Good day, and welcome to the Q3 2022 Radian Group Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. John Damian, Senior Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, and welcome to Radian's third quarter 2022 conference call. Our press release, which contains Radian's financial results for the quarter, was issued yesterday evening and is posted to the Investors section of our website at www.radian.com. This press release includes certain non-GAAP measures that will 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. In addition, specifically for our Homegenius segment, other non-GAAP measures that will be discussed today include adjusted gross profit, adjusted pretax operating income or loss before allocated corporate operating expenses and the related Homegenius profit margins. 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 Frank Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. 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 2021 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I'd like to turn the call over to Rick.

Thank you, John, and good afternoon. Thank you all for joining us today and for your interest in Radian. Despite a challenging macroeconomic environment and cooling of the mortgage and real estate markets, I am pleased to report another very strong quarter for Radian. Our teams remain focused across our three areas of strategic value creation, growing the economic value and future earnings of our mortgage insurance portfolio, growing our Homegenius business and managing our capital resources. Frank will discuss the details of our financial results shortly. Before he begins, let me share a few thoughts and observations about today's macroeconomic environment, the impact it has on the mortgage and real estate markets and our business and more specifically how we are positioned to navigate the road ahead. Clearly, there has been a significant macroeconomic shift in 2022, including a 40-year high rate of inflation, a dramatic increase in interest rates, financial market volatility, a significant widening of credit spreads and heightened geopolitical risk. This is all despite a resilient job market and a very low unemployment rate across the country. For our business, in terms of [technical difficulty] and claims paid, aside from the strength of underwriting at origination and the quality of loan servicers, one of the most important factors is the ultimate level and duration of unemployment through the cycle. We are closely monitoring the wide range of forecasts by economists related to the projected unemployment path. The good news is that our portfolio has been well underwritten. It has a strong overall credit profile with meaningful embedded equity. In fact, approximately 89% of borrowers in our default portfolio today have greater than 20% equity in their home. Additionally, we have distributed a significant amount of the risk to the capital and reinsurance markets. Over the past…

Thank you, Rick, and good afternoon, everyone. To recap our financial results issued last evening, we reported GAAP net income of $198.3 million or $1.20 per diluted share for the third quarter of 2022 as compared to $1.15 per diluted share in the second quarter of 2022 and $0.67 per diluted share in the third quarter of 2021. Adjusted diluted net operating income was $1.31 per share in the third quarter of 2022 compared to $1.36 in the second quarter of 2022 and $0.67 per share in the third quarter of 2021. I'll now turn to the key drivers of our revenue. Our new insurance written was $17.6 billion during the quarter compared to $18.9 billion in the second quarter of 2022 and $26.6 billion in the third quarter of 2021. New insurance written for purchase transactions was $17.3 billion, a decrease of 27% year-over-year. Purchase volume accounted for 98% of our total new insurance written for the third quarter of 2022 compared to 90% in the third quarter of 2021. Our reported quarterly annualized persistency rate increased to 81.6% this quarter compared to 67.5% a year ago. Primary insurance in force increased to $259.1 billion this quarter, showing growth of 7.3% year-over-year. We are modifying our expected insurance in force full year growth rate for 2022 to about 5.5% due to servicer reconciliations on our single premium policy cancellations and a reduction of NIW expectations due to slowing originations. This is down from our previous full year 2022 growth expectation of approximately 7%. Monthly premium insurance in force has grown 12% year-over-year and represents 85% of our total portfolio, as shown on webcast Slide 11. Total net premiums earned were $240.2 million in the third quarter of 2022 compared to $253.9 million in the second quarter of 2022 and…

Thank you, Frank. Before we open the call to your questions, I want to highlight that we are pleased with our results and remain focused on executing our strategic plans. We believe our mortgage insurance team is well positioned to navigate the macroeconomic environment and continue to build the economic value of our insurance portfolio. We remain excited about the future of Homegenius based on the market response to our innovative products and services. We continue to strategically manage capital by maintaining strong holding company liquidity and PMIERs cushion, opportunistically repurchasing shares and paying the highest-yielding dividend in the industry to stockholders. We are driving operational excellence across our businesses and aligning our overall expense structure and resources to reflect the market environment and our strategic priorities. And as I noted last quarter, we are extremely proud of our success over the years in ensuring the American dream of homeownership. And we know we're in a unique position to do even more. Our affordable homeownership initiative is focused on addressing the access to affordable, sustainable and equitable homeownership leveraging our expertise and local partnerships to help address homeownership barriers for people and communities of color. And finally, I want to thank our team for the outstanding work they are doing each and every day. Operator, we would be happy to take questions.

[Operator Instructions] And today's first question will come from the line of Mark DeVries with Barclays. Please go ahead.

Yes thanks. I was hoping you could comment on any thoughts you may have on the potential implications for your business of the FHFA's proposed price adjustments for the GSEs?

Yes. Thanks, Mark. This is Derek. It's kind of tough to say exactly what the impact's going to be. We certainly support the change. I think it's helpful in terms of focusing on lowering costs for low and modern income borrowers. The other thing to keep in mind is it's still our expectation that at some point, although probably a 2023 event that we'd see a reduction on the FHA side. So it's a little tough to say what the impact would be. I'd say overall, we don't expect to see a huge impact. The other thing to keep in mind the FHA market has kind of been a bit reduced in size. So if we had to estimate it in terms of its -- the increase on the MI market we'd probably estimate it being in the single digits.

Okay. That's helpful. And then -- thanks for the comments on what you're seeing in pricing. Just curious, are you adjusting pricing in a manner just to support your target returns across all businesses? Or are you selectively increasing pricing in certain areas to try and avoid positive risk that you don't want to get?

Yes, this is Derek again. So in terms of pricing, we've been adjusting pricing upward broadly really in Q3 and into October. And so when we think about pricing, we are really looking at relative value. So when we look at that, for instance, if we see less relative value, we'll adjust pricing up more. So as we kind of look at the pricing, we adjusted pricing up more on the below 680 FICO, some of the layered risk segments, but certainly take into account increased macroeconomic uncertainty, potential for home price changes. And so I would say, generally, what we've seen, I think, overall in the industry is pretty broad-based changes, some areas a bit more than others. I think some moving faster than others. I think we've probably been a bit more aggressive than the market overall in terms of our pricing changes, particularly in the latter half of Q3. And so as we think about Q4, we would expect to see a decrease probably in our NIW market share in light of that.

Okay. It's very helpful. Thank you.

Thank you. One moment for our next question, that will come from the line of Doug Harter with Credit Suisse. Please go ahead.

Thanks, Sticking with pricing. Can you just talk about the relative change in pricing that you've made on your policies and how that would compare to kind of the higher costs that you're seeing on ILNs or XOL reinsurance, just to kind of get a relative sense of how different parts of the market are pricing in the risk.

Sure. So in terms of that, and we've talked about this in the past, as we're sitting our pricing, we're not factoring in the cost of risk distribution. So really, the focus factoring in or change in terms of macroeconomic view, where we see market clearing levels. We're really trying to find the pieces or parts of the market that have the highest relative value and economic value, not factoring in risk distribution. Now that being said, certainly, what we've seen on the risk distribution side is a much wider kind of spreads on the ILN market. We haven't seen the traditional reinsurance market kind of price up as much. You're starting to see a little bit of it. And I think from our perspective, certainly, what you've seen on the ILN side and the spread widening is not really warranted by what we view as the fundamentals in terms of the business we're writing and what we're seeing from a market clearing level perspective. And I think that has caused us to certainly not issue in the ILN market recently in light of that. We just see the relative value is being more accretive for us to hold that risk given the market clearing levels that we see. And that's not terribly surprising. We're closer to the market. So sometimes you could see those who are further away from the market from our perspective over react in terms of the way they're repricing the market.

Understood. I appreciate that answer. Thank you.

One moment for our next question, that will come from the line of Bose George with KBW. Please go ahead.

Everyone, Good afternoon, I just wanted to ask a clarification on the -- that service reconciliation. Is that just a lag in terms of services reporting cancellations to you? And does that just show up as like more cancellations next quarter?

In short, the answer to that is yes, right on point.

Okay. Great. And then actually, switching to leverage, actually, leverage and buybacks. So your debt to capital ticked up a little more is like 27.5%, which is kind of the -- a little bit above the high end of your range. So when we think about buybacks going forward, should we really focus on excess earnings as the driver? Or does that jump in the contingency reserves in 2024. Or sort of help the cadence? Or should we really stick more to sort of what GAAP allows you to do? Or were you comfortable doing under GAAP leverage?

Yes, Bose, this is Frank. On the debt-to-cap ratio, there are two things that have actually impacted us recently on a go-forward basis, or excuse me, have impacted our current period debt-to-cap ratio. One is AOCI itself, and that's about 250 basis points of a decrease -- or excuse me, of a decrease in debt-to-cap and then the share repurchase is another, call it, 200 basis points. And so both of those factors have sort of impacted our leverage. One, certainly, we're very comfortable with the amount of share buyback that we have. The other one we're mindful of, our next maturity is coming up in October of 2024, so we could have an opportunity to delever further there. But in the interim, our equity continues to grow. So we're very comfortable at the level where we sit today, and we're obviously very mindful of it in our capital planning altogether. But those are sort of two near-term drivers of why you've seen an uptick in that.

Okay, great. Thanks.

Thank you. One moment for our next question. That will come from the line of Mihir Bhatia with Bank of America. Please go ahead.

Hi, thank you for taking my question. I think the first thing I wanted to just check on -- want to get clarity on what happened with the buyback authorization? I mean it seems like you've used all of the last one. I'm just kind of surprised that you didn't have another one in place. Is this just a timing thing related to Board meetings or something? I'm just a little surprised by that, any clarity there?

Yes, Mihir, this is Frank. If you recall, when we put that share repurchase authorization in place, it had a 2-year term to it. And I would say that the market conditions relative to the value-based targets and trigger points that we have in our 10b5-1 plan were such that we went through the $400 million very quickly because of the market price. We're certainly very comfortable with that as a possibility. When we put the 10b5-1 plan in place from a shareholder standpoint, it certainly has maximum impacts when you're buying back below book value. And when you front-end loaded it, if you will, so we're comfortable with all that. I think as you've heard us say in the past, our capital plans are announced at the time when we actually execute on them. This is not uncommon for us to exhaust a share repurchase plan and then have some delay before future capital plans and actions are announced. And I would say the landscape to now as it relates to just overall capital management is something that we're always very thoughtful about that the economic landscape right now is one that I think we want to be perhaps extra careful around. We have an abundance of capital. We have a good line of sight into our capital flows on an ongoing basis. So we're very comfortable with where we sit. We just want to be very thoughtful and careful as we always are with the planned uses for that capital.

Mihir, this is Rick. I think it's always good when Frank reminds the audience how many shares we bought back. So this year, 11% of our outstanding shares and I think since what, 2015, Frank? Something like 80 million shares. I think if I've got that number right.

That's right.

Appreciate that. Thank you.

Thank you. One moment for our next question. And that will come from the line of Eric Hagen with BTIG. Please go ahead.

Hi, thanks for taking my question. First one is just how do you think about reserving for credit in this environment based on criteria like debt-to-income ratio. Like how big of a driver is that relative to other factors at the loan level, which drive your decisions for reserving?

Yes. This is Frank. I'll start and then hand it over to Derek. But the reserving that we do, just as a reminder, our reserve estimates or an accounting estimate that we make each quarter based upon current information about the loss content that we expect to see in the delinquent loan portfolio. So we take into account current views on the economic environment, what we're seeing as far as performance, cure activity, et cetera, historic performance, et cetera, and do our best to look forward where we think risk factors, which is why I highlighted in the prepared remarks that there could be a potential divergence in what you're seeing from current period defaults or more recent production vintages relative to older production vintages simply because of the amount of home price appreciation that's embedded in there. So that -- those are all factors that we take into account when we establish our reserves. Derek, I don't know if you'd add anything to that.

I would just add in terms of kind of the drivers of the reserve, it's much more driven by kind of macroeconomic trends. So if you kind of think about it, kind of the view in terms of unemployment, home price appreciation, some of those borrower characteristics at origination become less significant in terms of trying to determine the probability, default will roll to claim. Once a borrower is in default, it's more indicative as to whether they get into default. Once they're in default, then the driver becomes much more in terms of, again, home price appreciation and reemployment rates are a bit of a bigger driver from a reserving perspective.

Got it. That's helpful detail. I'm looking at some of the more seasoned ILN transactions where the detachment point has risen materially as the capital structure has delevered. Maybe you can discuss the flexibility that you have to relever those transactions even against the backdrop of higher costs like you guys have discussed. I appreciate it.

Yes. Again, I'll start and hand it to Derek for additional color. This is Frank. As we did this period, when we're looking at risk distribution in the ILNs in particular, if the attachment points are relatively high, and we don't expect to see much benefit from a risk distribution perspective. And we're also limited or no longer receiving PMIERs credit for it, it doesn't really serve much purpose for us. So to the extent that we have the opportunity to unwind those sooner, we'll take advantage of that. But Derek, I don't know if you'd add anything.

I would just add in terms of as you think about relevering, one potential thing parties can do is potentially purchase kind of outstanding positions in terms of the tranches to potentially relever that hasn't been generally done that much in terms of the market. So from our perspective, we really are looking at that cost of capital, the probability that those structures actually attach and then what sort of tail risk they provide [technical difficulty] condition, what sort of capital relief we're getting to the extent that -- and we analyze that regularly, in terms of kind of when we have a call option kick in and if we don't see kind of a return from a cost of capital perspective in terms of keeping the structure in place will actually terminate the structures.

But helpful detail. Thank you guys very much.

And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Rick Thornberry for any closing remarks.

Thank you, and thank you all for joining us today and for your continuing interest in Radian. I'd like to take a moment to share our thoughts and prayers with all. We are dealing with the aftermath of Hurricane Ian. We're all very familiar with some of the tragic destruction that's gone on down there. We want to share our thoughts and prayers with those that are impacted. And before we close the call, I know many of you are familiar with our annual fundraiser for the MBA Open Doors Foundation, an incredible organization that shares our mission of enabling and protecting homeownership by helping families who are critically ill or injured to remain in their homes. While their children are in treatment, truly a special cause it's near and dear to our heart here at Radian and on a personal and professional level. We launched this year's campaign during the MBA annual convention. I want to thank all of you who have helped contribute to this outstanding cause. And just to let you know, we're going to continue to fundraise for this through November 18. So you can do visit radianopensdoors.com, if you'd like to learn more. If we didn't have such passion around the calls, I wouldn't share it with you, but we're very excited about it and really enjoy supporting this organization. So again, thank you all for joining, and I look forward to speaking to you next quarter.

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