation activity that occurred in the quarter.

The negative yield impact of ceded premiums, net of profit commission, was 7.3 basis points as compared to 11.5 basis points in the second quarter of 2020 and 4.5 basis points in the third quarter last year. This improvement on a linked quarter basis is primarily due to higher profit commission which increased to $20.4 million in the third quarter compared to a negative $10.6 million in the second quarter, as noted on press release Exhibit L.

The yield impact of reinsurance remains higher when compared to the third quarter of 2019, primarily due to the elevated level of single premium cancellations observed this quarter, and associated ceded premiums under our single premium QSR. Other components of our revenue include total Real Estate segment revenues of $33.3 million for the third quarter of 2020,

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