Radian : Q4 2020 Radian Group Earnings Conference Call Transcript

Corrected Transcript

Total Pages: 25

CORPORATE PARTICIPANTS

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

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OTHER PARTICIPANTS

Randy Binner	Ryan Gilbert
Analyst, B. Riley Financial	Analyst, BTIG LLC
Bose George	Geoffrey Murray Dunn
Analyst, Keefe, Bruyette & Woods, Inc.	Analyst, Dowling & Partners Securities LLC
Mark C. DeVries	Jack Micenko
Analyst, Barclays Capital, Inc.	Analyst, Susquehanna International Group, LLP (SIG)
Mihir Bhatia
Analyst, BofA Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Radian Fourth Quarter 2020 Earnings Call. My name is Jenny, and 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, Head of Investor Relations and Corporate Development. Mr. Damian, you may begin.

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John W. Damian

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

Thank you, and welcome to Radian's fourth quarter and year end 2020 conference call. Our press release, which contains Radian's financial results for the quarter and the year was issued yesterday evening and is posted to the Investors section of our website atwww.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, 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.

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 2019 Form 10-K and is updated in our quarterly report on Form 10-Q for the third quarter of 2020 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. As we look back at last year, it is safe to say that 2020 did not play out as we had originally planned. In March, the COVID-19 pandemic triggered a global health and economic crisis, and caused an abrupt shift in our day-to-day focus.

Combining a pandemic with heightened social unrest and a divisive political environment, I think it's fair to say that 2020 was the perfect storm. Despite the challenges of 2020, including shifting to a largely virtual work environment, we were able to write record-breaking levels of new mortgage insurance business and grow revenues in our Real Estate segment.

And while our quarterly and full-year results were impacted by the environment, I'm proud to say that our business model weathered the storm as designed, demonstrating that through the cycle of resiliency, we and the mortgage industry have been building since the last financial crisis. I'm pleased with our ability to operate well with strong momentum throughout a challenging year.

Although we continue to navigate the pandemic economic environment, as we enter 2021, we are encouraged by the signs of recovery and improvement in the overall economy, the continued strength and momentum in the housing market, and the positive default trends in our portfolio. I'd like to recognize our team across Radian and thank our customers, investors, business partners and Board for their commitment and support in helping us deliver solid results during this unprecedented time.

Frank will discuss the details of our financial position shortly, but let me first share a few highlights from 2020. We wrote nearly $30 billion of NIW in the fourth quarter, which is a 49% increase over the fourth quarter of 2019. This contributed to our record-breaking volume of new flow business written in 2020 of $105 billion, which represented a 47% increase year-over-year and marked our fifth consecutive year of record annual volume.

We grew our primary insurance in force to $246 billion, while the high volume of refinances during the year resulted in lower persistency. It's important to note that our high-quality insurance portfolio grew approximately 2% year-over-year and our monthly premium insurance in force grew 11% year-over-year.

Our mortgage insurance portfolio, which is one of the largest in our industry, is the primary driver of future earnings for our company. The economic value and the projected future earnings of this portfolio include the addition of the high-quality 2020 vintage, which represented more than 40% of our insurance in force as of December 31, 2020.

We grew our book value per share by more than 11%. We achieved this growth even after accounting for nearly $100 million of dividends that we returned to stockholders in 2020 through the significant increase to our quarterly cash dividend in the first quarter.

In our mortgage segment, we continued our focus on meeting the needs of our customers and maximizing the economic value and future earnings of our mortgage insurance portfolio. Given the flexibility of our RADAR Rates pricing model, we were able to respond to the rapidly changing economic environment in 2020.

Our strong customer relationships and excellent service delivery, combined with market intelligence and value-based pricing decisions, helped our team effectively navigate the competitive environment to originate a high quality book of business with significant economic value. Written at historically low interest rates, which should benefit persistency, we expect the 2020 vintage to produce attractive returns and contribute significant earnings in future periods.

For our Real Estate segment, despite a challenging pandemic environment, total revenues for the full year were $102 million, a 14% increase compared to 2019. While certain of our businesses experienced slowdown during 2020 as a result of the pandemic, we saw a strong growth in our title business, including a 238% year-over-year increase in closed title insurance orders, with a strong sales pipeline of large customers going into 2021.

The operating loss in the Real Estate segment for the fourth quarter and the year was largely the result of slowdowns in our valuation and REO businesses resulting from the foreclosure and eviction moratoria, staffing up to support our growing title business and our continued strategic investment in data analytics and technology across our digital valuation and real estate business platforms.

We remain focused on positioning our real estate businesses for future growth by driving competitively differentiated data-driven digital products and services to our customers, lenders, realtors, consumers and mortgage investors. Although, these real estate businesses are in the early stages of their development and maturity, we are very excited about their future and remain confident that we are well positioned with the customer relationships and an experienced team to drive increased stockholder value going forward. We will share more details about these businesses as we progress, including during our next Investor Day, which we plan to announce for later this year.

In 2020, we took steps to fortify our capital position and increase our strategic financial flexibility. During the second quarter, we strengthened our available liquidity by extending the term of our existing credit facility to

January of 2022 and issuing $525 million of senior notes due 2025. We continue to execute our aggregate, manage and distribute business model, focused on lowering the risk profile, and through the cycle volatility of the business.

In 2020, we entered into a single-premium quota share reinsurance program, which covers the 2020 and 2021 vintages of our single-premium production and executed two mortgage insurance-linked notes transactions for a total of $878 million.