Earnings Call Transcript - RDN Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Radian Group Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Kobell, EVP Finance. Please go ahead.

Dan Kobell, EVP Finance

Thank you, and welcome to Radian's Third Quarter 2025 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, President and Chief Financial Officer. 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.

Richard Thornberry, CEO

Good morning, and thank you all for joining us today. I am pleased to report another quarter of strong performance for Radian. Our mortgage insurance business continues to deliver excellent results, fueled by our large, high-quality in-force portfolio with strong persistency and credit performance. The performance of our portfolio reflects the excellent credit characteristics of the new business we are writing, leveraging our proprietary RADAR Rates platform. In addition to the strong performance of our Mortgage Insurance business, we continue to deploy capital with discipline and strategic focus. We have a long track record of consistently maintaining strong holding company liquidity, efficiently distributing capital from Radian Guaranty to Radian Group, and delivering value back to stockholders, including the highest yielding dividend in the industry. Since 2017, we have returned nearly $3 billion of capital to stockholders through dividends and share repurchases, while continuing to explore opportunities for long-term growth that meet our return objectives, including our planned acquisition of Inigo. Sumita will cover the highlights of our financial results, including the impact of our September announcement regarding the divestiture plan for our mortgage conduit, title and real estate services businesses. The process is well underway and has attracted interest from numerous potential buyers for each of the three businesses. We have engaged Citizens JMP to lead the sale of the title and real estate services businesses and Piper Sandler to lead the sale of the mortgage conduit. As we noted in September, we expect to complete the divestiture process by the third quarter of next year. During this time, we have strengthened our capital and liquidity position, grown our high-quality mortgage insurance portfolio, invested in our proprietary data and analytics platforms and leveraged the deep experience of our exceptional team. As part of our ongoing commitment to long-term growth and value creation, we have spent considerable time evaluating different paths to strategically diversify our business. We concluded that the highest value path was to position our company for continued growth as a global multiline specialty insurer. This led to our decision to acquire Inigo. The purchase price of $1.7 billion will be cash funded from available liquidity sources and excess capital with no equity raised. Along with liquidity at the holding company, the funding for the deal includes a unique and creative financing structure of $600 million that will be provided by Radian Guaranty to Radian Group through an intercompany note with a 10-year term. We believe the valuation for the deal is attractive at 1.5 times projected 2025 tangible equity. This acquisition, along with the divestiture plan I mentioned earlier, provides us with a clear strategic path for the future as we transform from a leading U.S. mortgage insurer to a global multiline specialty insurer. There are several reasons we were attracted to Inigo. The company was founded by highly respected industry veterans with decades of experience in the Lloyd's market who turned their deep industry experience into a successful and scaled business. They have attracted an exceptional team who share the founders' entrepreneurial spirit and a shared commitment to radical simplicity and disciplined underwriting. As we've spent time with the team, we continue to be impressed by the people and the business they have built. We are excited to partner with this group of highly experienced leaders with a strong track record of building and managing successful specialty insurance and reinsurance businesses. This highly talented team will continue to lead Inigo post-close. The Inigo team aligns well with our core strengths and the cultural match is strong. This makes them a natural fit that complements Radian's Mortgage Insurance business. And similar to Radian, Inigo is driven by data science. It shapes everything they do, how they make decisions and how they think about risk. We share this data-first mindset as well as an unwavering focus on disciplined underwriting. Our team is working closely with the Inigo team to complete this transaction, which is on track to close in the first quarter of 2026. As we look to the future, we are excited about what we can accomplish together. Radian's transformation from a leading U.S. mortgage insurer into a global multiline specialty insurer is expected to increase our addressable market for continuing operations by a factor of 12, providing flexibility to deploy capital across multiple insurance lines through various business cycles. We believe this combination also offers meaningful capital synergies as we move forward. By allocating our capital across strong and uncorrelated businesses, we can focus on putting our capital to work where we see the greatest opportunity for economic value and profitable growth. We look forward to updating you on the Inigo transaction, our divestiture progress and the execution of our go-forward strategy. Sumita will now cover the details of our financial and capital positions.

Sumita Pandit, President and CFO

Thanks, Rick, and good morning to you all. As Rick mentioned in his opening remarks, Radian is committed to long-term growth and value creation, and we have spent considerable time evaluating different strategic paths. Our objective is to build on our foundation and core strengths. With this objective in mind, we determined that the right strategic path was to build Radian into the future as a global multiline specialty insurer by acquiring Inigo. As a result of the strategic change in the third quarter of 2025, we've also announced a divestiture plan for our mortgage conduit, title and real estate service businesses. We've reclassified these businesses as held for sale on our balance sheet and now reflect their results as discontinued operations in our income statement. All prior periods have been revised for these changes and the impact of the accounting changes are presented on Slide 38 of our earnings presentation. Now let's discuss results of our continuing operations, which demonstrate another strong quarter of performance. In the third quarter, we achieved net income from continuing operations of $153 million or $1.11 per diluted share, the same as the second quarter. Net income inclusive of discontinued operations was $141 million in the third quarter. We generated a return on equity of 12.4%, including discontinued operations. The ROE for our continuing operations is 100 basis points higher at 13.4%. We grew book value per share 9% year-over-year to $34.34. This book value per share growth is in addition to our regular stockholder dividends, which were $35 million during the quarter. Turning now to the key drivers of our results, which highlight the consistency, balance and resiliency of our Mortgage Insurance business model. Our total revenues continued to be strong in the third quarter at $303 million. Slides 15 through 17 in our presentation include details on our mortgage insurance in-force portfolio as well as other key factors impacting our net premiums earned. We generated $237 million in net premiums earned in the quarter, which is the highest level in over 3 years. Our large high-quality mortgage insurance in-force portfolio grew to another all-time high of $281 billion. We wrote $15.5 billion of new insurance written in the third quarter of 2025, a 15% increase compared to the same period last year. As shown on Slide 15, our persistency rate remained strong at 84% this quarter. We remain focused on writing new insurance that we believe will generate future earnings and economic value while effectively maintaining the portfolio's health, balance and profitability. As of the end of the third quarter, approximately half of our insurance in-force portfolio had a mortgage rate of 5% or lower. Given current mortgage interest rates, these policies are less likely to cancel due to refinancing in the near term, and we, therefore, continue to expect our persistency rate to remain strong. As shown on Slide 17, the in-force premium yield for our mortgage insurance portfolio remained stable as expected at 38 basis points. With strong persistency rates and the current industry pricing environment, we expect the in-force premium yield to generally remain stable for the remainder of the year as well. As shown on Slide 18, our investment portfolio of $6 billion consists of well-diversified, highly rated securities and other high-quality assets. For the quarter, we generated net investment income of $63 million. Our provision for losses and related credit trends continue to be positive with strong cure activity and very low claim levels. On Slide 21, we provide trends for our primary default inventory. The number of new defaults in the third quarter was approximately 13,400, a decline of 2% from the same period a year ago. As expected, the number of total defaults increased in the third quarter to approximately 24,000 loans at quarter end, resulting in a portfolio default rate of 2.42%. This increase in total defaults reflects normal seasonal trends and the expected continued seasoning of our large insurance in-force portfolio. As we noted in the past, our new defaults continue to contain significant embedded equity, which has been a key driver of recent favorable credit trends, including higher cure rates and reduced severity for policies that result in claim submission. As shown on Slide 22, our cure trends have been very consistent and positive in recent periods, meaningfully exceeding our initial default to claim expectations. Cure rates in the third quarter exhibited typical seasonal trends in line with similar periods from prior years. We continue to closely monitor the recent news and stress seen in different credit asset classes like credit cards and subprime auto. However, the loans in our portfolio and loans in the broader conventional mortgage segment continue to perform well. Our outlook on the Mortgage Insurance business remains positive, and we will continue to monitor and make any adjustments to pricing as needed. Let's turn to Slide 23. We maintained our initial default to claim rate of 7.5%, which resulted in $53 million of loss provision for new defaults in the third quarter. Positive reserve development on prior period defaults of $35 million partially offset this provision for new defaults. As a result, we recognized a net expense of $18 million in the third quarter compared to $12 million in the second quarter. Now turning to our other expenses, where we continue to seek additional operating efficiencies. For the third quarter, our other operating expenses totaled $62 million, down from $69 million in the second quarter. Expenses in the third quarter included $9 million of nonoperating costs related to the Inigo acquisition. Excluding this acquisition-related expense, total operating expense was $54 million, a $16 million decline from the prior quarter as reflected on Exhibit E. We are revising our previous expense run rate guidance for Radian, which was $320 million and included expenses related to discontinued operations. We anticipate operating expenses for continuing operations to be approximately $250 million for the full year 2025. We expect this to represent our annual expense run rate as we move into 2026. Moving to our capital, available liquidity and related strategic actions. Radian Guaranty's financial position remains strong. It paid a $200 million dividend to Radian Group in the third quarter, while maintaining a PMIERs cushion of $1.9 billion. In addition, we expect that Radian Guaranty will pay a $195 million dividend in the fourth quarter, bringing total distributions to Radian Group during 2025 to $795 million. We expect to close the Inigo transaction in the first quarter of 2026, funding the $1.7 billion purchase price with our existing resources. Our available holding company liquidity grew to $995 million as of quarter end. We expect a $195 million dividend to be paid to our holding company in the fourth quarter, as I just noted, and expect $600 million to be paid from Radian Guaranty to Radian Group in the form of a 10-year intercompany note. With these payments, we expect our holding company liquidity to be approximately $1.8 billion at the beginning of 2026. In addition, we expect dividends of at least $600 million from Radian Guaranty to Group during 2026. With these resources, we expect to fund the Inigo acquisition in the first quarter of the year and maintain sufficient liquidity at our holding company after the transaction closes. We also just expanded our credit facility to $500 million. The facility is currently undrawn and is available for general corporate purposes. However, we expect that any draw of the facility will be repaid during 2026. Our leverage ratio declined to 18.7% this quarter, and we expect it to remain below 20% by year-end 2026. We expect Inigo will continue to operate as a stand-alone business, complementing Radian's mortgage insurance business, and we do not expect Inigo to have any funding needs from Radian Group or Radian Guaranty to achieve its 2026 business plan. As Rick mentioned, this is an exciting time for Radian. This acquisition is expected to double our earned premiums in a market that is expected to grow at 8% and expand the total addressable market by 12 times. This will enable Radian to strategically allocate capital across diverse insurance lines and focus on areas with the greatest potential for profitable growth. Lastly, by combining Radian and Inigo, we expect to deliver mid-teen operating earnings per share accretion and approximately 200 basis points of ROE accretion starting in year one. I will now turn the call back over to Rick.

Richard Thornberry, CEO

Thank you, Sumita. Our results in the quarter continue to reflect the balance and resiliency of our company as well as the strength and flexibility of our capital and liquidity positions. They also reflect the resilience of our Mortgage Insurance business model. Over the years, our industry has helped millions of families purchase their home or refinance their mortgage and is well positioned to continue promoting affordable, sustainable homeownership through various economic cycles. We are proud of the important role we play in the housing finance system and in building strong communities. We look forward to updating you on our progress as we transform from a leading U.S. mortgage insurer to a global multiline specialty insurer. And finally, I want to recognize and thank our team for the outstanding work they do every day. And now operator, we would be happy to take questions.

Operator, Operator

And our first question comes from Bose George with KBW.

Bose George, Analyst

Actually, first, I just wanted to ask, when you talk about the mid-teens accretion for 2026, should we add that 200 basis points to your current run rate ROE, which is a little over 13%? So I guess that would be a little over 15% in terms of the ROE and then your book value going into 2026, it looks like it will be about $35. So does that seem reasonable 15% on that $35?

Sumita Pandit, President and CFO

Thanks for the question, Bose. Our operating ROE for this quarter is 13.9%. This figure excludes one-time costs related to the Inigo transaction, such as advisory fees. A fair assumption might be to add a 200 basis points increase on top of that. The 13.9% is similar to last year's and serves as a solid benchmark for our stand-alone MI business. It's important to note that we've paused share repurchases, which means our denominator is somewhat inflated as we accumulate capital for Inigo. Consequently, the 13.9% ROE may be slightly lower than what we could achieve once the excess capital is utilized to purchase Inigo. Therefore, we can consider adding the 200 basis points to the 13.9% operating ROE presented this quarter.

Bose George, Analyst

Okay. Great. That's very helpful. And then can you walk through the potential capital benefit from using the unearned premiums at Radian as capital at Inigo? Is that something that eventually could be a source of incremental accretion over the 200 basis points that you've discussed?

Sumita Pandit, President and CFO

So I think in the future, we will be giving you more details, Bose, on exactly what are those opportunities that we see present to ourselves between the MI business as well as Inigo. I think as we mentioned in our presentation, at this stage, I think what we have discussed is that we do see potential synergies between the MI business and Inigo going forward, including some reinsurance that we could do between the two businesses. I think post close of Inigo, we plan to do an Investor Day early next year. And I think we'll be sharing more details about potential reinsurance opportunities that could potentially improve the accretion numbers further. I think the numbers that we have presented to you last month and now again in this earnings presentation assumes base case run rate assumptions and really is an addition of Inigo as it is operated today to Radian's numbers. We've not assumed these additional capital and operating efficiencies that we will discuss further with all of you as we close the transaction next year.

Operator, Operator

And our next question comes from Doug Harter of UBS.

Douglas Harter, Analyst

As you consider selling off the noncore businesses, how should we view the capital that could potentially be released from those businesses along with the cost savings you’ve already mentioned in discontinued operations?

Sumita Pandit, President and CFO

Yes. So I think as I mentioned, as of now, as of Q3, what we have done is we've reclassified discontinued operations as held for sale. If you look at our balance sheet and the carrying values for these three businesses, we carry these businesses at about $170 million or so as of the third quarter. We do not expect to have either like a huge gain or a huge loss versus those levels. I think the held for sale number is based on our best accounting estimate today of the true value of those businesses. I think we have given some indications to you in terms of what could be additional expenses that we incur in selling the businesses. I think Rick mentioned we've hired two banks. We've estimated a $7 million expense in selling the businesses today. There could be more or less going forward. But we think that the carrying value of $170 million is our best estimate as of today of the true value of those three businesses.

Douglas Harter, Analyst

I appreciate that. How do you plan to proceed with the key steps necessary to resume the buyback program? What should we be watching for regarding that?

Sumita Pandit, President and CFO

Yes, that's a great question. Let me walk you through our liquidity position and how to interpret the figures. As of the end of Q3, our liquidity stood at $995 million. We plan to pay another $195 million in dividends in the fourth quarter from Guaranty to Group, and we estimate an additional $100 million in dividends in Q1 of next year. This brings our total liquidity for the holding company to $1.29 billion. We will also be drawing down $600 million from the intercompany note upon closing Inigo. For next year, we anticipate at least $600 million in minimum dividends from RGI to Group. The best way to consider our share repurchase and overall liquidity is that within a few quarters after the Inigo acquisition, we expect to have excess liquidity in the group. When that occurs, we will reassess our share repurchase strategy. We believe this will happen fairly soon, given our plan to pay at least $600 million in dividends next year, which gives you a good indication of when we might reach an excess capital position in the holding company to consider resuming our share repurchase strategy. Currently, we have paused this activity as we are covering the full $1.7 billion purchase price using internal resources and are not raising new equity.

Operator, Operator

And our next question comes from Mihir Bhatia of Bank of America.

Mihir Bhatia, Analyst

Maybe just one quick one. Just any update on the timing of the divestitures and where you are with that process? I think you had said Q3 2026 earlier?

Richard Thornberry, CEO

Yes, we're still targeting completion by the third quarter of next year. To update you on the process, we have engaged two banks to assist us. There has been significant interest expressed across all three of our businesses, and we are currently initiating the process by sharing information with a wide range of potential interested parties. We anticipate that this process will progress quickly in the coming months and look forward to keeping you informed as we proceed. By early next year, we expect to have more updates. I'm proud that our teams remain focused on running the business and serving our customers, which positions each of our businesses well for the outcome we are striving for. We will continue to provide updates each quarter, and for now, we have a fully engaged process with the bankers and our teams, which is going very well.

Mihir Bhatia, Analyst

Got it. Turning to the business itself, I'm curious about what it would take for you to reduce the claim rate below the current 7.5%. I ask because you have a slide showing the claim triangles, and as noted, 90% get cured within a year, with your cure rates in the high 90s. I'm interested in what specific changes you need to see to lower that claim rate.

Sumita Pandit, President and CFO

Yes. I think Mihir, as you're aware, we made a change to that assumption maybe two or three quarters back when we were at 8% default to claim rate and now are at 7.5%. I think when we look at that assumption, we do want to make sure that we are making that assumption through the cycle. You're right that when you look at our cure trends and the cure triangles that we show you on Slide 22, we do have almost 97% to 98% of our defaults curing within 12 quarters. But when we think about our through-the-cycle assumption, we think that these are more favorable than where we would expect this to play out in the long run. And therefore, the 7.5% is our best estimate of that through-the-cycle performance. As of now, we feel really good about that assumption given the fact that we just updated this a few quarters back, and we don't expect to make changes to it in the near future. But again, it's a through-the-cycle assumption. And we think it's the right way for us to run the business, is prudent and has a view that's through the cycle.

Mihir Bhatia, Analyst

Sure. Has there been a change since COVID? Are people more open to forbearance now, or are the claim rate trends similar to what we observed in 2018 and 2019? I'm trying to determine if there's been a shift in the mortgage servicing environment that has contributed to these strong cure rates.

Richard Thornberry, CEO

Yes, Mihir, that's a great question. Sumita and I can address that together because it's something we consider each quarter as well. We often ask whether we are witnessing a fundamental shift compared to the past. Since COVID, we've experienced significant home equity growth, which has provided borrowers with various options to manage financial difficulties. This growth also helps servicers assist borrowers in navigating their challenges. Additionally, the experience gained during COVID with forbearance programs has built a framework for helping borrowers through tough times. I believe that the combination of rising home values and this learned experience has had a positive effect. As we move further from the accelerated home equity growth we observed in 2020 and 2021, we will see a return to more normalized home appreciation rates, although there may be regional variations. That aspect will settle, but the industry, including GSEs and servicers, has fundamentally changed its processes to better support borrowers in recovering. From a reserving perspective, we assess each quarter how we think these changes will affect the future. As Sumita mentioned, we take a long-term view that spans multiple years through different cycles. I would also add that we are currently evaluating some of the market uncertainties to influence our outlook. Overall, we've seen positive developments over the past four to five years—some of which likely will be sustainable, while other aspects may normalize over time, and that is what we are focused on assessing.

Operator, Operator

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Rick Thornberry for closing remarks.

Richard Thornberry, CEO

Thank you for joining us today and for your questions. We are excited about the path ahead with the acquisition of Inigo, hopefully in the new year. We look forward to seeing and speaking with as many of you as possible in the coming weeks. We appreciate your time and support. Enjoy the holidays, and if we don’t get to see you before then, we’ll talk soon. Take care.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.