Q3 2019 Earnings Call
Ladies and gentlemen, thank you for your patience and standing by and welcome to Radians third quarter of 2019 earnings call. At this time all participant phone lines are in listen only mode. We drew will be the opportunity for your questions if you'd like to queue up for question at any point today. Please press one followed by zero just a brief for my.
During today's conference is being recorded I'd now be happy to turn the conference over to senior Vice President of Investor Relations Emily Riley.
Thank you and welcome to Radians third quarter 2019 conference call. Our press release, which contains radians financial results for the quarter was issued last evening and its posted to the investors section of our website at Www Dot Radian Dop is this press release includes certain non-GAAP measures, which will be just.
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.
Complete description of these measures and the reconciliation to GAAP, maybe found in press release exhibit F and G and on the Investor section of our website <unk>.
In addition, we have also presented at related non-GAAP measure services, adjusted EBITDA margin, which we calculated by dividing services adjusted EBITDA by GAAP total revenue for the services segment.
This morning, you will hear from Rick Thornbury, Radiance, Chief Executive Officer, and Frank Hall, Chief Financial Officer also on hand for the Q and a portion of the call as 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 at 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.
These statements included in our earnings release and the risk factors included in our 2018 Form 10-K , and subsequent reports filed with the FCC. 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 for your interest in radio or TV is hosting todays call from Austin, Texas, where we've been meeting with customers. This week attending the annual MBS Convention.
During the past few days of has many discussions with customers and other other industry players and I'm pleased with a positive response to our one radio business flow or 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 of our customer relationships.
Position us as a value each 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 83 cents per diluted share.
Adjusted pre tax operating income was $213 million and adjusted diluted net operating income per share increase the 81 cents.
Value per share grew 24% year over year than $19.40. A return on equity was 18% with 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 should 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, the $237 billion, our mortgage insurance portfolio, which is one of the largest than the industry is the primary driver 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 low interest rates driving an increase in high quality purchase loans, where mortgage insurance is three to five times more likely to views as well as increase refinance activity.
Mortgage rates remain at attractive levels, both for homebuyers and certain homeowners looking to refinance our existing low in the market continues to be fueled by first time homebuyers, who represent one third of home sales.
In terms of home values across the country. According to data from the newly released Radian home price Index annualize home price appreciation has increased as of the third quarter compared to the second quarter of this year in fact.
Data from the September 2019, HP shows a 7.9% year over year increase and medium home values as compared to 5.8% annualized growth rate reported in the second quarter of 2019.
Given this positive environment, we continue to break company Records of radio we wrote $22 billion of anti W., which is a 19% increase over our previous record.
I am written in the second quarter of 2018, and a 40% increase over to the third quarter of 2018. This contributed to the growth in our high quality portfolio that I mentioned of 9% or $20 billion year over year.
We remain focused on providing customized pricing options and excellent customer service and continue to offer various options for doing business with radian that are based on customer needs and preferences and aligned with our appetite for appropriate risk and return.
We're pleased that this approach resulted in record levels of new mortgage insurance business that we will we project will generate attractive risk adjusted returns in the mid teens.
Our mortgage insurance results reflect the successful execution of our strategy, namely to effectively aggregate manage and distribute mortgage credit risk in order to manage our risk return profile and drive economic value.
And our expert team continues to leverage our proprietary data and analytics platform to carefully analyze the business, we write including risk attributes of the loan level as well as originator and servicer quality and performance.
Based on our performance, thus far in 2019, and our strong new business pipeline. We now expect to write new mortgage insurance business in 2018 in the range of $65 billion to $70 billion, which would represent approximately 20% increase over last year's record breaking levels.
As you've heard me say many times. This was a great time to be in the mortgage insurance business. The business fundamentals are very strong with guard rails in place for mortgage lending the servicing under Dodd, Frank and our mortgage insurance industry is governed by clear consistent and transparent risk based capital requirements under P. Myers.
And operating guidelines with a uniform master policy the credit quality of our existing book of business is excellent as is the credit environment. We operate in today for example, the number of defaulted loans in our portfolio remains at one of the lowest levels. We've seen in 20 years with cure activity at 10 year.
Hi, guys now moving to our services segment, we continue to make progress across our mortgage real estate and title services business and we are pleased to report a total services segment revenues.
$47 million in the third quarter, which represents growth of 10% from the prior quarter and 16% compared to a year ago.
We believe these improved results are a testament to the hard work of our excellent services team.
And the customer relationships, we continue to grow in value.
In terms of capital management, Frank will discuss our actions this quarter in detail, but I am pleased with the steps we've taken to improve our debt maturity profile and return capital to our stockholders. We completed one share repurchase program during the quarter and authorize a new one and the total we have repurchased today more.
The 13 million shares representing approximately 300 million and value.
I am pleased that our strong financial position has afforded us the opportunity to consider share repurchases opportunistically within the context of our overall Cabot capital strategy, which is designed to enhance our already strong capital structure and position.
Turning to the regulatory and legislative landscape on Monday Director, Mark Calabria spoke to the MBA convention attendees about those priorities for the Gses.
His comments were preceded by the release of the FHLB Phase 2019 strategic plan and scorecard for the Gses, which largely reflect the same themes that were present in the treasuries plan for housing Finance reform released in September .
These themes include the fostering of a competitive efficient and resilient national housing finance market.
Ensuring the safety and soundness of the Gses preparing the gses to transition out of conservatorship and better harmonizing the role of the FHLB and the Gses.
While the 2019 scorecard and strategic plan are limited in terms of specifics we continue to be encouraged by many themes, including for example, the FHLB phase desired encouraged a greater use of private capital.
To increase transparency of the gses to level, the playing field with private competitors.
Into appropriately.
Restrain the gses activities, where they encroach on areas, where private capital is available and willing to serve.
HUD Secretary been Carson also spoke to the group and with respect to FHLB pricey communicated a strong desire to continue to increase FHLB his financial strength and see the FHLB is capital position grow well above the 2% statutory minimum to withstand cyclicality and future.
Downturns as a result, we believe a reduction at FHLB pricing is unlikely.
In terms of the items on our watch lists we expect an announcement shortly from the FHLB regarding the new capital standards for the Gses and we understand that the CFPB is continuing to evaluate potential QM replacements for the GRC patch, which expires in January 2000.
21 as to QM. We believe there is a growing consensus that the CFPB will land on a solution that preserves credit access for worthy borrowers in the to transition away from the GRC patch will be orderly and not overly disruptive to the housing market.
We remain actively engaged in discussions around these important items as well as the broader dialogue on housing finance reform.
In his speech here in Austin Director, Calabria stated that Fannie and Freddies risks must be supported by private capital.
Based on collaborators comments, we continue to believe that given our industry strong and consistent capital standards are proven ability to manage and distributed risk our uniform master policies in our high operational standards.
Private mortgage insurance will remain a critical component of any new housing finance system.
Now I would like to turn the call over to fright for details of our financial position.
Thank you Rick and good morning, everyone to recap our financial results reported yesterday evening, we reported net income of $173.4 million or 83 cents per diluted share for the third quarter of 2019 as compared to 78 cents per diluted share in this.
Second quarter of 2019, and 66 cents per diluted share in the third quarter of 2018.
Adjusted diluted net operating income was 81 cents 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 a 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 slow basis.
Total Eni W. increased 40% compared to the third quarter of 2018, and our monthly premium Eni W increased 52% year over year.
Direct monthly and other recurring premium policies represented 85% of our Eni W. this quarter and increased from 83% for the second quarter of 2019, and an increase from 78% over the third quarter a year ago.
Our were paid policies represented 97% of our total new business for the third quarter 2019.
Borrower paid single premium policies represented 13% of our total and idle to you this quarter a significant increase from two years ago, when they accounted for less than 2% of total Eni W.
In contrast, lender paid single premium policies were less than 2% of our and I'll tell you 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 profile of our single premium business overall as borrower paid singles have higher expected returns relative to lender paid policies due in part to auto cancellation under the homeowners Protection Act.
Getting shorter expected lives and lower required capital under fee Myers.
Primary insurance in force increased to $237.2 billion at the ended the quarter with year over year insurance in force growth of 9%.
It is important to note that monthly premium insurance in force increased 12% year over year and has grown by over $35 billion over the past two years.
Our 12 month persistency rate of 81.5% declined from 83.4% in the prior quarter and increased slightly from 81.4% in the third quarter of 2018.
Our quarterly annualized persistency rate declined to 75.5% this quarter from 80.8% in the second quarter of 2019 and 83.4% in the third quarter of 2018.
The decline in quarterly annualized persistency compared to the third quarter of 2018 is primarily driven by increased refinance activity observed in the quarter.
While our long term expectations for persistency remained in the low to mid 80% range. We have said previously that near term persistency may fall below this level as was the case with the quarterly persistency metric and this reporting period.
It is worth, noting however that radians insurance in force grew by over $6 billion into third quarter slightly more growth on a dollar basis than in the third quarter of 2018.
Moving now to our portfolio premium yield.
As a reminder, the second quarter of 2019 included a positive cumulative adjustment to the expected lives of our single premium policies, which resulted in $32.9 million of additional net premiums earned.
Slide 11 shows that premium yield trend over the past five quarters, excluding the impact of this adjustment.
Two other lines worth noting on slide 11.
Our direct enforced premium yield and single premium policy cancellations.
Our direct enforce premium yield was 47.4 basis points this quarter compared to 47.9 basis points last quarter, and 48.6 basis points in the third quarter of 2018.
Our level of single premium policy cancellations contributed 4.6 basis points of yield in the third quarter compared to 2.1 basis points in the same quarter a year ago.
As we have noted previously the level of single premium policy cancellation may fluctuate given certain macro economic factors, primarily interest rates and can create volatility in our reporting premium yields.
For the past several years, we have expected the in force portfolio yield to decline gradually and over the past year. It has in fact declined by just over one basis point because in two key drivers.
The first driver is the natural turnover of the portfolio.
Older vintages that have relatively higher risk profiles written that higher premium rates are running off and are being replaced by new vintages, which carry lower premium rates due in part to industry price changes following tax reform in 2018.
The second driver is the lower premium rates on our new business commensurate with a lower risk profile as we have recently written a record levels of very high quality business with continued strong risk adjusted returns.
The recent trend of lower persistency and record levels of Eni W, which have further contributed to the turnover of our in force portfolio accelerating the expectations of a lower overall enforce portfolio yield.
While we continue to expect a gradual decline of the in force portfolio yield the timing and magnitude of future enforced portfolio yield changes, we'll continue to depend on several factors, including the volume and mix of new business relative to the volume and mix of cancellations and pre.
Repayments of older vintages in our portfolio.
Our recent production has consisted of a higher weighted average FICO lower expected losses and capital requirements relative to our previously written business.
In terms of future Eni W.
Our mix of business will continue to be guided by where we see value across the risks spectrum and the credit mix may vary quarter to quarter.
This may result in periodic variability in the profile of our Eni W, including weighted average FICO LTV and other risk metrics that impact average premium levels.
What is most important to remember about pricing. However is that we continue to remain focused on maximizing economic value and generating attractive risk adjusted returns in the mid teens.
These projected returns do incorporate the impact of our single premium quota share reinsurance program, but do not include the impact of insurance linked to notes.
Net mortgage insurance premiums earned towards $281.2 million in the third quarter of 2019 compared to $299.2 million in the second quarter of 2019 and $258.4 million in third quarter of 2018.
The decrease of 6% on a linked quarter basis is primarily attributable to the $32.9 million cumulative adjustment to unearned premiums recognized in the prior quarter.
Partially offset by an increase in single premium policy cancellations as well as the growth in our insurance in force.
Setting aside the impact of the adjustment our net premiums earned grew 6% quarter over quarter.
Similarly, the 9% increase from the third quarter of 2018 was primarily attributable to the growth in our insurance in force as well as the increase in single premium policy cancellations.
Total services segment revenue increased to $47.4 million for the third quarter of 2019 compared to $43 million for the second quarter of 2019 and $40.9 million for the third quarter of 2018.
The increase in revenue compared to the prior quarter was due to continued growth and expansion of customer relationships.
Our reported services adjusted EBITDA for the third quarter of 2019 was $3.7 million.
Our investment income this quarter of $43 million was down slightly from the prior quarter, but approximately 10% higher than the prior year.
The increase over the prior year was due to higher balances in our investment portfolio.
At quarter end, the investment portfolio duration increased slightly to four years from 3.7 years in the prior quarter.
Our 5.5 billion dollar investment portfolio has grown approximately 10% or just over $500 million since the third quarter of 2018, a sizable increase given that over the same time period, we have paid off debt and repurchased over $275 million of our common shares.
Moving now to our loss provision and credit quality.
As noted on slide 14, the provision for losses for the third quarter of 2019 includes a positive development on prior period defaults of $12.6 million. This positive development was driven by a reduction in certain default to claim rate assumptions on aged defaults, partially offset by an.
Increase of $11.8 million and the company's IB and our reserve estimate related to previously disclosed legal proceedings regarding servicers claims on loss mitigation activities largely on pre 2009 vintages.
Our primary default rate is now at 1.9% flat relative to last quarter and down from 2.1% a year ago.
Consistent with typical default seasoning patterns the shift in our portfolio composition toward more recent vintages is expected to result in slightly increased levels of new defaults in our portfolio for 2019 as compared to 2018 as new defaults for recent vintages will outpace the reduction in pre.
2009, new defaults.
Our total default count has consistently declined and is currently near the lowest level. We have seen at over 20 years at approximately 20000 loans with very high cure rates.
As economic indicators have continued their positive trends cumulative loss ratios on our post 2008 business continue to track to historically low levels.
As these positive economic and performance metrics have continued we did lower the default to claim assumption on new defaults from 8% to 7.5% during the third quarter.
Now turning to expenses.
Other operating expenses were $76.4 million in the third quarter of 2019 compared to $70 million in the second quarter of 2019 and $70 million in the third quarter of 2018.
The increase in operating expenses compared to prior quarter was primarily driven by a reduction in ceding commissions relative to last quarter as well as increased incentive compensation expense based on year to date performance.
Moving now to taxes.
Our overall effective tax rate for the third quarter of 2019 was 20.3% and our expectation for our 2019 annualized effective tax rate before discrete items is approximately the statutory rate of 21%.
Now moving to capital.
For Radian Guaranty as previously disclosed we entered into our second insurance linked no transaction of approximately $562 million in April of 2019, bringing the total insurance linked note issuance by Eagle rate to just under $1 billion and covering origination years of.
2017 in 2018 for our monthly premium business in total we have reduced radian guaranty Pmiers capital requirements by $1.4 billion as of the third quarter 2019 by distributing risks through both the capital markets and third party reinsurance execution.
We expect that this prudent risk distribution strategy and our disciplined capital management will continue to enhance our risk profile and improve our financial flexibility.
And while we expect to continue utilizing risks distribution on an ongoing basis for new vintages. We currently do not expect to pursue additional risk distribution on our older boats of monthly premium business. These vintages have experienced significant home price appreciation since originally written and also have shorter.
Expected lives given risk recent prepayment activity.
As a result, the combination of the cost of capital expected P. Myers benefit and duration of risk coverage.
Do not currently meet our objectives.
Radian Guaranty had p. Myers available assets of $3.4 billion and our minimum required assets were $2.7 billion as of the end of the third quarter 2019.
The excess available assets over the minimum required assets of $652 million represents a 24% pmiers cushion.
We have also noted on slide 19, our P. Myers excess available resources on a consolidated basis of $1.6 billion, which it fully utilized represents 59% of our minimum required assets as of September Thirtyth 2019.
We expect our pmiers cushion to be sufficient to support projected organic growth as well as potential volatilities, such as a cyclical economic downturn before giving any consideration for the additional benefit of future premium revenue.
Moving now to our capital plans for Radian group.
During the third quarter 2019, the company redeemed the remaining $27 million of senior notes due 2020, and the remaining $70.4 million of aggregate principal amount of senior notes due 2021.
Also during the third quarter of 2019, radian repurchased 3.3 million shares or $77.5 million of Radian group common stock including commissions.
This repurchase activity completed the company's $250 million share repurchase program initiated in August 2018, and included shares purchased under the company's new $200 million program authorized in August 2019.
In addition, after quarter end into in October 2018, the company purchased an additional 1.1 million shares for approximately $25 million of Radian group common stock including commissions.
As of October Thirtyth 2019 purchase authority of approximately $150 million remained available under the existing program, which expires on July 30, Onest 2020.
On October 17th 2019, Moody's investors service upgraded the senior unsecured debt rating of Radian group to be a one with a stable outlook.
Moodys cited expectations for continued strong profitability for mortgage insurers due to favorable us housing market and economic fundamentals as well as radians recent actions to reduce its financial leverage extend its debt maturity profile and increased liquidity at the holding company.
Moody's also upgraded the insurance financial strength rating of Radian guaranty to be double a one.
Noting our strong position in the market our increased risk distribution through insurance linked to notes and traditional reinsurance are substantial pmiers cushion in our significant capital resources to absorb potential losses during periods of economic stress.
Holding company liquidity at the end of the third quarter 2019 was $731 million compared to $879 million at the end of the second quarter of 2019.
Excluding any consideration for our $268 million credit facility.
As we continue optimizing our capital structure and evaluating appropriate uses for capital. We will continue to update you on our progress.
At Radian, we have a strong history of taking thoughtful prudent and shareholder friendly actions and managing our sources and uses of capital.
Over the past several years, we have completely restructured our debt lowered our absolute cost of debt and recently extended and enhance the debt maturity profile to better met matched the expectation of future contingency reserve releases from Radian Guaranty.
We've enjoyed improved ratings from the rating agencies, we've repurchased approximately 15% of our outstanding shares at value prices.
We prudently managed our pmiers capital through surplus notes and risks distribution.
We have returned $825 million of capital from Radian guarantee to Radian group over the past 12 months.
All that said and as we have stated previously the range of options that we will continue to consider are focused on creating value for our shareholders. The former timing and execution of potential actions are available to us.
Because of the considerable actions, we have taken to position all of our financial resources from maximum flexibility and into risk appropriate manner.
As of now we are returning capital to our shareholders by utilizing the previously authorized $200 million share repurchase of which we have approximately $150 million remaining.
It is our continued practice to announced the specifics of our capital actions as they occur.
I'll now turn the call back over to Rick.
Thank you Frank before we open the call to your questions. Let me remind you that net income was $173 million and diluted net income per share was 83 cents adjusted diluted net operating income per share grew to 81 cents book value per share increased 24% year.
Year over year to $19 in 40 cents return on equity was 18%.
Our $237 billion mortgage insurance portfolio grew more than 9% year over year and as the primary driver of future earnings for Radian. Our services segment grew 16% from a year ago to $47 million and we made progress against our capital strategy completing our.
Hundred $50 million share repurchase program and initiated 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 and ladies and gentlemen.
If you would like to acute yourself up for question you can press one followed by zero at this time.
Again, if you would like to Q appear for question you can press one followed by zero. If you are using a speaker phone here. This morning and may be helpful lift the handset before pressing those number keys. Once again press one followed by zero now to place yourself in Q.
Maybe just one moment for our first question.
First we'll go through line of Mihir Bhatia Your line is open.
Hi, Thanks for taking my questions.
Well I would maybe I'll just start with the FHLB certainly encouraging via the feature is not looking at cutting prices.
I was curious what would you like you know there has been some talk about the future maybe adopting risk based pricing could you comment on what that impact of the officially adapting such.
I would have on the am I industry, just in terms of where they will make so volume.
As opposed to that Garen get a fixed rate pricing across the banks. Thanks.
Im here this is Rick and I appreciate your question.
Yes, theres been there has been discussion around the FHLB considering the.
This past week.
The FHLB is primarily focused on fixing the number of their internal.
Alleges, if you will from a technology and operations point of view and I think from the comments. This week from Dr. been Carson when he spoke to the EMEA here. The Austin. He was he is very very focused on rebuilding.
Rebuilding the capital bonuses.
Hey, the fund and so I think his comments really lead lead us to really believe the you are building the capital level above the two perceived to be able to sustain the fund through the cycle from a credit risk point of view is really the primary focus in what we what we hear what we understand is that.
Really when they think about risk based pricing is largely around some of the higher risk areas, which we though really participate.
So I think at this point, we don't really see a risk from lower premium pricing, we think more of the trend is towards trying to build capital within the within the FHLB fund and capital structure that I think at this point were units, it's not a concern of ours for pricing perspective.
Next in queue in light of Jack Micenko with FMCG. Your line is open.
Okay.
Hey, good morning.
What does thats, what the expense ratio came in a little higher than we're thinking and obviously you had a really really big.
And I W. quarter.
But just wondering.
How should we think of that is sort of the normal run rate.
Or do you think you can leverage that more as the insurance in force book continues to grow just some thoughts there.
Yeah. Jack this is Frank good morning. So this quarter was a little choppy on the on the expense side, primarily for the reasons cited on a linked quarter basis, we did not have.
The ceding Commission and and we also had a little uptick in Sci I think a way to think about expenses going forward is instead of on our expense ratio basis, maybe just looking at the absolute dollars and I think on a go forward basis, something around a 72 million dollar expense level.
Just on a normalized basis is probably the right level too.
To think about.
Okay.
And then.
Rick on the regulatory side on the FHA.
I hear you on the on the price cuts or lack of price cuts on out of the associated but.
The seemed like there were some commentary this week on.
You are kind of maybe ring fencing.
Yes.
The.
False claims act.
Issues and trying to bring more banks into the fray.
To do more FHLB business, how do you think about that.
From a competitive standpoint.
Yes, no. Thanks for the questions. So it's a great question I think and there was great great deal of focus on the.
Kind of the memorandum of understanding that I think.
As I've said through meetings with customers and other kind of industry meetings as I think it's clearly good for the lenders who sat on the sidelines you have kind of with the uncertainty out there, but when you. So specifically some of the large banks.
I think you, though theres really when you think about it it's still the same FHLB business that were that we that exist. Today. There is no changes. So when you take the pricing aspect of about all you really doing is looking the.
Having more competitors enter the marketplace of I think you could see market share shifts among competitors mortgage originators, maybe some shift from independent mortgage bags back to bags. So if the banks choose the owner there are still a number of issues to resolve butoh FHLB from an operational point of view.
From a servicing point of view and it's pretty clear today that the execution ROE conforming loan with them I is is a smoother transaction for lenders to the extent that its eligible so I think when I look at the memorandum of understanding. It's the features moving into right direction to really kind of modernize their programs.
That brings certainty and clarity to kind of the legal structure of doing business with FHLB, but I don't see it really impacting the market share for EMI because still the same of Ajay products. So largely I think I think largely of market share kind of transition between originators is more likely the impact.
So, let's say the FHLB not that may change, the PMI or or is how you're thinking I mean, when you really think of it theres nothing changing on the FHLB product side. It's just it's a new set of competitors. So if you take you know if you take pricing changes off the table. It's still the same FHLB product that we compete with everyday.
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 stated on the correspondent side because of less issues around the false claims act and.
And you though.
From a from a risk point of view. So it's really these players kind of reiterating the origination market to go after the same products that exist today, So theres really not a change in product a change of price a change in economics. So we still think EMI competes very favorably, where we feel like we want to compete right on the types of pro.
Products the risk profile the credit profile. So no I you know I think it's a it's a it's a well needed clarification across the industry and I.
Commend the FHLB for taking the steps to bring more clarity and certainty, but I think from them I business point of view, it's it's not impactful Greg Thanks, taking my questions.
Sure. Thank you.
Next in queue, we had the line of Bose George of KBW. Your line is open.
Hey, good morning.
Just one more for Amies, having reported do you have any feel for any of their changes in your market share.
Our Bose. This is Rick. Thank you great question, I think and good morning.
I think it's.
Obviously, there is still to more to go we we though no in it as you've heard me say.
No. 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 will service the risks that we take very well so I think.
I think we had a very strong quarter. Thank our team did a phenomenal job the sales team the operations and risk team I think this market environment, we feel like we're we're producing a very high quality book of business with our at IBW, We feel like it plays to our strength from an analytics point of view and.
In our ability to really kind of pick and choose again, who we do business with but also the types of loans in the risk in the risk return and the economic value that we generated from these loans. So im 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 economic value for our investors and I think our team's done an excellent job on that I think truthfully the results of.
The other W., we had this quarter I think somewhat speak for themselves in terms of our effectiveness of being good stewards of capital good fiduciaries from an economic value creation point of view and do business with customers who align with.
Aligned with our objectives, so I feel very good about when we set.
Okay makes sense. Thanks, and then thank you switching to the loss reserve.
You had the that 11.8 million increase in the IB and are related to that litigation.
And you had a charge there last quarter is that.
Don for is that kind of getting closer to the end or in any way to think about that.
Yes.
We we believe were appropriately reserved for all the matters and we and we do not currently expected any further material.
Increases related to these matters. So given given the nature of litigation is hard to predict future outcomes as possible our accrual could go up or down in future as things develop I think that's probably.
How I can comment today.
Okay. Thanks. Thank you just one more the the services segment can you just.
Do you just talked about the outlook there.
Just given the improvement.
Yes. Thank you.
I mentioned in my comments, we we have been very pleased even this week, while we've been here at Austin meeting with.
Dozens and dozens of customers about how the view of Radian. This change in in the marketplace.
To be accompany beyond just semi and I think you know as I said at our Investor Day. These are busy.
Our services businesses are in different stages of maturity in development and we're investing where we see strategic opportunity I think we're starting to see the results of that I think.
You know I'm very pleased with the receptivity in the marketplace and and I think as you look at.
The revenue we gave revenue guidance that we would hit a run rate this year.
Yes, somewhere between 175, and 200 million revenue, obviously, we hit that this quarter.
10% to 15% of EBITDA I think we're right around 8% this quarter and quite frankly.
The though I'm less focused on that because to the extent that we make investments along.
Along the way that may be cost us a little bit in EBITDA from an expense point of view, but allow us to grow and position strategically for the future we're going to do that all day long.
So I think you today I am very I feel very good about where we sit in specifically I think you know are the 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.
Obviously existing my customers and others around the services, we can provide from title perspective title insurance title and settlement services and also the different real estate data and analytics valuation services are really playing the being received well in the marketplace I think thats where.
We expect to see the greatest growth in the coming coming year or so we're excited about it the team's doing a great job.
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 our thank our customers are responding very well the number of customers. It came to me this past week and so.
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 last couple of years, So feel good about.
That's helpful. Thanks.
Next in queue, we as a line of Mackenzie Aron Zelman and associates. Your line is open.
Thanks. Good morning, just wanted to follow up on the comments around very healthy services business and and the revenue growth. This quarter were there any particular areas of the business that have really drove the strength. This quarter was that more broad base just any color you can provide all the different areas.
Yes. So thank you Mckenzie this is Rick.
I think where I see see the growth developing.
I would put.
You know title was such a small starting point I think I've referred to as into passes really in industrial strength startup, where we've invested in technology and people in facilities and put these two top two companies together to create radian title services and we acquired an underwriter to really be in a position the controller.
Our own destinations to some degree so I think title is one that.
Is because of the low starting point is beginning to show.
Strong momentum and Ics and acceleration Im very pleased with that but also expected that and I think as we go forward that as a very interesting growth opportunity I think around the real estate valuation side not not only.
Traditional appraisals through kind of that 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 could see evolving into a really strong kind of subscription based product. So I think real estate entitle. The the mortgage services business kind of grows based upon the volume, but I would say the growth opportunities that were.
Seeing today and the opportunities we see in the future.
I really do revolve around title in the and and true real estate data and analytics and technology that that we haven't place today.
Okay, Great and then I think this one is for you Frank but when you think about the capital and the significant excess that you continue that to halt can you just talked about how you think about Wang depression content, a dividend versus increase the dividend for said a continuation at the opportunistic buybacks.
Sure Mackenzie Great question I think that is.
Thats it certainly one of the topics that we talk about I think a.
More than theoretical distinction between the two is just the sort of on demand nature of a share repurchase program you can announce and amount you can be sort of in and Don If you will a dividend does require I would say a higher hurdle to clear just as it relates to the ability to to sustain it over the.
Long term.
And so I just want to be very careful as we contemplate different methods of capital return to shareholders to make sure that before we start something new that it can.
Sort of meat that that high threshold.
We would have been it but I would tell you that right now we've been very successful and implementing our share repurchase program, both with our previous $250 million authorization, having been completed.
And also our existing 200 million dollar 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 we feel that we've been very successful and taking out shares.
At value prices and so we think thats been very effective means of capital return to our shareholders.
And so that is that 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. Thank you so much.
The Q.
And next in queue, we have the landmark degree of Barclays. Your line is open.
Yes. Thanks.
Another question about market share it feels like.
The last couple of years is players in industries have rolled out the risk based pricing models, we've seen more quarterly volatility in market share.
Across the industry than we've seen historically just mentioned getting your thoughts on on kind of that pricing dynamic and what you're observing in terms of I'd like to some sustainability of your business with each individual.
Customer you have.
Yes. Thank you Mark this is Rick.
Yes.
I really think again from a market share point of view were less focus on market share I think if you. If you look over time, we have largely been.
Pretty consistent you know and and I think we haven't seen the same volatility because we don't participated in some of the large.
Large bulk I'll call them bidding situations that create the volatility around market share and I think you'll see ebbs 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 you know align well with our risk return profile and where we can enable them to be very competitive in the marketplace and I think you as I've said before I think you though.
There in the team in the sales team are highly focus we're very data and analytics driven in our business. So when you think about the environment. We're in today I think 100% plays to our story and I think the evidence of our of our success is really how we've been able to sustain.
Being strong relationships with a broad base of very high quality players produce high quality volume that you know very attractive mid teens returns as Frank went through you know.
And generate significant economic value as we displayed in our.
The Investor day kind of presentation. So we feel very good about it I can tell you. The early time I hear the market share awards in our own discussion is really around earnings call time, because we're focused on doing business with the right customers. The right that do business the right way and truthfully I think we're you know.
Nick 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.
We are in 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 positioned in this environment plays to our strength and I feel very comfortable about it.
Okay. So just to clarify it sounds like your observation is that most of the the share shift and what Youre seeing is is due to the more of the bulk of business, you're not necessarily seeing pockets of your flow, where there's elements of risk. So just.
It looks like it's going away because maybe the pricing moved again soon you and you have to respond Theres a yes.
Good.
I think the big market share shifts are exactly as you described I think from an overall pricing point of view, we see a fairly stable rational environment you know.
I think we feel very well positioned to compete and where we don't choose to to.
Participate I think Thats, where you see the volatility.
Okay. That's helpful and then Frank.
Just interested to hear if there any tangible benefits the you're looking for as a result of the Moody's upgrades.
I know there's a great question Mark I think we've 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 doesnt it doesn't prevent us.
From doing business with any of our customers on the on my side So that is.
Certainly a practical consideration there we'd still have 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 there's not a significant.
The distinction with with the upgrade but happy to have the upgrade and hope to see more in the future.
Okay got it thank you.
Ladies and gentlemen, just a reminder, if you would like to please yourself hearing people question you can press one followed by zero. Once again, just one followed by zero Q yourself up for question next we have the line of feel Stephano with Deutsche Bank. Your line is open.
Yes. Thanks.
I guess geography question on the other operating expenses it feels like the.
The mortgage insurance other operating expenses has been coming down and a larger proportion of the total has been allocated to corporate which then a you know gets allocated back to the segments. It can you is that right and can you help me understand why they geography, there is changing.
Sure. Phil This is Frank I can tell you it's right.
And the geography.
I will say will will change from time to time, just as a as we reposition resources across the different.
Plants.
So I wouldn't say, there's a wholesale reason why that happens over to say, it's it's 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 movements 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 know you're just grounded in what the total expense base for the organization has.
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.
With time, I guess over the past couple of quarters, when we think about refinances and the.
The increasing number of people, who are refinancing, but not able to drop mortgage insurance I mean is they're different returns for this business.
Given that did it probably won't be around as long with the with housing price appreciation should we be thinking persistency might be pressured a bit.
Just because again these guys might be falling off of their am I coverage faster than maybe some of the other policies and looking back historically over the business.
Hi, This is Derek so in terms of from return perspective on kind of looking across different care credit characteristics. They expected returns are pretty stable and so obviously when we project that we factor in fact at the 85 below are gonna have shorter duration, and all things being equal to the extent that that portfolio becomes more skewed.
Towards lower LTV that it's going to have an impact and persistency overtime.
Okay.
That's what I have is on the services revenue in it and Rick maybe you could just give US a reminder.
How much of the services revenue ease repetitive business versus the.
The quarterly revenue is dependent upon sales that happened a quarter or two ago I guess, when I think about the insurance brokers segment.
It feels like 90% of their business is on January 1st they wake up and know that it's going to renew and they only really have to do 15% new business and I guess, a 5% organic and everybody's happy.
Can you can you put that the services business and similar terms.
As to how we might be able to think about it.
Yeah. That's a great question, then and I think if I look back two and a half years ago. You know I would have so there was a little bit more.
Masonic as my favorite will hurt.
I would say today, given the nature of the business, it's it's becoming increasingly recurring than what I mean by recurring just so we define the term is becoming a recurring because we're creating relationships with customers who have continued either that or that were integrated with from a technology point of view, whether its title and settlement services.
As whether its valuation services and you know we're also seeing steady flow from a mortgage services perspective, as a securitization market kind of though you know as as a level of stability and growth through it. So I think today, it's you though away from the special project work that maybe occurred during the financial crisis.
There and much more focused on kind of normal flows and integration on mainstream business around origination activities are securitization activities SFR financings.
Oreo transactions that are in our pipeline, so where the volatility will come it as obviously there can be some cyclicality in that from an origination cycle. So you know.
Purchase a purchase market cycle and seasonality around that so but from a from a customer relationship and integration point of view you know much like we see Onea my business in terms of kind of embedding within our customer relationships and partnering with them, that's really where the business. It is heading and.
It really is more there today than it was two years ago.
Okay. Thank you.
Great question, but we think.
Next in queue. The line of Geoffrey Dunn of Dowling and partners. Your line is open.
Thanks, Good morning.
Uh huh.
Obviously, we've seen what has been driving.
The ability to keep lowering the incidence assumption now to seven and a half.
And I doubt there is much more Rome, although there could be maybe another 50 basis points or something like that based on how you guys talked about in the past, but what are some of the 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 slowed down to one or 2%.
What's the sensitivity if unemployment went up to four or 5%.
How can we think about credit going forward and watching the macro economy.
Turning to the Dara I mean, I think that he had upon the two main line in terms of home price appreciation and to be an indication that only unemployment rate, but also re employment rate that ends up being a big back in our model as well that's going to have an impact on cure rate and then looking at kind of our reported results, while you're going to be looking for our kind of share.
Great and then cure rate in kind of the distribution of kind of how long loans and involve a number of missed payments. So I don't have particular sensitivities and HP goes down by first and how that translates into kind of default performance, but those are going to being your standard early indicators and performance that you're going to see across pneumonia.
Is it fair that it is it fair if Vincent I'm, sorry, as a fair if home prices did slow down into that zero to 2% that seven in half is probably not the right right.
Except to say the other thing you have to factor in the distribution in book in terms of I would say pre crisis and post crisis right. So with respect to that a lot of its going to depend upon also the embedded H.B.A. you have within those loans, obviously on the margin.
Higher home price appreciation can it be favorable but the other thing we certainly see it kind of on those private post crisis defaults as it was increased they have higher care rate anything to factor in certainly if you see home price depreciation really kind of back up and you see kind of an increase in default you see more modification and modification kind of opera.
Communities I think going forward, so I think it art and it gets kind of draw straight line and say it works it really kind of depends on the distribution of defaults as well.
This is Rick I would just add I think the other important factor to consider and all this which you know there's there's not a tremendous amount of historical experience, but it will work to the positive in the future, which as you know servicers have a lot more tools and they're in their tool belt sort of speak the ultimate.
Police resolve defaults. So you may see of incentive to kind of an increase in defaults based upon certain macroeconomic factors.
But we also see servicers in investors and even the political environment much more focused on ultimately curing borrowers situations more effectively in the past. So I think that all comes into play with how we think about the go forward and what some of the.
Because of the upward items are around ultimately how these things move through from initial defaults equation.
Okay, and then just last follow up I guess is it conceivable that the rate could still further decline.
Yes, I think Thats I mean, it really is tough to judge I mean, I think I think we may have guided toward a a lower bounds couple of hundred basis points ago. So it really is tough to say.
Okay. Thanks.
Thank you.
And our last question here in Q comes from the line of Sam Choe of Credit Suisse. Your line is open.
Hi, I'm most of my questions have been answered, but are there any additional I am I on insurance and it's our reinsurance that we should be aware off.
And the timing on that will be great. Thank you.
Thanks, Sam This is Frank a great question, you know as I mentioned in my prepared remarks, we do.
Feel that that islands are 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 are.
Contemplating and send 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 Q 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 is putting into this and obviously the support reaffirm our board of I. Thank each of you for your interest in Radian, we truly appreciate it.
I want to make one last comment as a diehard Saint Louis Cardinals fan what to congratulate all in that spans out there with a wonderful world series one.
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, does now conclude the conference for this morning, we thank you very much for all of your participation and using our 18 executive teleconference Service you may now disconnect.
We're sorry your conference is ending now please hang up.