Earnings Call Transcript
RADIAN GROUP INC (RDN)
Earnings Call Transcript - RDN Q3 2024
Dan Kobell, Head of Investor Relations and Capital Management
Thank you, and welcome to Radian's third quarter 2024 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 radian.com. This press release includes certain non-GAAP measures that may be discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity. A complete description of all of our non-GAAP measures may be found in press release Exhibit F and reconciliations of these measures to the most comparable GAAP measures may be found in press release Exhibit G. These exhibits are on the Investors section of our website. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Sumita Pandit, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage Insurance. 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 2024 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.
Rick Thornberry, CEO
Thanks, Dan, and thank you all for joining us today. Last evening, we reported another quarter of excellent financial results for Radian. Our results continue to reflect the economic value of our high-quality mortgage insurance portfolio, the strength and quality of our investment portfolio, our strong capital and liquidity positions and our ongoing strategic focus on managing expenses. For the quarter, we increased book value per share by 18% year-over-year to $31.37. We grew revenues to $334 million during the quarter, generating net income of $152 million. Our annualized return on equity in the third quarter was 13.2% and our adjusted net operating return on equity was 13.7%, which reflects our strong financial results, including positive credit performance. We continue to leverage our proprietary analytics and RADAR Rates platform to identify and capture economic value in the mortgage insurance market, which resulted in $13.5 billion of high-quality new insurance written in the third quarter. Our primary mortgage insurance in force, which is the main driver of future earnings for our company, grew to $275 billion. We continue to focus on managing operational efficiency and expenses, which resulted in a decrease in other operating expenses in the third quarter. Our primary operating subsidiary, Radian Guaranty, paid a quarterly dividend to Radian Group in the amount of $185 million in the third quarter for a total of $485 million paid year-to-date. At the end of the quarter, we paid off $450 million of our senior debt, reducing our leverage ratio to 18.5%. Our overall capital and liquidity positions remain strong with a PMIERs cushion for Radian Guaranty of $2.1 billion and our available holding company liquidity was $844 million at the end of the third quarter after paying off the debt. We are pleased that our strong financial position and capital flexibility allow us to deliver excellent financial results, grow our business and help our customers transform risk into opportunity while also returning value to our stockholders. In terms of the housing and mortgage market, the supply of existing homes remains constrained, which we expect will continue to provide support for home values from an HPA perspective and based on the originations thus far and the forecast for the remainder of 2024, we continue to estimate that the private mortgage insurance market will be approximately $300 billion this year, consistent with 2023. Looking ahead, based on current market projections for 2025, we expect the MI market to be approximately 10% larger in 2025 than in 2024. I believe it's also worth noting the continuing positive impact that we are experiencing from the current interest rate environment in terms of increasing our investment portfolio returns and maintaining strong persistency benefiting our insurance in force. Overall, our outlook for the housing market and our mortgage insurance business remains positive. I also want to highlight that Radian continues to be a catalyst for homeownership in the market, leveraging decades of experience and relationships. Most recently, our Mortgage Conduit business, Radian Mortgage Capital, is focused on providing secondary market liquidity to our lender customers and sponsoring mortgage credit to investors. We believe this business is a natural extension of our business model and have been encouraged by the customer interest in the business. Sumita will now cover the details of our financial and capital positions.
Sumita Pandit, CFO
Thank you, Rick, and good morning to you all. I'm pleased to provide additional details about our third quarter results, which reflect another strong quarter of performance, producing net income of $152 million or $0.99 per diluted share, in line with the prior quarter. Adjusted diluted net operating income per share was slightly higher than the GAAP metric at $1.03 for the third quarter compared to $0.99 for the previous quarter. Annualized return on equity in the third quarter was 13.2%. Adjusted net operating return on equity was 13.7%, an increase from the second quarter. Book value per share grew to $31.37, an increase of 18% year-over-year. This book value per share growth is in addition to our regular stockholder dividends, which were $37 million during the quarter, reflecting our quarterly dividend of $0.245 per share. We also repurchased $49 million of shares during the third quarter. Turning now to the detailed drivers of our results. Our revenues continue to be strong in the third quarter. We generated $334 million of total revenues during the quarter, an increase compared to $321 million in the second quarter and $313 million in the third quarter of last year. Slides 10 through 12 in our presentation include details on our mortgage insurance in force portfolio as well as other key factors impacting our net premiums earned. Our primary mortgage insurance imports continue to grow, reaching $275 million as of the end of the third quarter and generating $235 million in net premiums earned in the quarter. Contributing to the growth of our insurance in force was $13.5 billion of new insurance written in the third quarter of '24 compared to $13.9 billion written in the prior quarter. The persistency rate of our existing insurance in force also remained high at 84.4% in the third quarter based on the trailing 12 months compared to 83.6% a year ago. As of the end of the third quarter, 70% of our insurance imports had a mortgage sheet of 6% or less. Given current mortgage interest rates, these policies are less likely to be canceled due to refinancing in the near term, and we therefore continue to expect our persistency rate to remain strong. As shown on Slide 12, the import premium yield for our mortgage insurance portfolio remained stable in the quarter at 38.2 basis points. With strong persistency rates in the current industry pricing environment, we expect our in-force portfolio premium yield to continue to remain stable. As shown on Slide 13, our investment portfolio of $6.6 billion consists of well-diversified, highly rated securities. Our portfolio has continued to increase over the past year in both size and average yield, generating a net investment income of $78 million in the third quarter. This includes $8 million of income in the third quarter related to mortgage loans held for sale within Radian Mortgage Capital. Excluding that impact, net investment income grew 7% year-over-year. We've continued to reinvest cash flows in the current environment, benefiting our investment portfolio yield, which was 4.3% in the third quarter. Our unrealized net loss on investments reflected in stockholders' equity was $233 million at quarter end, an improvement of $144 million from the prior quarter, driven primarily by a decline in market interest rates. We continue to expect that our strong liquidity and cash flow position will provide us with the ability to hold these securities to recovery of the remaining unrealized losses, which would equate to $1.56 that is expected to accrete back into our book value per share over time. I will now move on to our provision for losses and related credit trends, which continue to be positive with continued strong cure activity and very low claim levels. On Slide 16, we provide trends for our primary default inventory. Total defaults increased to approximately 22,000 loans at quarter end, resulting in a portfolio default rate of 2.25% compared to 2.04% in the previous quarter. As expected, the number of new defaults reported to us by services increased in the third quarter to approximately 13,700 from 11,100 reported in the second quarter. This increase in new defaults, which impacts our mortgage insurance results reflects normal seasonal trends and the expected continued seasoning of a large insurance in force portfolio. Our new defaults also continue to contain significant embedded home equity with approximately 76% of new defaults this quarter having at least 20% equity using an index-based approach. This equity profile, which has been a key driver of recent favorable credit trends is largely unchanged from prior quarters. Looking ahead, we expect the impact of Hurricanes Milton and Helene to impact the number of new defaults reported in the fourth quarter. Within the third quarter, we estimate that approximately 200 incremental new defaults were reported in FEMA designated areas impacted by hurricane Beryl. Historically, defaults associated with storms and other natural disasters have cured at higher rates. This past performance is also recognized within PMIERs, which provides for a lower capital requirement for defaulted loans in FEMA designated areas. Our loss ratio remained low this quarter with a net expense of $6 million in our mortgage insurance provision for losses in the third quarter compared to a net benefit of $2 million reported in the second quarter. We continue to maintain our default-to-claim roll rate assumptions for new defaults at 8%, which resulted in $57 million of loss provision for new defaults reported during the quarter. Positive reserve development on prior period defaults of $51 million mostly offset this provision for new defaults. Our defaults continue to cure at rates greater than our previous expectations, resulting in releases of prior period results that in recent years have significantly offset reserves established for new defaults. As shown on Slide 17, our cure trends have been very consistent and positive in recent periods, with approximately 90% of defaults curing within four quarters and 96% curing within eight quarters meaningfully exceeding our initial expectations. Cure rates in the third quarter exhibited typical seasonal trends and compare favorably to similar periods from past years. As noted above, our favorable loss experience continues to be driven primarily by the significant embedded homeowner equity resulting from the strong home price appreciation experienced in recent years, using an index-based approach, approximately 78% of our total default inventory is estimated to have embedded home equity of 20% or more. Moving to our other business lines. Total revenues in our all other category, which include investments held at Radian Group as well as revenues from other lines of business were $40 million in the third quarter, in line with the second quarter. The adjusted pretax operating loss for all other was $5 million in the third quarter compared to a $6 million operating loss in the second quarter. Within our all other categories, Radian Mortgage Capital closed its inaugural private label prime jumbo securitization transaction during the third quarter. This securitization involves the issuance of $349 million of certificates collateralized by residential mortgage loans, of which we retained certificates valued at $6 million. These certificates were issued by a newly created securitization trust, which is considered to be an available interest entity or VIE. As a result of the economic exposure that we retained and the corresponding rights that our retained interests have, we are considered the primary beneficiary of the VIE and in accordance with accounting guidance, Radian will consolidate the VIE in our financial statements. Therefore, you will see new line items this quarter reflecting the VIE's assets, liabilities and results in our financial statements. It is important to note that Radian's economic exposure is limited to our retained certificates with a net impact from this exposure, including changes in fair value reflected in the line item income loss on consolidated VIEs in our income statement each period. Now turning to our other expenses. For the third quarter, our other operating expenses totaled $86 million, a decrease compared to $92 million recognized in the second quarter. The lower expenses in this quarter were consistent with our expectations and reflect the benefit from our expense savings actions to date. This decrease was partially offset by a $10 million nonoperating impairment on internal use software recognized in the quarter. As noted previously, we expect a significant reduction in our other operating expenses on a full year basis in comparison to 2023 with an estimated run rate reduction of $20 million to $25 million beginning in 2025. Moving to our capital available liquidity and related strategic actions. Radian Guaranty's financial position remains strong. We paid $185 million ordinary dividend to Radian Group in the third quarter while maintaining a stable PMIERs cushion of $2.1 billion. As highlighted on Slide 21, Radian Guaranty held $191 million of unassigned funds at the end of the third quarter, providing the capacity to distribute approximately $190 million of additional funds to Radian Group in the fourth quarter. As a reminder, we had provided guidance at the beginning of the year that we expect Radian Guaranty to pay $400 million to $500 million of dividends for the full year 2025. We are pleased that we are in a position to meaningfully exceed this guidance with $485 million of dividends already paid year-to-date, and another $190 million expected to be paid in the fourth quarter. Moving to our holding company, Radian Growth. In September, we executed on the planned redemption of our 2024 senior notes in the amount of $450 million which reduced our holding company debt to capital ratio to 18.5%. This action is expected to reduce our ongoing interest expense by approximately $20 million annually and Radian has no senior debt maturities due until 2027. Within the quarter, we repurchased 1.5 million shares of our common stock at a total cost of $49 million for an average price of $33.61 per share and returned $37 million in shareholder dividends for a total of $86 million of capital returned in the quarter. We have $618 million remaining on our current share repurchase authorization which expires on June 30, 2026. Over the past four quarters, we've returned approximately $360 million in the form of share repurchases and dividends to shareholders. As demonstrated by this past quarter's repurchase activity and our track record in recent years, we believe that share repurchase provides an attractive option to deploy our excess capital. Following the redemption of our 2024 senior notes, our available holding company liquidity was $844 million at the end of the third quarter. We also have an undrawn credit facility with a borrowing capacity of $275 million, providing us with significant financial flexibility. I will now turn the call back over to Rick.
Rick Thornberry, CEO
Thank you, Sumita. Before we open the call to your questions, I want to highlight that our results for the third quarter continue to reflect the balance and resiliency of our company as well as the strength and flexibility of our capital and liquidity positions. We expect the earnings and cash flows generated from our large in-force mortgage insurance and investment portfolios to allow us to continue operating from a position of strength and delivering value to our customers, policyholders and stockholders. We increased book value per share by 18% year-over-year. We returned $86 million of capital to stockholders during the third quarter and approximately $360 million over the past 12 months in the form of share repurchases and dividends. As you've heard me say before, our business model is well established and proven significantly strengthened by the PMIERs capital framework, dynamic risk-based pricing, and the distribution of risk into the capital and reinsurance markets. We believe this is recognized on Capitol Hill, and we are well positioned to fulfill our important role in the housing finance system. And finally, I want to recognize and thank our dedicated and experienced team at Radian for the outstanding work they do every day. Now, operator, we would be happy to take questions.
Operator, Operator
And our first question comes from Bose George of KBW.
Alex Bond, Analyst
This is actually Alex Bond on for Bose. Maybe just starting with Radian Mortgage capital. Would you be able to give a little more color there relating to maybe what you expect the cadence of issuance will be there moving forward?
Rick Thornberry, CEO
Yes, thank you for the question. This is Rick. I don't think we will provide any forward guidance on that. However, we completed our first deal in the third quarter and our second deal recently in the fourth quarter. We anticipate becoming a regular issuer in the market as the business grows. Thus, we expect to continue issuing next year, but we haven't provided specific forward guidance. However, you can expect that the frequency and regularity of our market issuances will be influenced by our business scaling in the future.
Alex Bond, Analyst
Okay. Great. And then maybe just one more relating to the $10 million software impairment in the quarter. Was that related to the mortgage services or the other segment? And then maybe just to go a little bit deeper there, would you be able to give any color relating to some of the strategic actions you're taking in that segment in terms of the footprint there?
Sumita Pandit, CFO
Yes. Thanks for the question. I think, yes, the $10 million impairment that we took was on some software that we felt we needed to impair given the current use of the software, and it was related to businesses that sit in our all other category, and we think that it's a one-time item. I think in terms of like for our all other business, we've given some more disclosure on what our expected revenues are going to be. I think for the last two quarters, we've been at about $40 million. We do expect that some of our investment income and all other may come down as we've repaid our debt, and therefore, $450 million of liquidity has gone out from our holding company. So we expect that all of the number to come down a little bit by about $5 million, but $35 million to $40 million of revenues is still a good estimate for All Other, and that captures all of our businesses in the All Other business segment.
Rick Thornberry, CEO
Yes, this is Rick. In the context of providing a strategic update on those businesses, I want to highlight that this category includes our conduit business, title business, real estate services business, and our tech platform, along with the interest income from Radian Group's investment portfolio. There are several components involved. We are focusing on scaling the conduit business, but its current results are not significantly impacting the overall business. The title business has navigated a challenging period over the past few years, but it is now well positioned with an expanding customer base, and we are optimistic about its future prospects. Our real estate services business, which encompasses SFR, REO, and valuation services, has been profitable, though slightly less so during the cycle, but it remains a market leader in its various product categories. We anticipate ongoing profitable contributions from this business. Lastly, our homegenius real estate tech platform has seen a significant reduction in expenses, and the team has made excellent progress in enhancing data analytics, computer vision, and AI tools integrated into the platform. We're engaging in active discussions with various interested partners, and we will provide updates as more information becomes available. This summarizes the update across the other category.
Operator, Operator
Our next question comes from Mihir Bhatia of Bank of America.
Mihir Bhatia, Analyst
I wanted to ask about the pricing backdrop. I appreciate that the in force yield was steady and your comments about your expectations moving forward. Should we conclude that the pricing environment remains quite stable, or is that more a reflection of your individual pricing? I'm trying to understand the market dynamics from a competitive standpoint, possibly even outside of your company. Any comments on the competitive environment and pricing in the market would be appreciated.
Derek Brummer, President of Radian Mortgage Insurance
Mihir, this is Derek. In terms of the pricing environment overall, I think it's been pretty consistent really for probably the last 1.5 years to 2 years. And so as I would characterize the pricing environment continues to be rational and disciplined. You do see some movements here and there kind of around the edges in terms of pricing from quarter to quarter, and you see that reflected kind of in market share movements when you look at kind of the top line. But overall, I would say the price environment continues to be stable, an environment that we like because it allows us to leverage our analytics to really pick our spots and find value in the market. So we really find value kind of across the risk spectrum, and that's been pretty consistent for quite some time.
Mihir Bhatia, Analyst
And then turning to defaults and really cures more than defaults. For many quarters now, you'll have had very elevated cure rates and been releasing significant number of reserves and I guess the question I have is, when does that become like part of your history where you start actually lowering the claim rate and taking less reserves upfront? Or is the thought process that it's better to be conservative, take the reserves upfront and then just release?
Sumita Pandit, CFO
Yes, I think it's a good question. And I would say that when we think about our reserve assumptions, we always try to be prudent, and we always try to look at it through the cycle. So clearly, like the claim rates we see today, they are very low. And we are obviously focused on making sure that the accounting assumptions we make are longer term and through the cycle. So I think that's the reason why we've kept our 8% default to claim rate unchanged, even though, as you rightly pointed out, our actual claim experience is very, very benign. So we don't see that environment to necessarily change our accounting assumptions, and we would like to continue to be prudent.
Mihir Bhatia, Analyst
Can I ask when was the last time you all hit an 8% claim rate? Any vintage that has hit that?
Sumita Pandit, CFO
No, none of our current vintages. And I would say it's been a while.
Rick Thornberry, CEO
Yes. The answer to that is likely sometime before COVID. I don't recall the exact timeline, but when I arrived in 2017, we were still recovering from the great financial crisis and moving from a default to claim assumption. So, as Mihir pointed out, our focus is on future performance rather than specific historical points, while we keep an eye on how our default portfolio is performing. If you refer to the materials we provide, particularly the triangle schedule, you’ll notice the consistent cure rate over time. I would say that before COVID, we were still coming down from the repercussions of the financial crisis. When estimating future modeled losses, we factor that into our reserves since we reserve when loans become 2X delinquent and default. Another positive point to note is that when Derek and the team price, we do so with anticipated loss assumptions going forward. The business we’ve written during this default cycle is exceeding our pricing expectations, leading to better-than-expected returns from prior periods. As mentioned by Sumita, we aim to maintain a through-the-cycle perspective and continue evaluating sustainable trends that might affect us. Nonetheless, we believe that the current housing cycle is generally positive, largely due to the supply-demand imbalance, which is providing consumers with better opportunities to resolve their defaults and protect their equity. We will keep monitoring this closely, as it has been an extremely favorable trend that we will continue to assess from an accounting standpoint.
Mihir Bhatia, Analyst
Got it. And I appreciate that in particularly the Slide 17 disclosure. And really, that's what we were looking at. And just as you mentioned, you just see really consistent cure activity and that kind of almost backfill. I hear what you're saying.
Operator, Operator
Our next question comes from Scott Heleniak of RBC Capital Markets.
Scott Heleniak, Analyst
Just wondering if you could expand on the comment, Rick, you may expect the private insurance mortgage insurance market to grow 10%. Can you talk about some of the drivers you expect there? It sounds like you're pretty positive on that for 2025 and how you expect Radian to participate in that in terms of NIW growth as that happens?
Rick Thornberry, CEO
Thank you for the question. When examining the current industry forecasts from various sources, it's evident that there is an expected growth in the purchase market, along with some refinances that depend on interest rates. We anticipate growth in the purchase market, and mortgage insurance will play a significant role in that growth. This expectation is what I referred to in my prepared comments, which are based on industry forecasts. These forecasts can experience some fluctuations throughout the year based on interest rate changes, but we are primarily driven by the growth in the purchase market. Historically, this market has faced challenges due to limited inventory and a lack of turnover in existing homes. We believe there is potential for faster growth in new home sales as well. Looking ahead to next year, we expect the purchase market to continue expanding, and mortgage insurance will be part of that growth. Regarding our participation, our mortgage insurance team, led by Derek, has the opportunity to utilize our data, analytics, and proprietary tools, such as RADAR Rates, to effectively evaluate risk profiles and enhance economic value from our selections within the purchase volume. We are focused on optimizing the economic value rather than chasing market share, and we aim to be well-positioned to benefit from this growth.
Scott Heleniak, Analyst
Okay. That's helpful detail. And just on the persistency, that ticked up a little bit sequentially. Others have kind of seen flattish persistence or even down a little bit. And just wondering if you could comment as to whether you think you can see further improvement there. It's obviously closer to peak levels, but you have a lot of customers that have a lot of embedded home equity in there. So just curious what your thoughts are on persistency.
Sumita Pandit, CFO
Yes. I think on a 12-month basis, I would say our persistency has been in and around that 84% level. So I do think that what you're seeing is a small uptick is more fluctuations in the quarterly measure. We don't expect persistency to go up as such. We think that we are pretty much at stable levels. Now it is possible that we see some pockets of refinance activity as rates decline in which case we will see an impact in our persistency. But I would just remind you that 70% of our in-force book has still been written at less than 6% note rate. So we expect persistency to more or less remain high in the low 80s and feel pretty good about it.
Scott Heleniak, Analyst
Okay, great. The last question is about how we plan to use our excess capital. It seems like share buybacks will be the primary focus, but could you discuss potential increases in regular dividends, special dividends, investments in the business, mergers and acquisitions, or any other uses? It appears that our debt-to-cap ratio is at its lowest level in a long time. I would appreciate your thoughts on how we might utilize excess capital over the next 12 months.
Sumita Pandit, CFO
Yes, I'll start and Rick jump in with other thoughts on some of the strategic uses. I would say, as you pointed out, like we've been pretty consistent about our capital return. This quarter, we returned about $87 million; last year, $360 million; the last three years, $1.2 billion; the last five years, $1.9 billion. So I think you'll see that we have been consistently returning capital back to shareholders. And we are also the highest yielding dividend stock in the industry. I'd say from a forward view, I think in our prepared remarks, we mentioned that we used some of our excess holdco liquidity to pay down our debt and draw down our leverage ratio to 18.5%. We've built that $844 million liquidity back up to about $1 billion pretty quickly by year-end, just given our expectation of dividends from Radian Guaranty to Group. So I think that we will continue to buy back shares. We believe that we are still reasonably undervalued. I think $1.5 is just in our AOCI. And if you just think about in our last Investor Day, we've given some estimates of our expectation of future discounted earnings from our existing book. That was about $13.50 a share. So we still think that we are trading reasonably below our intrinsic value, and we'll continue to buy back shares. And we have the liquidity to do that. Rick, do you want to comment on some of our M&A initiatives?
Rick Thornberry, CEO
We plan to invest in businesses that are experiencing organic growth, particularly in our mortgage insurance sector where we see potential. We are exploring various M&A opportunities, although we haven't pursued any recently due to a lack of perceived value. Our primary focus is on returning capital to shareholders while being disciplined in our approach. We aim to balance investments, whether organic or inorganic, to enhance returns and long-term shareholder value. We have a solid track record in managing our capital. Currently, we have significant liquidity at the holding company level, and we've recently eliminated our debt, leaving us with around $1 billion at year-end. Additionally, we have considerable PMIERs excess capital, projected to be $2.1 billion by the end of the third quarter. This provides us with the flexibility to allocate capital effectively for improved shareholder returns. While we often reflect on our past actions, our best outlook is informed by our history of being disciplined and thoughtful in our decisions for our shareholders.
Operator, Operator
I'm showing no further questions. I'd like to turn it back over to Rick Thornberry for closing remarks.
Rick Thornberry, CEO
Yes. Well, I appreciate everybody joining us today. It's been an eventful week. I know we're probably all exhausted from watching all the political activities over the last several months and coming to a conclusion. But I appreciate your interest in Radian and look forward to crossing paths in the near future and continuing to answer your questions and share our insights about our business. So thank you very much, and have a very happy holiday season, should we not cross paths before then. Take care.
Operator, Operator
This concludes today's conference call. Thank you for participating, and you may now disconnect.