Good day, and thank you for standing by. Welcome to the Radian Group Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Damian, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you, and welcome to Radian's fourth quarter and year end 2022 conference call. Our press release, which contains Radian's financial results for the quarter and full year, was issued yesterday evening and is posted to the Investors section of our Web site at www.radian.com. This press release includes certain non-GAAP measures that maybe 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 in our press release that maybe discussed today include adjusted gross profit and adjusted pretax operating income or loss before allocated corporate operating expenses. A complete description of all of our non-GAAP measures maybe found in press release Exhibit F and reconciliations of these measures to the most comparable GAAP measures maybe found in press release Exhibit G. These exhibits are on the Investors section of our Web site. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Rob Quigley, Controller and Chief Accounting 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 Web site. 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 headwinds in the macroeconomic environment and continued cooling across the mortgage and real estate markets, I'm pleased to report another solid quarter for Radian. In a few minutes, Rob will discuss the details of our financial results, expense management progress and capital actions. Before he begins, let me share a few thoughts on the environment, our strategic focus and how we are positioned to navigate the road ahead. In terms of the macroeconomic environment, the weakness in the economy continues to be driven by the dual headwinds of high inflation and interest rates. Although there are concerns related to a potential recession, inflation has begun to ease somewhat in 2023, which the Fed recognized with a reduced interest rate hike last week. And despite these economic factors, there continues to be a strong labor market with the lowest unemployment rate in more than 50 years. And from a mortgage and real estate market perspective, despite near term challenges, our outlook for housing remains surely positive over the near and long term. In 2022, the doubling of interest rates negatively impacted volumes with mortgage applications falling to recent record lows. For 2023, recent industry mortgage origination forecasts call for a bottoming out of the origination market with a decline of approximately 20%, followed by a return to growth in 2024 with increased purchase loans and expected strong participation by first time homebuyers. And after a two year run where the real estate market saw a significant gain in home prices, many regions across the country are seeing home prices coming off their record highs that we believe should support a healthy real estate market in coming years. And although the rapid…

Thank you, Rick, and good afternoon, everyone. I appreciate the opportunity to speak today on behalf of the Radian team about our fourth quarter and full year results, especially given the strength of those results and the positive impacts from the capital actions that we completed during the quarter. As reported last night, in the fourth quarter of 2022, we earned GAAP net income of $162 million or $1.01 per diluted share compared to $1.07 per diluted share in the fourth quarter a year ago. For the full year, net income was $743 million or $4.35 per diluted share compared to $3.16 per diluted share in 2021. Those earnings helped produce an 18.2% return on equity for the full year 2022 compared to 14.1% for 2021 with the year-over-year improvement driven primarily by favorable credit trends that benefited our mortgage insurance loss provision. Adjusted diluted net operating income per share was $0.04 higher than the GAAP amount for the fourth quarter and $0.52 higher for the full year as reflected in the detailed reconciliations provided in our press release. Turning to more detail behind these results. I will first address our revenue and related drivers, which were impacted by the broader macroeconomic environment in both positive and negative ways. As detailed on Exhibit D in our press release, we reported total net premiums earned of $233 million in the fourth quarter of 2022. Compared to prior periods, this amount reflects a decline in revenues, resulting from fewer single premium policy cancellations in our Mortgage Insurance portfolio as well as lower title insurance volume, both due primarily to the significant reduction in mortgage refinance activity during 2022. Changes in the size and average premium yield of our in force Mortgage Insurance portfolio also impacted our net premiums earned. Our primary insurance…

Thank you, Rob. 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 are driving operational excellence across our businesses and aligning our overall expense structure and resources to reflect the market environment. Our $261 billion mortgage insurance portfolio is highly valuable and is expected to deliver significant earnings going forward. 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 and stockholders, and are now positioned to pay recurring ordinary dividends from Radian Guaranty. We continue to focus on our ESG efforts and recently issued our first DEI annual report. I am also pleased to report that Radian was named for the fifth consecutive year to the Bloomberg Gender Equality Index in recognition of our commitment to advancing gender equality in the workplace. And as I've mentioned previously, we are extremely proud of our success over the years in ensuring the American dream of homeownership and we know we are in a unique position to do even more. As a cornerstone partner of the MBA's Convergence Philadelphia Initiative, we look forward to the launch next month into working together with the MBA and other local partners to help address homeownership barriers for people and communities of color. And finally, I want to thank our team for helping to drive our 2022 results and for the outstanding work they do every day. Now operator, we would be happy to take questions.

[Operator Instructions] Our first question comes from the line of Doug Harter with Credit Suisse.

Hoping you could talk a little bit about how you're viewing the competitive environment. It still seems like there are still big market share shifts kind of across the industry and just kind of how you're seeing the competitive pricing dynamics.

So I wouldn't say we've seen necessarily bigger market share shifts. So we typically do see shifts when we see kind of a change in terms of cycle. So you tend to see market share shifts if you're in a down cycle from pricing or an up cycle. And I would characterize that we're in an increasing cycle right now. I think we've seen, on the competitive side, more increases in Q4. We actually started increasing prices in July and have continued into 2023. So overall, I would say in the aggregate, an increasing cycle continue to be very focused on picking our spots where we find the most economic value with a particular focus on geographic pricing, and that's played out pretty well for us. We've been pretty aggressive in terms of how we price geos. And we've seen pretty good correlation geos that we've priced up that we've been under allocated from a share perspective. And that has also correlated closely with the geos where we've seen more of a decrease in home prices recently, and I would say the reverse was true. The geos that we were leaning in, we have outsized market share and we've seen prices hold up better.

Our next question comes from the line of Bose George with KBW.

The unusual expenses that you mentioned, how much of that was at Homegenius? And also, what do you think Homegenius could do -- I mean, could you think Homegenius could get to breakeven if the mortgage market remains sub $2 trillion, say, for the next couple of years?

Let me -- Bose, thank you for the question. And Rob may add to this, but let me just give a little bit of a Homegenius kind of update, because I think that covers both of your questions. I think 2022 is really kind of a -- was a challenging year from many perspectives across Homegenius. Kind of a bit of a perfect storm and so like many others in the space across the mortgage and real estate markets, we saw a rapid decline in volumes, as you've seen in some of the other businesses that you follow. And that clearly disrupted our kind of near term plans for growth. We anticipated some of that change in our plans, but we also -- like we all know, the market volume declined at a pace and size that no one contemplated. Certainly, the speed at which it occurred. So the greatest impact across our plans throughout the year and even today has been the rapid decline in title business as the revenue and contribution from this business is off materially year-over-year. Regardless of the reasons, the '22 financial performance of Homegenius was just not acceptable from our perspective, which is why we took aggressive expense management actions and are making other adjustments to better position us for 2023 and beyond. So for Homegenius, we reduced overall direct and allocated expenses, to your question, including cost of services, approximately 15% to 20% through today. And so given the volatility in the business that continues and specifically related to market volumes and the direction that volume will go both in the real estate and mortgage market, we're not able to provide guidance related to this business. But based on all the seasonality factors and the current run rates in the overall market that are somewhat challenged, we expect the first quarter to be -- continue to be challenging, but albeit at a lower expense base, right, as we prepared for it. That being said, our team remains focused on developing the high level components of our platforms and continuing to navigate this business towards a profitable contribution, and that is the focus. And I think by virtue of our actions that we took throughout last year as we saw really the market changed dramatically, I think we're positioned better now, obviously, than we were throughout 2022, positioned towards benefiting from growth, benefiting from a lower expense base. And I think in certain of our businesses, we certainly see them bottoming out. We see new technologies that we're bringing to the market that we're receiving positive feedback, too. And so as we look forward in the year, our focus is to kind of guide this back -- not guide, from a financial guidance point of view, but to navigate the business back to profitability. So that's our focus, and I think that's a little bit of the history of how we've operated throughout the year.

And then actually just one more. Just given the increased, I guess, flexibility on statutory capital, can you just remind us of sort of the other constraints like debt to capital that you have as we kind of model what could be the level of capital return over the next couple of years?

So maybe again, Rob and I can maybe tag team this. I think in terms of -- one of the great things that occurred in the fourth quarter is we crossed over a very important threshold, which was to -- that was 15 years in the making, really since the great financial crisis to kind of move from a regulatory point of view, our negative out of sight surplus to positive, right, which puts us in a situation to pay ordinary dividends from Radian Guaranty to Radian Group on a recurring basis, right? And so that -- for us, that's a transformational change in the overall capital structure. When you think about like binding capital, obviously, the regulatory requirements, I think we're in good shape on from an overall kind of risk perspective. When you look at PMIERs, we've got significant cushions. So from a Radian Guaranty, I think the strength of the current capital structure puts us in a position to pass capital to Radian Group, as Rob and I both stated in our comments. When you look at leverage, the overall leverage of the business today, we feel really comfortable where we sit. And I think this business, one of the great things about our business is that it naturally deleverages very quickly, and so you can see that kind of over time. We also have kind of maturities on our two debt securities, which we commented on when we did the 2025 maturity issuance, that they align very well with the capital flows. So we feel like we're in a great financial flexibility position to manage leverage, feel good about where we're at and we don't think it really creates any barriers for us in the future in terms of our ability to leverage our financial flexibility across our capital structure.

I'll add a constraint on the statutory side. As we said in our remarks, we expect Radian Guaranty for 2023 to distribute $300 million to $400 million up to our holding company. We'd expect that to happen relatively evenly throughout the year. And then in future years, we'd expect the distributions from Radian Guaranty to Group to mirror the statutory earnings of Radian Guaranty. And that is still one of the constraints around ordinary dividends under the Pennsylvania insurance laws. So in terms of sizing that amount of capital flowing up to Radian Group, we think it would mirror closely Radian Guaranty's statutory earnings.

Our next question comes from the line of Mihir Bhatia with Bank of America.

I did want to ask about the Radian -- I wanted to follow up on Bose's question about just the capital distribution. Maybe talking another way, does the fact that you now have ordinary distributions available, does that change in any way your view around capital return weighting between dividends? Maybe you want to grow the stock dividend a little bit more because now you have more confidence, you don't have to go through the extra approval process. Anything on that?

By the way, we love the sounds of children in the background. We've all gotten used to that over the last three years, and never feel like you got to apologize for that. But look, I think we have -- thank you for the question. Really, really, I think, thoughtful. We've been good -- I think we have a history of being great stewards of capital. I think over the last five years, we returned $1.7 billion of capital to shareholders. Last year, we returned $535 million through a combination of $135 million of dividend and $400 million of share buybacks, of which we bought back about 11% of our outstanding shares. And our Board just recently authorized the $300 million in January from a share repurchase plan over the next two years. So I think our track record and our history kind of says we take managing capital very seriously. And I do -- as you highlighted and Bose highlighted, this change for us that occurred in December is transformational. It gives us tremendous financial flexibility around how we connect earnings to capital flows to Radian Group, how we manage the overall capital growth from -- capital position to kind of drive growth. So having said that, the team has worked incredibly hard to get to this point. I couldn't be more proud of them. It's a big monumental accomplishment. As you know, that's a long winded way of giving you this answer. But as you know, we don't comment on kind of future capital plans. But I think again, our track record speaks for itself. And I think we have a track record of managing it appropriately. We will obviously manage this on any kind of share buybacks as we have in the past on a value based approach. I think given the economic environment that we're all kind of monitoring very closely today, we're going to take a very balanced approach and make sure that we're considering the changes in the economic environment as we navigate through our capital plan. And then as we have in the past, we'll update you each quarter on kind of our plans and our planned execution from a progress point of view and different capital activities. But we're very proud and very happy with where we sit today in terms of our overall capital position and the ability, as Rob described, to continue to release capital from Radian Guaranty based on future earnings as we go forward, and puts us in a position to exercise our capital strength as we go forward.

And just one other question for me. In terms of going to the -- last thing you mentioned about just the economy and where we fit in just some kind of general softening. Is there anything, whether in your portfolio that you're seeing, in the environment that you're steering from originator partners, that makes you worry about housing credit specifically? Like obviously, I understand the macro concerns and potential if you have a recession, unemployment goes up. But is there anything related to like credit standards or some -- or just something related to housing specifically that is giving you pause, making you maybe be a little bit more cautious?

It's a great question. It's one Derek and I probably talk about it on a daily basis kind of in the teams. I would say today, and I think we're cautiously optimistic about kind of where things are because the economy, there are legitimate fears about a recession. I think more economists are kind of leaning towards the direction of that being not an extended harsh kind of environment. But that the things that we're encouraged by from a housing credit, housing value point of view, are really unique to this environment, so maybe coming out of COVID where we have a significant home price appreciation, kind of embedded equity within our existing portfolio. Today, we have a supply -- demand-supply imbalance across the housing market where you have millennials -- as my comments suggested, where you have millennials entering the market at just huge numbers with no homes to buy, especially in our market. Remember, we operate in kind of the bread and butter market of the housing market across the country. We're not in $10 million homes in New York or in Naples, Florida or in San Francisco. We're in the basic first time homebuyer, middle income, that market is undersupplied by significant numbers. So from a home price appreciation, we see and we challenge every day, we actually see more balance in that and are, I guess, more comforted by that than you might otherwise expect going into a recession. So I think when we look at it, we're -- obviously, I wouldn't want to leave you with the impression that we've let our guard down at all. But we do have a level of confidence around housing today that I think informs our view about the future and makes us feel good about kind of our overall position. Derek, do you want to…

I would just add. I mean, the credit quality, the underwriting quality continues to be very solid as well as the servicing quality. So when you look at all of those metrics, very positive. From a macroeconomic perspective, Rick alluded to the fact of just supply and demand imbalance, which is kind of helping from a home price perspective. So when we talked last quarter, at that point, the FHFA Index, again, most representative of the business that we write, we saw that decrease in July and August. We've actually seen that kind of flatline the last several months. So we've talked in the past, our base cases still for home prices did go down. I would say I'm a bit more optimistic than what I was last quarter in terms of some of the data we're seeing from a home price appreciation perspective at this point.

Our next question comes from the line of Eric Hagen with BTIG.

I think I got a couple here. I'm curious how to think about the loss provision on current period defaults going forward. Like which cohort of loans do you see defaults maybe being concentrated, what are the variables at the loan level which you're looking at to make that determination? And then I'm curious how you see pricing developing in response to lower mortgage rates from here? Like are there any cohorts of the market where you could get maybe more aggressive because rates are lower and there's more visibility for certain elements of that kind of borrower cohort?

I'll take the two parts. In terms of cohorts or what we're looking at in terms of defaults, a lot of it is going to be driven by seasoning. So as you kind of have certain vintages go through their peak kind of default years, you're going to see those go bit higher rate. But in terms of the indicators, I think the traditional ones you're going to look at, right? So it's going to be driven by FICO and LTV. What we're finding in terms of new default is the embedded equity is holding up. So we talked about the embedded equity in our default portfolio. But when we look at new defaults in Q4, again, they gradually shift from a vintage perspective but importantly, they still have significant embedded equity. So that's what we're looking at. Then on the macro side, what we're looking at is our home price projections and unemployment and reemployment rates, right? So the propensity to cure is driven very much by that reemployment rate and the HPA or embedded equity in the houses, that's why it's very important when we construct the portfolio that we're doing it at a very kind of granular geographic level, because that embedded equity can be quite a bit of dispersion in terms of performance embedded equity. So those are some of the things we look at there. In terms of your second question in terms of products and given -- I think it was related to interest rates and the decline, not a huge impact. The way we would view it is depending upon where rates are, it will affect the persistency potentially. So as we kind of think about that, you'll have different durations. And so that can affect how we would price it. But I would say on the margins, I don't think rates being down 100 basis points significantly affects how we're pricing in different segments.

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Rick Thornberry for closing remarks.

Thank you. And thank you all for joining us today and for your interest in Radian. Before we sign off, I have to note the excitement of Sunday Super Bowl match up as the Philadelphia Eagles, which is home to many of our Radian team, as I'm surrounded by many of them here in Wayne, Pennsylvania, take on my Kansas City Chiefs. We hope you enjoy the game as much as we will. Whoever you favor, I want to wish my Philadelphia based teammates good luck, but I will be rooting for the Chiefs as they're all quite aware. And we hope you take care, and we look forward to talking to you soon. Thank you again for joining us today and we will talk soon. Take care.

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