Ladies and gentlemen, thank you for standing by and welcome to Radian Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later will be an opportunity for your questions. [Operator Instructions] Just a brief reminder today's conference is being recorded. I would now like to turn the conference over to Senior Vice President of Investor Relations, Emily Riley.

Thank you and welcome to Radian's third second quarter 2019 conference call. Our press release, which contains Radian's financial results for the quarter was issued last evening and is posted to the Investors section of our website at www.radian.biz. 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 services 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, we have also presented a related non-GAAP measures services adjusted EBITDA margin which we calculate by dividing services adjusted EBITDA by GAAP total revenue for the services 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, Senior Executive Vice President of Mortgage Insurance and Risk Services. 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 2018 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.

Thank you Emily, and good morning. Thank you all for joining us today and for your interest in Radian. Our team is hosting today's call from Austin, Texas where we've been meeting with customers this week attending the annual MBA convention. During the past few days I've had many discussions with customers and other industry players and I've been pleased with the positive response to our one Radian business model. Our customers appreciate the value we bring to them across the entire mortgage and real estate value chain. It is clear that our broad set of products and services are strengthening our customer relationships and positioning us as a valued strategic business partner. Turning to our financial results, I am pleased to report another excellent quarter for our company. Net income for the quarter was $173 million or $0.83 per diluted share. Adjusted pre-tax operating income was $213 million and adjusted diluted net operating income per share increased to $0.81. Book value per share grew 24% year-over-year the $19.14 and return on equity was 18% with an adjusted net operating return on equity of 17.4%. I would like to take a moment to congratulate our entire Radian team on these results which reflect their talent and dedication. I'd also like to thank our customers who continue to place their trust and confidence in us. Turning to our mortgage insurance business. We grew our primary insurance in force by 9% year-over-year to $237 billion. Our mortgage insurance portfolio which is one of the largest in the industry is the primary driver of future earnings for our company. We believe the projected future earnings from this portfolio represents unrecognized economic value for shareholders and provides us with significant strategic financial flexibility. The mortgage origination market was strong in the third quarter with…

Thank you Rick. And good morning everyone. To recap our financial results reported yesterday evening we reported net income of $173.4 million or $0.83 per diluted share for the third quarter of 2019 as compared to $0.78 for diluted share in the second quarter of 2019 and $0.66 per diluted share in the third quarter of 2018. Adjusted diluted net operating income was $0.81 per share in the third quarter of 2019 an increase of 1% from the second quarter of 2019 and an increase of 14% over the same quarter last year. I will now focus on some of the drivers of our results for the quarter. I'll start with the key drivers of our revenue. Our new insurance written was $22 billion during the quarter compared to $18.5 billion last quarter and $15.8 billion in the third quarter of 2018. Our third quarter 2019 volume marks our highest quarterly new insurance written on a flow basis. Total NIW increased 40% compared to the third quarter of 2018 and our monthly premium NIW increased 52% year-over-year. Direct monthly and other recurring premium policies represented 85% of our NIW this quarter, an increase from 83% for the second quarter of 2019 and an increase from 78% over the third quarter a year ago. Borrower paid policies represented 97% of our total new business for the third quarter 2019. Borrower paid single premium policies represented 13% of our total NIW this quarter a significant increase from two years ago when they accounted for less than 2% of total NIW. In contrast lender paid single premium policies were less than 2% of our NIW this quarter a dramatic decline from over 21% of total production two years ago. This shift in business mix is expected intentional and designed to improve the return…

Thank you Frank. Before we open the call to your questions let me remind you that net income was a $173 million and diluted net income per share was $0.83. Adjusted diluted net operating income per share grew to $0.81. Book value per share increased 24% year-over-year to $19.14. Return on equity was 18%. Our $237 billion mortgage insurance portfolio grew more than 9% year-over-year and is the primary driver of future earnings for Radian. Our services segment grew 16% from a year ago to $47 billion and we made progress against our capital strategy completing our $250 million share repurchase program and initiating a new program with more than 13 million shares repurchase thus far in 2019. Now operator we would like to take your questions.

Thank you. [Operator Instructions] First we'll go to the line of Mihir Bhatia. Your line is open.

Hi, thanks for taking my questions. Maybe I'll just start with the FHA. Certainly encouraging to hear that the FHA is not looking at cutting prices. I was curious what would you like there has been some talk about the FHA maybe adopting risk-based pricing. Could you comment on what's an impact of the FHA adapting such would have on the MI industry just in terms of whether your mix or your volume as opposed to their current fixed-rate pricing across the mix?

Mihir here this is Rick and I appreciate your question and yes there has been discussion around the FHA considering that this past week the FHA is primarily focused on fixing a number of their internal challenges if you will from a technology and operations point of view and I think from the comments this week from Dr. [indiscernible] when he spoke to the MBA here in Austin, he's very, very focused on rebuilding the capital balances of FHA the fund and, so I think his comments really lead us to really believe that building that capital level above the 2% to be able to sustain the fund through the cycle from a credit risk point of view is really the primary focus and what we hear and what we understand is that really when they think about risk-based pricing it's largely around some of the higher areas which we don't really participate in. So I think at this point we don't really see a risk from lower premium pricing. We think more the trend is towards trying to build capital within the FHA fund and capital structure and I think at this point it's not a concern of ours from a pricing perspective.

And next in queue is the line of Jack Micenko with SIG. Your line is open.

Hey. Good morning. What does expected expense ratio came in a little higher than we were thinking and obviously you had a really really big NIW quarter but just wondering should we think of that as sort of the normal run rate or do you think you can leverage that more as the insurance and force book continues to grow? Just some thoughts there.

Yes, Jack this is Frank. Good morning. So this quarter was a little choppy on the expense side primarily for the reasons cited on a linked quarter basis. We did not have the seating commission and then we also had a little uptick in SGI, I think a way to think about expenses going forward is instead of on an expense ratio basis maybe just looking at the absolute dollars and I kind of go forward basis something around $72 million expense level just on a normalized basis is probably the right level to think about.

Okay. And then Rick on the regulatory side on the FHA. Here you on the price cuts or lack of price cut out of the FHA but it seems like there were some commentary this week on kind of maybe ring-fencing the False Claims Act issues and trying to bring more banks into the fray to do more FHA business. How do you think about that from a competitive standpoint?

Yes. Thanks for the question. So it's a great question. I think there was a great deal of focus on the kind of the memorandum of understanding and I think as I've sat through meetings with customers and other kind of industry meetings, I think it's clearly good for the lenders who sat on the sidelines kind of with the uncertainty out there but when you specifically some of the large banks. I think there's really when you think about it's still the same FHA business that exists today. There's no changes when you take the pricing aspect of it out. All you're really doing is looking at having more competitors enter the marketplace and I think you could see market share ships among competitors, mortgage originators maybe some shift from independent mortgage banks back to banks. If the banks choose to enter. There are still a number of issues to resolve FHA from an operational point of view from a servicing point of view and it's pretty clear today that the execution around a conforming loan with MI is a smoother transaction for lenders to the extent that it's eligible. So I think when I look at the memorandum of understanding it's the FHA is moving in the right direction to really kind of modernize their programs and bring certainty and clarity to kind of the legal structure of doing business with FHA. But I don't see it really impacting the market share for MI because still the same FHA products. So largely I think largely a market share kind of transition between originators is more likely the impact.

So FHA to FHA not FHA to PMI or is how you are thinking about. A - Rick Thornberry Yes. I mean really when you really think of it there's nothing changing on the FHA product side. It's just, it's a new set of competitors. So if you take pricing changes out of off the table it's still the same FHA product that we compete with every day today. You just may have a new set of players and remember many of those players today, many of the large banks exited the origination business but they stayed in on the correspondence side because of less issues around the False Claims Act and from a risk point of view, so it's really these players kind of reiterate in the origination market to go after the same. products that exist today. So it's really not a change in product, to change your price, change in economic. So we still think MI competes very favorably where we feel like we want to compete right on the types of products, the risk profile, the credit profile. So now I think it's a well needed clarification across the industry and I commend the FHA for taking the steps to bring more clarity and certainty but I think from an MI business point of view it's not impactful.

Right. Thanks for taking my questions. A - Rick Thornberry Sure. Thank you.

Next in queue we have the line of Bose George of KBW. Your line is open.

Hey good morning. Just before MI having reported do you have any feel for if there are changes in your market?

Hi Bose. This is Rick. Thank you for your question. Good morning, I think it's obviously there's still two more to go. We don't know and as you've heard me say we're not we don't focus on market share we focus on doing the right business with the right customers who ultimately produce quality and we'll service the risks that we take very well. So I think we had a very strong quarter. I think our team did a phenomenal job the sales team the operations and risk team. I think this market environment we feel like we're producing a very high quality book of business with our NIW. We feel like it plays to our strengths from an analytics point of view and our ability to really kind of pick and choose again who we do business with but also the types of loans and the risk and the risk return and the economic value that we generate from these loans. So very pleased with the volume we did. Not really concerned about market share other than we're focused on doing business with the right customers at the right risk return and we are 100% focused on creating an economic value for our investors and I think our team has done an excellent job on that and I think hopefully the results of the NIW we had this quarter I think somewhat speak for themselves in terms of our effectiveness to be good stewards a capital, good fiduciaries from an economic value creation point of view and do business with customers who align with our objectives. So I feel very good about what you said.

Okay. Makes sense. Thanks. And then switching to the loss reserve you had the that 11.8 million increase in the IBNR related to that litigation and you had to charge their last quarter. Is that any thought for is that kind of getting closer to the end or in any way so think about that?

Yes. We believe we're appropriately reserved for all the matters and we do not currently expect any further material increases related these matters. That's given the nature of litigation. It's hard to predict the future outcomes as possible that [indiscernible] could go up or down and future as things develop. I think that's probably how I can comment today.

Sure. Okay. Thank you. If I could just one more the services segment, can you just talk about the outlook there just given the improvement.

Yes. Thank you. As I mentioned in my comments we have been very pleased even this week while we've been here in Austin meeting with dozens and dozens of customers about how the view of Radian is changing in the marketplace to be a company beyond just MI and I think as I said it our Investor Day these are business our services businesses are in different stages of maturity and development and we're investing where we see strategic opportunity. I think we're starting to see the results of that. I think I'm very pleased with the receptivity in the marketplace and I think as you look at the revenue we gave revenue guidance that we would hit a run rate this year somewhere between 175 million and 200 million in revenue obviously we hit that this quarter. 10% to 15% EBITDA I think we're right around 8% this quarter and quite frankly I'm less focused on that because the extent that we make investments along the way that maybe cost us a little bit EBITDA from an expense point of view but allow us to grow in position strategically for the future we're going to do that all day long. So I think I'm feel very good about where we sit and specifically I think our opportunity we have around title and real estate from a growth perspective are quite interesting and the receptivity that we're getting from the marketplace from obviously existing my customers and others around the services we can provide from title perspective, title insurance title in settlement services and also the different real estate data and analytics valuation services are really playing being received well in the marketplace and I think that's where we expect to see the greatest growth in the coming years. So we're excited about it. The team is doing a great job. We couldn't be happier with how the team is laser focused on our business and making sure that we deliver great quality service to our customers and I think our customers are responding very well. The number of customers that came to me this past week and said we're looking at Radian very differently. We're looking at you as a strategic business partner is what we've been focused on for the last couple of years. So I feel good about.

Great. It's helpful. Thanks.

Next in queue we has a line of Mackenzie Aron, Zelman & Associates. Your line is open.

Thanks. Good morning. I just wanted to follow up on the comments around the real estate services business and the revenue growth this quarter. Were there any particular areas of the business that really drove the strength this quarter or was it more broad-based with just any color you can provide on the different areas?

Yes. So thank you Mackenzie. This is Rick. I think where I see the growth developing and I would put title was such a small starting point I think I've referred to it in the past as really an industrial-strength startup where we've invested in technology and people and facilities and put these two companies together to create Radian title services and we acquired an underwriter to really be in a position to control our own destiny to some degree. So I think title is the one that because of the low starting point is beginning to show strong momentum in acceleration. I'm very pleased with that but I also expected that and I think as we go forward that is a very interesting growth opportunity. I think around the real estate valuation side not only traditional appraisals through kind of an appraisal management company that we have but also the other kind of automated valuations tools and then also this quarter we rolled out our home price index you might have read about which we think is very unique in the marketplace, provides, exposes our unique data set from a valuation point of view in another way from a product that we can see evolving into a really strong kind of subscription-based product. So I think real estate entitle the mortgage services business kind of grows based upon the volume but I would say the growth opportunities that we're seeing today and the opportunities we see in the future really do revolve around title and true real estate data and analytics and technology that we have in place today.

Okay. Great. And then I think this one is for you Frank when you think about the capital and the significant excess that you continue to hold can you just talk about how you think about weighing the pros and cons of a dividend versus increasing the dividend versus a continuation of the opportunistic buyback.

Sure McKenzie. Great question. I think that is, that's certainly one of the topics that we talked about. I think more than theoretical distinction between the two is just the sort of on-demand nature of a share repurchase program. You can announce an amount. You can be sort of in and done if you will and does require I would say a higher hurdle to clear just as it relates to the ability to sustain it over the long term and so I just want to be very careful as we contemplate different methods of a capital return to shareholders to make sure that before we start something that it can sort of meet that high threshold that we would have but I would tell you that right now we've been ve ry successful in implementing our share repurchase program both with our previous $250 million authorization having been completed and also our existing $200 million share repurchase program underway. So if you look at what we've done over the last five years we have repurchased about 15% of our outstanding shares. So we feel that we've been very successful in taking out shares at value prices and so we think that's been a very effective means of capital return to our shareholders and so that is the path that we're currently on right now but as you would expect from us the conversations are broader than that and incorporate a couple of different dynamics there.

Great. Well, thank you so much.

Thank you.

And next in queue we have line of Mark DeVries of Barclays. Your line is open.

Yes, thanks. I had a question about market share. It feels like last couple of years is players and industries have rolled out their risk-based pricing models. We've seen more quarterly volatility and market share across the industry than we've seen historically. Just interesting getting your thoughts on I'm kind of that pricing dynamic and what you're observing in terms of like the sustainability of your business with each individual customer you have.

Yes. Thank you Mark. This Rick. I really think again from a market share point of view we're less focused on markets. I think if you look over time we've largely been pretty consistent and I think we haven't seen the same volatility because we don't participate in some of the large column bidding situations that create the volatility around market share and I think you'll see ups and flows of different volume from quarter to quarter as different participants play in those different programs. We're focused on doing business with the customers that align well with our risk return profile and where we can enable them to be very competitive in the marketplace and I think as I've said before I think you know Derek and the team and the sales team are highly focused. We're very data analytics driven in our business so when you think about the environment we're in today I think it 100% plays to our strengths and I think the evidence of our success is really how we've been able to sustain strong relationships with a broad base of very high quality players produce high-quality volume, very attractive mid-teens returns as Frank went through and generate significant economic value we displayed in our Investor day kind of presentation. So we feel very good about it. I can tell you the only time I hear the market share words in our own discussion is really around earnings call time because we're focused on doing business with the right customers, they do business the right way and truthfully I think we're unique and the way we deploy data and analytics not only around loan attributes but we do just as thorough review of our customers and how they originate quality and how they service our risk. So I'm much more comfortable with how we select where and who we do business with based upon our alignment with their strategic objectives and our ability to help make them more competitive. And I think we're winning business where we see the opportunity and we're going to continue to, I think we're well position in this environment to our strengths and I feel very comfortable about it.

Okay. So just to clarify it sounds like your observation is that most of the share shift that you're seeing is due to the more the bulk good business. You're not necessarily seeing pockets of your flow where there's elements of risk that just looks like it's going away because maybe the pricing moved against you and you have to respond is that the correct way?

I think the big market share shifts are exactly as you described. I think from an overall pricing point of view we see a fair stable rational environment and I think we feel very well positioned to compete and where we don't choose to participate, I think that's where you see the volatility.

Okay. That's helpful. And then Frank just interested to hear if there are any tangible benefits that you're looking for as a result of the Moody's upgrades?

That's a great question Mark. I think we've talked about this for a number of years we have and continue to have a stated goal of returning to investment grade for strategic reasons. Practically speaking it doesn't prevent us from doing business with any of our customers on the MI side. So that is certainly a practical consideration there. We'd still love to return to investment grade for just a broader set of strategic options but as it relates to our core business practically speaking there's not a significant distinction with the upgrade but happy to have the upgrade and hope to see more in the future.

Okay. Got it. Thank you.

[Operator Instructions] Next we have the lineup Phil Stefano with Deutsche Bank. your line is open.

Yes. Thanks. Quick I guess geography question on other operating expenses. It feels like the mortgage insurance other operating expenses has been coming down and a larger proportion of the total has been allocated to corporate which then gets allocated back to the segments. Is that right and can you help me understand why the geography there is changing?

Sure. Phil this is Frank. I can't tell you it's right and the geography I will say will change from time to time just as we reposition resources across the different segments. So I wouldn't say there's a wholesale reason why that happens. I would you say it's its ordinary course review and just updating of our allocation methodologies and where the expenses reside. But I would say that because there is the opportunity for a little bit of movement and perhaps a little bit of noise period to period there I would just try to circle you back to the total expense line just to make sure that you're just grounded and what the total expense space for the organization is.

Got it and that was the 72 million issue as you had mentioned before.

That's right.

Okay. In looking at the proportion of LTV the 85% and below it feels like that has been growing with time. I guess over the past couple quarters when we think about refinances and the increasing number of people who are refinancing but not able to drop mortgage insurance is there different returns for this business given that it probably won't be around as long with us with housing prices appreciation? Should we be thinking persistency might be pressured a bit just because again these guys might be falling off of their MI coverage faster than their maybe some of the other policies and thinking back historically over the business?

Hi this is Derek. So in terms of from a return perspective kind of looking across different credit characteristics the expected returns are pretty stable and so obviously when we project that we factor in the fact that the $0.85 below are going to have shorter duration and all things being equal to the extent that the portfolio becomes more skewed towards lower LTV that is going to have an impact in on persistency overtime.

Okay. That's what I have is on the services revenue and Rick maybe you could just give us a reminder, how much of the services revenue is repetitive business versus the quarterly revenue is dependent upon sales that happened a quarter or two ago I guess when I think about the insurance broker segment it feels like 90% of their business on January 01, they wake up and know that it's going to renew. I mean they only really have to do 15% new business and then get some 5% organic and everybody's happy. Can you put that the services business in similar terms as to how we might be able to think about it?

Yes. That's a great question and I think if I look back 2.5 years I would have said it was a little bit more episodic as my favorite word. I would say today given the nature of the business it's becoming increasingly recurring and what I mean by recurring just so we defined the term it's becoming a recurring because we're creating relationships with customers who have – that are integrated with from a technology point of view whether its title and settlement services whether it's valuation services and we're also seeing steady flow from a mortgage services perspective as a securitization market kind of as a level of stability and growth to it. So I think today it's away from the special project work that may be occurred during the financial crisis error and much more focused on kind of normal flows and integration on mainstream business around origination activities or securitization activities, SFR financings, REO transactions that are in our pipeline. So where the volatility will come in as obviously there can be some cyclicality in that from an origination cycle. So purchase market cycle and seasonality around that so but from a customer relationship and integration point of view and much like we see on the MI business in terms of kind of embedding within our customer relationships and partnering with them, that's really where the business is heading and really is more there today than it was two years ago.

Okay, thank you.

That's a great question by the way, thank you.

Next in queue, we have the line of Geoffrey Dunn of Dowling & Partners. Your line is open.

Thanks, good morning.

Hi, Geoff.

Obviously we've seen what has been driving the ability to keep lowering the incidence assumption now to 7.5. And I doubt there's much more room although there could be maybe another 50 basis points or something like that based on how you guys have talked about in the past. But what are some of the leading indicators we should watch for that might move that back up towards a normalized level. For example what's the sensitivity if home prices slowdown to 1% or 2%? What's the sensitivity if unemployment went up to 4% or 5%? How can we think about credit going forward and watching the macro economy?

Sure, this is Derek. I mean I think that you hit upon the two main ones in terms of home price appreciation is going to be an indication not only unemployment rate but also reemployment rates that ends up being a big factor in our model as well. That's going to have an impact on tier rates. And then, looking at kind of our reported results while you're going to be looking for or kind of tier rates and then tier rates and kind of the distribution of kind of how long loans have been in default and number of missed payments. So, I don't have particular sensitivities if HPA goes down by 20%, how that translates into kind of default performance. But those are going to be your standard early indicators of performance that you're going to see across the mortgage book.

Is it fair if for instance, I'm sorry, is it fair if home prices did slow down into that 0% to 2% that 7.5 is probably not the right rate?

It's tough to say. The other thing you have to factor in is the distribution of the book in terms of I would say pre-crisis and post-crisis. So, with respect to that a lot of its going to depend upon also the embedded HPA you have within those loans. Obviously, on the margin higher home price appreciation is going to be favorable but the other thing we certainly see is kind of on those post-crisis defaults as those increase they have higher tier rates. The other thing to factor in certainly if you see a home price depreciation really kind of back up and you see kind of increases in defaults. You see more modification and modification kind of opportunities I think going forward. So, I think it's hard to just kind of draw a straight line and say it works; it really kind of depends on the distribution of defaults as well.

Right. This is Rick, I would just add. I think the other important factor to consider in all this which there's not a tremendous amount of historical experience but it'll work to the positive in the future which is servicers have a lot more tools in their tool belt so to speak. They ultimately resolve defaults. So, you may see an incident of the kind of an increase in defaults based upon certain macroeconomic factors but we also see services and investors. And even the political environment much more focused on ultimately curing borrower's situations more effectively in the past. So, I mean I think that all comes into play with how we think about to go-forward and what some of the kind of the upward pounds are around ultimately how these things move through from initial default to claim.

Okay. And just last follow-up, I guess. Is it conceivable that the rate could still further decline?

Yes. I think that I mean that really is tough to judge. I mean I think we may have guided toward a lower bounds a couple hundred basis points ago. So, it really is tough to say.

Okay, thanks.

Thank you.

And our last question here in queue comes from the line of Sam Cho of Credit Suisse. Your line is open.

Hi. Most of my questions have been answered. But are there any additional Ireland issuances or re-insurance that we should be aware of and the timing on that will be great. Thank you. A – Frank Hall: Thanks Sam this is Frank, a great question. As I mentioned in my prepared remarks we do feel that Ireland's are a valuable tool for risk distribution and it's something that we would consider on a flow basis. So, that is certainly something that we are contemplating and to the extent that we would move forward with anything you would see an announcement around that.

Thank you.

And with no further questions here in queue I'll be happy to turn it back to our host for any closing remarks.

Thank you. And I want to thank our team for just a great quarter and all the hard work that everybody's putting into this. And obviously the support we get from our board and I want to thank each of you for your interest in Radian. We truly appreciate it and I want to make one last comment as a die-hard St. Louis Cardinals fan, I want to congratulate all the Nats fans out there with a wonderful World Series win and so I hope you get to celebrate. And we look forward to talking to each of you meeting with each of you in the future and certainly welcome any questions. So, thank you and have a great day.

Ladies and gentlemen, it does now conclude the conference for this morning. We thank you very much for all of your participation and using our AT&T executive teleconference service. You may now disconnect.