Earnings Labs

Radian Group Inc. (RDN)

Q3 2024 Earnings Call· Thu, Nov 7, 2024

$35.79

+0.06%

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the Third Quarter 2024 Radian Group 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, Dan Kobell, Head of Investor Relations and Capital Management. Please go ahead.

Dan Kobell

Analyst

Thank you, and welcome to Radian's third quarter 2024 conference call. Our press release, which contains Radian's financial results for the quarter, was issued yesterday evening and is posted to the Investors section of our website at radian.com. This press release includes certain non-GAAP measures that may be discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity. A complete description of all of our non-GAAP measures may be found in press release Exhibit F and reconciliations of these measures to the most comparable GAAP measures may be found in press release Exhibit G. These exhibits are on the Investors section of our website. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Sumita Pandit, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage Insurance. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2024 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I would like to turn the call over to Rick.

Rick Thornberry

Analyst

Thanks, Dan, and thank you all for joining us today. Last evening, we reported another quarter of excellent financial results for Radian. Our results continue to reflect the economic value of our high-quality mortgage insurance portfolio, the strength and quality of our investment portfolio, our strong capital and liquidity positions and our ongoing strategic focus on managing expenses. For the quarter, we increased book value per share by 18% year-over-year to $31.37. We grew revenues to $334 million during the quarter, generating net income of $152 million. Our annualized return on equity in the third quarter was 13.2% and our adjusted net operating return on equity was 13.7%, which reflects our strong financial results, including positive credit performance. We continue to leverage our proprietary analytics and RADAR Rates platform to identify and capture economic value in the mortgage insurance market, which resulted in $13.5 billion of high-quality new insurance written in the third quarter. Our primary mortgage insurance in force, which is the main driver of future earnings for our company grew to $275 billion. We continue to focus on managing operational efficiency and expenses, which resulted in a decrease in other operating expenses in the third quarter. Our primary operating subsidiary, Radian Guaranty, paid a quarterly dividend to Radian Group in the amount of $185 million in the third quarter for a total of $485 million paid year-to-date. At the end of the quarter, we paid off $450 million of our senior debt, reducing our leverage ratio to 18.5%. Our overall capital and liquidity positions remain strong with a PMIERs cushion for Radian Guaranty of $2.1 billion and our available holding company liquidity was $844 million at the end of the third quarter after paying off the debt. We are pleased that our strong financial position and capital flexibility…

Sumita Pandit

Analyst

Thank you, Rick, and good morning to you all. I'm pleased to provide additional deals about our third quarter results, which reflect another strong quarter of performance, producing net income of $152 million or $0.99 per diluted share, in line with the prior quarter. Adjusted diluted net operating income per share was slightly higher than the GAAP metric at $1.03 for the third quarter compared to $0.99 for the previous quarter. Annualized return on equity in the third quarter was 13.2%. Adjusted net operating return on equity was 13.7%, an increase from the second quarter. Book value per share grew to $31.37, an increase of 18% year-over-year. This book value per share growth is in addition to our regular stockholder dividends, which were $37 million during the quarter, reflecting our quarterly dividend of $0.245 per share. We also repurchased $49 million of shares during the third quarter. Turning now to the detailed drivers of our results. Our revenues continue to be strong in the third quarter. We generated $334 million of total revenues during the quarter, an increase compared to $321 million in the second quarter and $313 million in the third quarter of last year. Slides 10 through 12 in our presentation include details on our mortgage insurance in force portfolio as well as other key factors impacting our net premiums earned. Our primary mortgage insurance imports continue to grow, reaching $275 million as of the end of the third quarter and generating $235 million in net premiums earned in the quarter. Contributing to the growth of our insurance in force was $13.5 billion of new insurance written in the third quarter of '24 compared to $13.9 billion written in the prior quarter. The persistency rate of our existing insurance in force also remained high at 84.4% in the…

Rick Thornberry

Analyst

Thank you, Sumita. Before we open the call to your questions, I want to highlight that our results for the third quarter continue to reflect the balance and resiliency of our company as well as the strength and flexibility of our capital and liquidity positions. We expect the earnings and cash flows generated from our large in-force mortgage insurance and investment portfolios to allow us to continue operating from a position of strength and delivering value to our customers, policyholders and stockholders. We increased book value per share by 18% year-over-year. We returned $86 million of capital to stockholders during the third quarter and approximately $360 million over the past 12 months in the form of share repurchases and dividends. As you've heard me say before, our business model is well established and proven significantly strengthened by the PMIERs capital framework, dynamic risk-based pricing, and the distribution of risk into the capital and reinsurance markets. We believe this is recognized on Capitol Hill, and we are well positioned to fulfill our important role in the housing finance system. And finally, I want to recognize and thank our dedicated and experienced team at Radian for the outstanding work they do every day. Now, operator, we would be happy to take quarters.

Operator

Operator

[Operator Instructions] And our first question comes from Bose George of KBW.

Alex Bond

Analyst

This is actually Alex Bond on for Bose. Maybe just starting with Radian Mortgage capital. Would you be able to give a little more color there relating to maybe what you expect the cadence of issuance will be there moving forward?

Rick Thornberry

Analyst

Yes. Thanks for the question. This is Rick. I don't think we will give any kind of forward guidance on that. But I think as we've -- we did our first deal in the third quarter. We actually did our second deal in the fourth quarter just recently. We expect to be a regular issuer in the market as the business scales. And so we would expect next year to be a continuing issuer, but haven't really given forward guidance, but I think you'll continue to see that the frequency and regularity of issuance into the market to be driven by as we scale the business going forward.

Alex Bond

Analyst

Okay. Great. And then maybe just one more relating to the $10 million software impairment in the quarter. Was that related to the mortgage services or the other segment? And then maybe just to go a little bit deeper there, would you be able to give any color relating to some of the strategic actions you're taking in that segment in terms of the footprint there?

Sumita Pandit

Analyst

Yes. Thanks for the question. I think, yes, the $10 million impairment that we took was on some software that we felt we needed to impair given the current use of the software, and it was related to businesses that sit in our all other category, and we think that it's a onetime item. I think in terms of like for our all other business, we've given some more disclosure on what our expected revenues are going to be. I think for the last two quarters, we've been at about $40 million. We do expect that some of our investment income and all other may come down as we've repaid our debt, and therefore, $450 million of liquidity has gone out from our holding company. So we expect that all of the number to come down a little bit by about $5 million, but $35 million to $40 million of revenues is still a good estimate for All Other, and that captures all of our businesses in the All Other business segment.

Rick Thornberry

Analyst

Yes. And I think -- this is Rick. Also, I think in the context of like a strategic update on those businesses, I think you also asked about. We -- that particular category includes our conduit business, our title business, our real estate services business. And then our [HG] tech platform as well as the interest income kind of the investment portfolio of Radian Group. So it's got a number of things in there. The conduit business, as I said, we continue to kind of focus on scaling that business. The results are not really material today to the overall business. The title business is -- we navigated a difficult cycle over the last few years. I think the title business is well positioned with kind of a growing customer list and look forward to kind of continuing to see the prospects for that as we go forward in momentum. Our real estate services business, which is our SFR, REO and valuation business, been profitable, a little bit less profitable through the cycle, but continues to be a market leader across its different categories of products and services, and we continue to expect to see a profitable contribution from that business. And then the last one, which is our homegenius kind of our real estate tech platform. As I've mentioned in previous quarters, we're focused on -- we significantly reduced the expense run rate of that business, and the team has really continued to make great progress around the data and analytics and computer vision and AI tools that are embedded within that platform. And we're having an active dialogue with partners across a variety of different interested parties. And as we have more to update, we'll update on that. But that's really kind of the update across a particular all other category.

Operator

Operator

Our next question comes from Mihir Bhatia of Bank of America.

Mihir Bhatia

Analyst

I wanted to ask just first about the pricing backdrop. Obviously, I appreciate that the in force yield was steady and your comments about -- that's your expectation from here. Should we take from that, that the pricing environment remains quite stable? Or is that more a function of your individual pricing? Like I'm trying to understand what's going on in the market just from a competitive dynamics perspective, maybe even away from you all. But just trying any comments on that, just competitive environment and pricing in the market.

Derek Brummer

Analyst

Mihir, this is Derek. In terms of the pricing environment overall, I think it's been pretty consistent really for probably the last 1.5 years to 2 years. And so as I would characterize the pricing environment continues to be rational and disciplined. You do see some movements here and there kind of around the edges in terms of pricing from quarter-to-quarter, and you see that reflected kind of in market share movements when you look at kind of the top line. But overall, I would say the price environment continues to be stable, an environment that we like because it allows us to leverage our analytics to really pick our spots and find value in the market. So we really find value kind of across the risk spectrum, and that's been pretty consistent for quite some time.

Mihir Bhatia

Analyst

And then turning to defaults and really cures more than defaults. For many quarters now, you'll have had very elevated cure rates and been releasing significant number of reserves and I guess the question I have is, when does that become like part of your history where you start actually lowering the claim rate and taking less reserves upfront? Or is the thought process that it's better to be conservative, take the reserves upfront and then just release [would make] cure.

Sumita Pandit

Analyst

Yes, I think it's a good question. And I would say that when we think about our reserve assumptions, we always try to be prudent, and we always try to look at it through the cycle. So clearly, like the claim rates we see today, they are very low. And we are obviously focused on making sure that the accounting assumptions we make are longer term and through the cycle. So I think that's the reason why we've kept our 8% default to claim rate unchanged, even though as you rightly pointed out, our actual claim experience is very, very benign. So we don't see that environment to necessarily change our accounting assumptions, and we would like to continue to be prudent.

Mihir Bhatia

Analyst

Can I ask when was the last time you all hit an 8% claim rate? Any vintage that has hit that?

Sumita Pandit

Analyst

No, none of our current vintages. And I would say it's been a while.

Rick Thornberry

Analyst

Yes. I think probably the answer to that would be sometime prior to COVID. I don't remember the exact timeline, but if you remember back, I got here in 2017, we were actually coming down off the great financial crisis from a default to claim assumption. And so I think to your point, Mihir, it's one of those things where we're -- as Sumita said, we're really looking forward versus like at a point in time and then we monitor that default portfolio performance. And as you look at our schedule in the materials that we provide, we call it the triangle schedule. You can see how consistent that cure rate has been for a period of time. But I would say pre-COVID, we were coming down off the great financial crisis. And so as we look at kind of the modeled losses going forward, we try to anticipate that in the reserve because remember, we reserve when loans go 2x delinquent and default. The other thing I would just highlight, which is just more good news is when we price, when Derek and the team price, we price through an anticipated kind of loss assumption kind of going forward. And so all the business that we've been writing that is going through that default cycle is far outperforming our pricing, which is resulting in greater than expected returns on the business we wrote in previous periods. And so when that turns, going back to Sumita's comment, we try to have a through-the-cycle view and we'll continue to try to think through sustainable trends that could influence that. We do, however, believe that the housing cycle today remains generally positive with the supply-demand imbalance and that's giving consumers more opportunities to solve their own default and retain their equity. So we're going to continue to monitor it closely, but it's been an extremely favorable trend that all we can do is continue to evaluate monitor as we go forward from a accounting point of view.

Mihir Bhatia

Analyst

Got it. And I appreciate that in particularly the Slide 17 disclosure. And really, that's what we were looking at. And just as you mentioned, you just see really consistent cure activity and that kind of almost [backfill]. I hear what you're saying.

Rick Thornberry

Analyst

Yes. Mihir, if you look out four quarters, I mean, it's...

Sumita Pandit

Analyst

90%.

Rick Thornberry

Analyst

Yes. So it's very consistent and then continues to improve. So we appreciate the question because it's something we internally are highly focused on and have pretty robust discussions each quarter as we go through and think through it. But thank you for the question.

Operator

Operator

Our next question comes from Scott Heleniak of RBC Capital Markets.

Scott Heleniak

Analyst

Just wondering if you could expand on the comment, Rick, you may expect the private insurance mortgage insurance market to grow 10%. Can you talk about some of the drivers you expect there? It sounds like you're pretty positive on that for 2025 and how you expect Radian to participate in that in terms of NIW growth as that happens?

Rick Thornberry

Analyst

Yes. Again, thank you for the question. But I think we are -- when you look at the current industry forecast and we look across the GSEs and the MBA and other sources that we kind of look to, you can see there's an implied growth in the purchase market, a little bit of refinances, which may or may not materialize depending upon interest rates. But we continue to see growth in the purchase market, MI is going to have a strong participation in that growth. And so that really is what drives the comments I made in my prepared comments is really just looking at industry forecast. Now those can have some degree of volatility as we go through the year, either plus or minus, depending upon where interest rates, but I think we're largely fueled by a purchase market growth. And we know historically, that market has been kind of slowed by the lack of inventory and the lack of churn in the existing homes and kind of -- from new home sales perspective, even we'd like to see faster growth there. But I think as we look to next year, that purchase market continues to expand, would be our view and mortgage insurance is going to participate in that growth as well. The other part of your question about how we participate in it. I think our mortgage insurance team, Derek and the team in that market, as Derek explained in one of the earlier questions, we have the opportunity to leverage our data and analytics, our proprietary tools, our RADAR Rates, to really select the risk profile and the risk return and the driving economic value across that selection to really pick and choose across that universe of purchase volume. So I think we're well positioned to kind of target the economic value alongside that growth. And I think as we've said before, we're not really focused on market share. We tend to kind of range in and out. We're focused on really optimizing the selection of economic value across our tools across the broader market. So I think we're well positioned for that and like to see that growth materialize.

Scott Heleniak

Analyst

Okay. That's helpful detail. And just on the persistency, that ticked up a little bit sequentially. Others have kind of seen flattish persistence or even down a little bit. And just wondering if you could comment as to whether you think you can see further improvement there. It's obviously closer to peak levels, but you have a lot of customers that have a lot of embedded home equity in there. So just curious what your thoughts are on persistency.

Sumita Pandit

Analyst

Yes. I think on a 12-month basis, I would say our persistency has been in and around that 84% level. So I do think that what you're seeing is a small uptick is more fluctuations in the quarterly measure. We don't expect persistency to go up as such. We think that we are pretty much at stable levels. Now it is possible that we see some pockets of refinance activity as rates decline in which case we will see an impact in our persistency. But I would just remind you that 70% of our in-force book is still has been written at less than 6% note rate. So we expect persistency to more or less remain high in the low 80s and feel pretty good about it.

Scott Heleniak

Analyst

Okay. Great. And then just the last question was just on use of excess capital now. It sounds like buybacks is number one use, but can you talk about dividend just increases in regular dividends, special dividends, reinvestments in the business, M&A or anything else like that? It sounds like your debt is -- the debt to cap has been at the lowest level it's been probably ever, at least a long time. But just any thoughts on the excess capital and uses over the next 12 months.

Sumita Pandit

Analyst

Yes, I'll start and Rick jump in with other thoughts on some of the strategic uses. I would say, as you pointed out, like we've been pretty consistent about our capital return. This quarter, we returned about $87 million; last one year, $360 million; last three years, $1.2 billion; last five years, $1.9 billion. So I think you'll see that we have been consistently returning capital back to shareholders. And we are also the highest yielding dividend stock in the industry. I'd say from a forward view, I think in our prepared remarks, we mentioned that we used some of our excess holdco liquidity to pay down our debt and draw down our leverage ratio to 18.5%. We built that $844 million liquidity back up to about $1 billion pretty quickly by year-end, just given our expectation of dividends from Radian Guaranty to Group. So I think that we will continue to buy back shares. We believe that we are still reasonably undervalued. I think $1.5 is just in our AOCI. And if you just think about in our last Investor Day, we've given some estimates of our expectation of future discounted earnings from our existing book. That was about $13.50 a share. So we still think that we are trading reasonably below our intrinsic value, and we'll continue to buy back shares. And we have the liquidity to do that. Rick, do you want to comment on some of our M&A initiatives?

Rick Thornberry

Analyst

Well, I think for us, obviously, we're going to invest in our businesses that are kind of an organic growth phases, continue to invest in our mortgage insurance business where we see opportunities. So those are kind of one form of strategic capital. You mentioned M&A. We obviously get a lot of looks at a lot of different M&A opportunities. We haven't done one for a while because we haven't really seen the value, but I would say, like a normal capital allocation waterfall, Sumita and I and our team, we go through -- we prioritize return of capital to shareholders and being very disciplined and focused on that. And then thinking about how we invest either organically or inorganically to improve returns and long-term value for shareholders. So I think we have a pretty disciplined track record of how we manage capital. The good news is today, we're in a situation where we have significant holdco liquidity. As Sumita said, we just paid off our debt. We're going to still have near, somewhere in that $1 billion category at year-end, tremendous PMIERs excess capital, I think, $2.1 billion at the end of the third quarter. So we've got a lot of flexibility around our franchise to think about allocating capital effectively to improve returns for shareholders. So we always talk in hindsight, so not much forward to talk about there. But the best forward view is what we've done in the past, I think, sometimes is trying to remain very disciplined and thoughtful on behalf of our shareholders.

Operator

Operator

I'm showing no further questions. I'd like to turn it back to Rick Thornberry for closing remarks.

Rick Thornberry

Analyst

Yes. Well, I appreciate everybody joining us today. It's been an eventful week. I know we're probably all exhausted from watching all the political activities over the last several months and coming to a conclusion. But I appreciate your interest in Radian, and look forward to crossing paths in the near future and continuing to answer your questions and share our insights about our business. So thank you very much, and have a very happy holiday season, should we not cross paths before then. Take care.

Operator

Operator

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