Earnings Labs

Radian Group Inc. (RDN)

Q3 2023 Earnings Call· Thu, Nov 2, 2023

$35.79

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Radian's Third Quarter 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to John Damian, Senior Vice President, Investor Relations and Corporate Development. Please go ahead.

John Damian

Analyst

Thank you, and welcome to Radian's Third Quarter 2023 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 may be discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity. A complete description of all of our non-GAAP measures may be found in press release Exhibit F, and reconciliations of these measures to the most comparable GAAP measures may be found in press release Exhibit G. These exhibits are on the Investors section of our website. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Sumita Pandit, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. 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 discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors including in our 2022 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.

Rick Thornberry

Analyst

Good afternoon, and thank you all for joining us today. I am pleased to report another excellent quarter for Radian. GAAP revenues grew year-over-year to $314 million. We generated net income of $157 million or $0.98 per diluted share. Our annualized return on equity was 15%, and adjusted net operating ROE was 16% in the third quarter. Book value per share increased 12% year-over-year to $26.69. Radian Group paid a $35 million dividend to stockholders, reflecting the highest yielding dividend in the industry. We repurchased 1.9 million shares or $50 million of common stock in the quarter. And our overall liquidity and capital positions remained very strong. These results reflect the quality and earnings power of our highly valuable mortgage insurance portfolio combined with our successful track record of effectively managing our capital resources. We continue to monitor macroeconomic trends, including heightened geopolitical risks. While we continue to experience mortgage and real estate market headwinds in terms of higher interest rates, housing supply constraints and affordability challenges, market conditions for our mortgage insurance business remained positive, including increasing home prices, employment stability, decreased inflation and an improved reinsurance market for risk distribution. In terms of our mortgage insurance business, we continue to leverage our proprietary analytics and RADAR Rates platform to successfully identify and capture economic value in the market. As a result, we wrote $13.9 billion of high-quality mortgage insurance business in the third quarter of 2023. This contributed to 4% growth year-over-year in our primary mortgage insurance in force portfolio, which is the main driver of future earnings for our company. We continue to see positive credit performance in our mortgage insurance portfolio during the quarter, and our persistency rate remains strong. From a quality perspective, our $270 billion mortgage insurance portfolio has been well underwritten and has…

Sumita Pandit

Analyst

Thank you, Rick, and good afternoon to you all. I'm pleased to provide additional details about our third quarter results, which demonstrated the continued strength of our high-quality mortgage insurance in force portfolio and our ongoing strategic focus on capital management. We produced another strong quarter of operating results in the third quarter of 2023, earning GAAP net income of $157 million or $0.98 per diluted share compared to $0.91 per diluted share in the second quarter. Adjusted diluted net operating income per share for the quarter was slightly higher at $1.04 compared to $0.91 per share in the second quarter. We generated a 15% annualized return on equity and 16% adjusted net operating return on equity for the third quarter. Our book value per share grew 12% year-over-year to $26.69 as of September 30. Despite continued challenges in the macroeconomic environment, we generated $314 million of total revenues during the third quarter compared to $290 million in the second quarter. As a reminder, our total revenues and net premiums earned in the second quarter were reduced by a onetime increase in ceded premiums earned of $21 million due to the Eagle Re tender offers and subsequent retirement of certain seasoned insurance linked notes and the corresponding portion of the reinsurance agreements that no longer provided any capital benefit to Radian Guaranty. In the third quarter, our total revenue, net premium yield and net premiums earned, all began to benefit from the ongoing savings in ceded premiums resulting from the successful Eagle Re tender offers. Slides 10 through 12 in our presentation include details on our ceded premiums as well as other key drivers of our net premiums earned. Our primary insurance in force grew 4% year-over-year to $270 billion as of September 30, 2023, generating $237 million in net…

Rick Thornberry

Analyst

Thank you, Sumita. 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 growing $270 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, expecting to continue to pay ordinary dividends from Radian Guaranty to Radian Group and opportunistically repurchasing shares, including $50 million of common stock in the quarter. I know many of you are familiar with our annual fundraiser for The MBA Opens Doors Foundation, an incredible organization that shares our mission of affordable homeownership by helping families with critically ill or injured children to remain in their homes while their children are in treatment. We launched this year's campaign during The MBA Annual Convention in our hometown of Philadelphia. I wanted to thank all who have contributed to this outstanding cause. We will be fundraising through November 17. So visit radianopensdoors.com if you would like to learn more. And finally, I want to recognize our team for helping to drive our strong results and for the outstanding work they do every day. And now operator, we would be happy to take questions.

Operator

Operator

[Operator Instructions] The first question comes from Bose George with KBW.

Bose George

Analyst

I wanted to ask about the expense reductions. As you guys noted, it's moving in the right direction really well. Just when you think about it going forward, I know you reiterated the guidance for the full year. But on a quarterly basis, could we see the OpEx remain closer to what you guys did this quarter? Or will that kind of bounce around a little bit still?

Sumita Pandit

Analyst

Yes, thanks, Bose, for the question. I think we had given guidance for our full year. We have not traditionally given a quarterly guidance. So I think last year, if you look at our 2022 total expenses, which includes cost of services and other operating expenses, we were at about $464 million. I think the guidance we had given at the beginning of the year was $380 million to $400 million for 2023. And I think what we are reiterating is that we expect to be at the top end of that range from an expense savings perspective. I think, going forward, we would continue to have a similar run rate for each quarter, but we've not given a specific quarterly guidance as of now.

Bose George

Analyst

Okay. Great. That's helpful. And then actually, just switching to homegenius. To the extent that rates kind of remain in the range they're in now, any updated thoughts about when that gets closer to breakeven?

Rick Thornberry

Analyst

Bose, I appreciate the question. Look, as we’ve discussed the environment, not just for homegenius, certain of the businesses, but the entire mortgage industry and real estate industry has been challenging, continues to be challenging. And I think our team has done a very good job of focusing on expenses. And I just – if I kind of walk through some of the different components of it, I think sometimes it’s helpful that when you think about the capacity – addressing capacity in both our real estate services, which is our REO, SFR and valuation business and our title business, that since – with a significant decline in volumes, we’ve been addressing expenses throughout the year to drive that down closer to profitability. Actually, our real estate services business is profitable kind of through the cycle, has great operating leverage to it. And the title business has been a little bit more challenging as we gone through the year. I think we’ve made great progress on that. The other part of the expense spend, if you will, is really our investment in our data and analytics and technology platform around our digital real estate platform. And that investment has really been made from a thoughtful and considered way in terms of how we see the opportunity to create value through that platform. And so where I would summarize today is that our team is highly focused on managing expenses and kind of moving the business towards profitability. We’re going to continue to kind of manage our title and real estate services business towards that profitable contribution as we go into 2024, and we’re going to continue to invest in the digital technology platform because we see value. And just a quick comment the recent MBA Conference, where we rolled out…

Operator

Operator

[Operator Instructions] The next question comes from Mihir Bhatia with Bank of America.

Mihir Bhatia

Analyst · Bank of America.

Maybe I'll just start with the pricing question. Maybe just we've been -- just wanted to check in, what's the pricing environment like that you're seeing? Did you see any signs of increased price competition between the MIs this quarter? What have you been doing on the pricing side? Any updates there?

Derek Brummer

Analyst · Bank of America.

Mihir, it's Derek. So in terms of the pricing environment, it continues to be rational and disciplined. And we saw a fairly normal pricing fluctuations really throughout the quarter. This included what we estimate was a small decrease in market clearing levels in the latter half of the quarter. But important to keep in mind that, that's really within the bounds of what I'd call a normalized kind of competitive environment. In terms of the current environment, we view it as a strong one to deploy capital. Pricing remained substantially above from where it was in 2022. And we continue to see really good value across the credit spectrum. So as a result, really, the way we look at it, the pricing and competitive landscape remains very favorable to our strategic focus, which we talked a lot at our Investor Day about and that focuses on generating long-term economic value and leveraging our analytics to generate alpha with really a focus on finding the portion of the MI market with what we estimate to be the long-term economic value of the highest order. So that's really been what we've been focused on. And so we think that today's environment offers a really good ability to successfully implement that strategy and deploy capital.

Mihir Bhatia

Analyst · Bank of America.

Got it. And on persistency, I think you mentioned that you expect it to stay high. But I guess, the question is, is there room for it to increase any more from where it is? Or is this pretty much a cyclical peak or historic peak or what have you?

Rick Thornberry

Analyst · Bank of America.

Yes, it's a great question, Mihir. I mean we're in very unusual times, rapid rise in rates, a lot of mortgage borrowers at really very low rates. Historically, we've kind of bought mid -- kind of mid-80s was kind of normalized range, kind of the high end of the curve. I would tend to stick there. I think there's a variety of different factors. I think really the question is kind of also a duration question, right, and kind of how our portfolio extends in duration from an earnings potential point of view. And that kind of comes back to Derek's comment about how we think about economic value and future earnings of the portfolio. And if you remember from our Investor Day, as we kind of gave an illustration of kind of those future earnings, the longer persistency persists, right, is kind of positive towards the long-term earnings profile of our portfolio. So I wouldn't -- I would not necessarily give you confidence that it could go higher. But I do think there's a lot of -- Sumita, I think, in her prepared remarks commented about kind of the percent of our portfolio above -- below 6%. So there's a pretty significant movement in mortgage rates required before you see any level of refinance incentive.

Mihir Bhatia

Analyst · Bank of America.

Got it. And then just my last question, maybe on the originations backdrop, right? Obviously, Rick, I think even you mentioned that expecting it to be challenging in the next couple of quarters. And I have 2 questions related to your business from that, right? One is, typically, these are the times you start seeing originators stretch and doing things that from a credit perspective, as they're trying to drive volume, that might not be the best from a credit perspective. Are you seeing any evidence of that in the MI business? And then relatedly, any update on Radian Mortgage Capital? Any uptick in opportunity or something there from what's just from the tougher [indiscernible]?

Rick Thornberry

Analyst · Bank of America.

Yes, Mihir, thank you for that question. And Derek, feel free to jump in to add to this. But on the -- I would -- given what we've come through from the great financial crisis all the way through today, I would say lenders remain extremely disciplined from an underwriting point of view. Obviously, the nature of the market today is a purchase-driven market. So we see certain attributes kind of increase generally LTVs because of first-time homebuyers; DTIs, the general purchase market attributes. But I'd say from a credit underwriting point of view, we tend to see lenders remaining very disciplined. As you know, Derek and his team have a very detailed and thorough process of monitoring the quality of our originators from a number of different attributes as well as from a servicing point of view. And I would say today, not really seeing those trends do anything other than what we would expect given the type of purchase market we're in today.

Derek Brummer

Analyst · Bank of America.

The other thing I would add is we don't see a lot of dispersion, I think, in terms of performance from the manufacturing quality kind of across lenders. The other thing to keep in mind is just from a pricing perspective, given kind of RADAR Rates platform, we have the ability, and we do exercise that to differentiate price based upon performance and where we see any sort of deterioration in terms of performance or manufacturing quality as well.

Rick Thornberry

Analyst · Bank of America.

Yes. And the regulatory restrictions that went in place as part of the post-financial crisis and really kind of do keep – put constraints on certain types of products that I think are meaningful from the markets we operate in. To your question about Radian Mortgage Capital, it’s a great question. It’s a timely question. As we’ve talked about, we’ve taken over the last couple of years as we’ve built the platform, gotten the license across the country really, put together an extremely talented team, a very lean and mean team, I should say, but they’re highly talented experienced folks. Derek and I have kept it gated and kind of taken a very measured approach because we thought the market was generally not – it was more or less challenging. I would say, today, we see the opportunity opening, and we’re kind of exploring that opportunity, primarily related to the kind of the changes that have gone on through the banking system with the Basel III, obviously, the higher cost of funds. And then obviously, there are some other challenges, I think, to the banking mortgage product around some of the proposed CRA [ph] regulations, other things that are kind of impacting and causing banks to rethink their presence in the mortgage business, but most of all taking away a large part of the portfolio bid for non-agency production. So we’ve seen that market begin to rationalize and become interesting and attractive, and we just continue to explore the opportunity we see for the platform and the capabilities we have to create the appropriate risk-adjusted returns that we would expect from this business.

Operator

Operator

At this time, I show no further questions. I would like to turn the call back to Rick Thornberry for closing remarks.

Rick Thornberry

Analyst

Thank you. And thank you, everyone, for your interest in Radian. We enjoy talking about our business each quarter with you, and we look forward to spending time with many of you over the coming days and weeks, kind of further interacting through discussions about the business. I also want to just take time, as I always try to do, is just reiterate the great work our team is doing to serve our customers and find ways to help our customers and say, navigate a challenging environment and also help each other as we all kind of find ourselves in different challenges through life. So I want to thank our team, and we look forward to the opportunity to talk to all of you as the days ahead come along. So take care, and I appreciate your time that you stay with us today.

Operator

Operator

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