Q4 2019 Earnings Call
Momentarily please continue to hold.
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Momentarily please continue to hold.
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I welcome to the fourth quarter 2019 earnings conference call. At this time all phone lines are in a listen only mode. Later, we will conduct a question answer session and instructions will be given to you at that time, if you should require assistance during our call today. Please press star followed by zero and we'll assess.
You offline from the contracts and as a reminder, today's conference is being recorded I'll now turn the conference over to Emily Riley Senior Vice President Investor Relations. Please go ahead.
Thank you and welcome to Radians fourth quarter and year end 2019 conference call. Our press release, which contains rating financial results.
The quarter was issued last evening and its posted to the Investor section of our website at Www Dot Radian Dot bear.
This press release includes certain non-GAAP measure, which will be discussed during today's call, including adjusted pre tax operating income adjusted diluted net operating income per share adjusted.
Being return on equity and services adjusted EBITDA, a complete description of these measures and the reconciliation to GAAP, maybe found in press release exhibit and Jay and on the Investor section of our website. In addition, we have also presented a related non-GAAP measure services, adjusted EBITDA margin, which we calculate by dividing.
Services adjusted EBITDA by gap total revenue, but it services segment.
This morning, you will hear from Rick Thornbury, Radiants, Chief Executive Officer, and Frank Hall, Chief Financial Officer also enhance for the Q and a portion of the call is Derek Brummer Senior executive Vice President of mortgage insurance and Rick services.
Before we begin I'd like to remind you that comments made during this call will include forward looking statements. These statements are based on current expectations estimates projections that assumption 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 under 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 Radian I'm pleased to report another outstanding quarter in year for our company 2019 was our first full year of operating under our one radian brands, reflecting the combined strength of our unified company.
Our team not only performed at a very high level. We also continue the strategic.
Eric transformation of our my business model capital structure of our services businesses I'm pleased to share some of the highlights from 2018 with you. This morning.
Before we begin I'd like to recognize or team across.
Our mortgage and real estate businesses. It just take our customers investor's business.
Partners and board for their support and helping us deliver these excellent results.
Now let me review the highlights from an exceptional year. We earned net income for the full year 2019 of $672 million or $3.20 per share.
Adjusted.
Pre tax operating income for the year was $855 million.
And adjusted diluted net operating income for sure was $3.21.
Return on equity was 17.8% and adjusted net operating return on equity was 17.9% for 2019.
We wrote $20 billion of in IBW in the fourth quarter, which is a 57% increase over the fourth quarter of 2018, and the second highest quarterly volume of flow.
W in our history.
This contributed to our record breaking volume of new flow business written in 2000.
19 of $71.3 billion marked our fourth consecutive year of record annual volume.
We grew our primary insurance in force by 9% year over year to $241 billion.
Our mortgage insurance portfolio, which is one of the largest in our industry. This.
The primary driver of future earnings for our company.
We believe the projected future earnings and economic value of this portfolio provides us with significant strategic financial flexibility the composition of our mortgage insurance portfolio continues to improve today, 95% of our primary.
The risk in force consists of business written after 2008.
We strategically transformed our pricing approach through the rollout of radar rigs in early 2019.
Combined with other innovative pricing structures. Most importantly, this combined approach provided our customers with choices for.
Doing business with radio has significantly increased the granularity and flexibility of our risk based pricing as I've said, we believe this environment plays to our history, where we can leverage our proprietary data and analytics to evaluate risk at a low originator and servicer level and deliver risk based pricing.
Turning to our high quality customers through a variety of digital channels. Our focus is on meeting the needs of our customers balance with maximizing the economic value add future earnings of our mortgage insurance portfolio.
For our services segment, we reported total revenues for the full year 2019 of 100.
And $70 million, a 9% increase compared to 2018.
Consistent with the strategic positioning of our services segment and our focus on our core products and capabilities, we sold Clayton services last month.
Now that the sale of Clayton services is complete we.
Continue to focus on building, our remaining high value real estate businesses through a data driven digital transformation is come to define our one radian strategy.
These businesses include title valuation asset management, which include our Oreo and single family rental businesses and our other digital.
Little real estate services, we are excited about the future and we remain confident that we have the customer relationships and the team to grow revenues financial contribution and value going forward.
In 2018, we took several steps to optimize our capital and liquidity position, we returned 300.
Hundred $70 million in capital from rating guaranteed a radian group.
This is an addition to other reimbursements made radian group from its subsidiaries based on our interest in operating expense sharing agreements.
We purchase 13.5 million shares or Radian group common stock returning $300 million.
Stockholders.
We reduced our total debt outstanding lowered our cost of financing and improved our debt maturity profile.
We have continued to strategically transform our insurance business from a buy and hold model to an aggregate manage and distributor model lowering the risk profile and through.
The cycle volatility of the business.
In April 2019, we executed our second mortgage insurance linked notes transaction.
For $562 million earlier this week, we executed our third mortgage insurance like notes transaction for $488 million.
Which further enhanced our capital efficiency and strengthen our risk profile.
And last month, we entered into a new quota share reinsurance arrangement for premium single premium business written in 2020 and 2021. This program includes 65% session of business, although the terms of theirs.
Similar to our existing 2018 single premium QSR transaction.
We believe there are number of strategic benefits from leveraging the regularly accessing both the capital reinsurance markets to distribute risks, including increased financial flexibility.
Reduction of our overall cost to capital enhance.
Capital efficiency, and most importantly, the opportunity to reduce portfolio and financial volatility through economic cycles.
Overall during 2018, we made significant progress by strategically transforming our business and establishing a firm foundation for the future with.
The focus on leveraging data and analytics and technology across our businesses, including through granular risk based pricing risk distribution strategic capital management and the execution of our real estate services strategy.
Now I'd like to spend a few minutes on the mortgage market and regulatory.
Yes.
The mortgage origination market was strong again in the fourth quarter with low interest rates driving high quality purchase loans were mortgage insurance is generally three to five times more likely to be used.
As well as increase refinance activity.
Mortgage rate rates remain at attractive levels for both homebuyers.
In certain homeowners looking to refinance our existing loan and the market continues to be fueled by first time homebuyers, who represent one third of home sales.
The quality of originations in the market remains very strong, including overall loan quality originator production quality and service or default risk.
Sure.
As we have said previously we believe our data and analytics driven process to evaluate the quality at risk of each lender and servicer, we partner with when combined with our loan level assessment of risk enables us to build the economic value of our portfolio with greater certainty and we believe our approach.
Provides unique insights to our customers as well.
As greater certainty to our counterparties in the capital markets and reinsurance markets.
Given the market environment, our customer footprint and our projections based on industry forecasts, which included a slight decline in overall mortgage origination market in 2000.
20.
Got a modest increase and purchase originations.
We expect to write new business in 2020 of approximately $60 billion.
Turning to the regulatory and Legislative landscape housing Finance reform continues to advance administratively Scf HF.
Hey has taken steps.
To prepare the gses for an eventual release from conservatorship sometime in the future.
To this end the FHLB recently announce engagement of financial advisor to support the development of a roadmap for ending GFC conservatorships.
Additionally, we expect the FHLB to.
At least a new proposed capital rules for the Geocities sometime early this year as was the case with the initial proposed capital rule, we expect a new rule to generate significant comment and debate and we look forward to participating in this important discussion.
Also on the horizon, we're expecting the CFPB either.
It is proposed replacement for the QM patch, which effectively grants QM status of loans eligible for purchased by the Gses, regardless of the borrowers debt to income or DTR ratio.
Based on recent reports the CFPB may be leaning towards UQM approach that would remove BTI in favor of a.
Pricing based test.
Regardless of the final solution, we continue to believe that the CFPB. This focus on preserving credit access for worthy borrowers in the transition away from the QM patch will be orderly and not overly disruptive to the housing market.
Regardless of the CFPB as.
So just UQM, we will continue to us to apply a strong risk management discipline to the loans, we are willing to ensure.
Finally, we continue to be encouraged by the receptivity of members of Congress The administration the FHLB at other regulatory agencies.
Turning the important role that our industry plays as a private investor and managing and distributing mortgage credit risk.
As FHLB director Calabria has stated on more than one occasion.
My industry is an example, where private capital is working well within the housing finance system.
Now I'd like to turn the call over to Frank for details of our financial position.
Thank you Rick and good morning, everyone.
To recap our financial results issued yesterday evening, we reported GAAP net income of $161.2 million or 79 cents per diluted share.
There for the fourth quarter of 2019 as compared to 83 cents per diluted share in the third quarter of 2019, and 64 cents per diluted share in the fourth quarter of 2018.
As previously announced the fourth quarter of 2019 includes a pretax impairment charge of 18.
Point $5 million for goodwill and other acquired intangible assets related to the sale of Clayton services.
Adjusted diluted net operating income was 86 cents per share in the fourth quarter of 2019, an increase of 6% from the third quarter of 2019, and an increase of 23.
<unk> percent over the same quarter last year.
I will now focus on some of the drivers of our results for the quarter.
I will start with the key drivers of our revenue.
As Rick mentioned earlier, our new insurance written was $20 billion during the quarter compared to $22 billion last quarter and 12 point.
$7 billion in the fourth quarter of 2018.
For the full year 2019, we wrote $71.3 billion of new insurance written a 26% increase over full year 2018.
Direct monthly and other recurring premium policies were 82 per.
Percent of our new insurance written this quarter decreased from 85% for third quarter of 2019, and 83% for the fourth quarter a year ago.
In total.
No were paid policies were 97% of our new business for the fourth quarter.
Borrower paid single premium policies were.
18% of our total new insurance written this quarter, a significant increase from two years ago, when they accounted for less than 4% of total new insurance written.
In contrast, lender paid singles were less than 2% of our new insurance written this quarter, a dramatic decline from 20% of total production two.
Hours ago.
This shift in business mix is expected intentional and designed to improve the expected return profile of our single premium business overall as borrower paid singles have higher expected returns relative to lender paid policies due in part the automatic cancellation under the.
Motors Protection Act, creating a shorter expected life and lower required capital under Pmiers.
Primary insurance in force increased to approximately $241 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 approximately $35 billion over the past two years.
Our 12 month persistency rate of 78.2% decreased from 81.5% in the prior quarter and 83.
0.1% in the fourth quarter of 2018.
Our quarterly annualized persistency rate declined slightly to 75.0% this quarter from 75.5% in the third quarter of 2019 and 85.5% in the fourth quarter of 2018.
The decline in quarterly annualized persistency compared to the fourth quarter of 2018 is primarily driven by increased refinance activity observed in the quarter.
While our long term expectations for persistency remain in the low to mid 80% range. We have said previously that near term.
And see May fall below this level as was the case in this reporting period.
It is worth noting that despite relatively low persistency rates radians insurance in force grew by over $3 billion in the fourth quarter.
Moving now to our portfolio premium yield.
During the.
Fourth quarter of 2019 earned premiums were positively impacted by a 17.4 million dollar cumulative recognition of deferred initial premiums on monthly premium policies.
Slide 10 shows the premium yield trend over the past five quarters, excluding this impact.
Since we don't expect it to recur in the ordinary course.
This item represents an update and our accounting for the ultimate Collectability of the initial premium receivable on monthly borrower paid policies, which we typically do not collect at the inception of the mortgage loan.
The materiality of this estimate has.
Increased as our portfolio of borrower paid monthly policies has continued to expand.
Two other lines worth, noting on slide 10, our direct enforce premium yield and single premium policy cancellations.
Our direct enforce premium yield was 47.1 basis points this quarter.
As compared to 47.4 basis points last quarter, and 49.0 basis points in the fourth quarter of 2018.
Our level of single premium policy cancellations increased to 4.4 basis points of yield in the fourth quarter compared to 1.7 basis points in the same quarter a.
We go.
As we have noted previously the level of single premium policy cancellations may fluctuate given certain macro economic factors, primarily interest rates and their impact on refinance activity.
And can create volatility in our reported premium yields.
Turning to longer.
Term enforce portfolio yield expectations for the past several years, we have expect to be enforced portfolio yield to decline gradually and over the past year. It has in fact declined largely because of two key drivers.
The first driver is the natural turnover of the portfolio.
Older.
Outage is that have relatively higher risk profiles written at higher premium rates are running off and are being replaced by new vintages, which carry lower premium rates.
Lower premium rates are due in part the industry price changes following tax reform in 2018, as well as lower priced business.
Associated with the lower relative risk profile and capital requirements of our recent production.
This lower risk profile is the second driver of our expected portfolio yield decline.
Our recent production has a higher weighted average FICO lower than expected losses and reduced capital requirements.
Relative to the past several years.
In terms of future New insurance written our mix of business will continue to be guided by where we see value across the risk spectrum and the credit mix may vary quarter to quarter. This may result in periodic variability in the profile of our new insurance written including.
At average FICO, LTV and other risk metrics that impact average premium yields.
What's also noteworthy is the recent trend of lower persistency and record levels of new insurance written which have further contributed to a higher turnover rate of our mortgage insurance portfolio contributing to our.
One of a lower overall portfolio yield.
The timing and magnitude of future portfolio yield changes will continue to to depend on several factors, including the volume and mix of new business relative to the volume and mix of cancellations and prepayments of the older vintages and our portfolio.
What is most important to remember about our 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 not include the impact of insurance linked note that caused that coverage is put in place after the policies.
Our originated but do incorporate the impact of our single premium quota share reinsurance program, which is in place at the time of origination.
Net mortgage insurance premiums earned were $301.5 million in the fourth quarter of 2019 compared to $281.2 million.
Colors, and the third quarter of 2019 and $261.7 million in the fourth quarter of 2018.
The increase of 7% on a linked quarter basis is primarily attributable to the 17.4 million dollar impact from the recognition of deferred initial premiums on.
Monthly premium policies mentioned earlier.
Setting aside this impact our net premiums earned still grew 1% quarter over quarter and 9% year over year. This 9% increase from the fourth 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 was $44.0 million for the fourth quarter of 2019, representing a decrease compared to $47.4 million for the third quarter of 2019, and an increase compared to 41.
Point $5 million from the fourth quarter of 2018.
Our reported services adjusted EBITDA for the fourth quarter of 2019 was $2.2 million.
Our full year services segment revenue was $170.4 million in 2019.
Compared to $157.1 million in 2018.
The total revenue contribution of Clayton services, which we sold in January 2020 was approximately $50 million during 2019 and as previously communicated we do not expect this sale to have a material.
Impact to our future financial results on a net basis.
Given this recent sale, we will review our segment reporting framework to ensure that it continues to align to our internal management of these businesses.
To the extent there are any changes to the competent composition of business lines within our reportable.
We expect to have these changes reflected in our first quarter 2020 results and we will update any related financial guidance accordingly at that time.
Our investment income this quarter of $41 million was down slightly from the prior quarter and same quarter prior year.
The decrease was primarily a.
Attributable to lower investment yields, which were partially offset by higher balances in our investment portfolio.
At quarter end the investment portfolio duration was approximately four years consistent with the prior quarter.
It is noteworthy that our 5.7 billion dollar investment portfolio has grown approximately 10.
10% or just over $500 million since the fourth quarter of 2018, a sizable increase given that we have paid off debt and repurchase shares during the period.
Moving now to our loss provision and credit quality.
As noted on slide 13, the provision for losses.
For the fourth quarter of 2019 includes positive development on prior period defaults of $8.2 million. This positive development was driven by a reduction in certain default to claim rate assumptions on the aged defaults.
Our primary default rate is now at 2% up slightly from last.
Quarter, which is consistent with seasonal patterns and down slightly from 2.1% a year ago and still remain among the lowest levels in the past 20 years.
The total number of new defaults in the fourth quarter of 2019 increased by 3% compared to the third quarter of 2019.
Consistent with typical seasonal patterns.
Further consistent with typical default seasoning patterns. This shift in our portfolio composition toward more recent vintages has resulted in slightly increased levels of new defaults in our portfolio for 2019 as compared to 2018.
As the increase in new defaults for recent vintages outpaced the reduction in pre 2009, new defaults.
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 the default to claim assumption on new defaults remained at 7.5% during the fourth quarter of 2019, consistent with the third quarter of 2019.
Now turning to expenses.
Other operating expenses were 80.9 million.
Dollars in the fourth quarter of 2019 compared to $76.4 million in the third quarter of 2019 and $77.3 million in the fourth quarter of 2018.
The increase in operating expenses compared to the fourth quarter of 2018 was primarily driven by an increase.
Yes in the accrual for incentive compensation based on full year 2019 performance.
Our consolidated quarterly run rate.
Base operating expenses were previously estimated at approximately $72 million before the sale of Clayton services.
Our new.
Base run rate will likely be closer to $70 million, a modest adjustment from our presale levels as most of the expenses in the sold businesses were reflected in direct cost of services and not in the other operating expenses line item.
We will continue to note any material variances from these.
Acted levels that may occur in the execution of our strategic priorities throughout the year.
Now moving to taxes, our overall effective tax rate for the fourth quarter of 2019 was 21.6% our expectation for our 2020 annualized effective tax rate before discrete items.
As approximately the statutory rate of 21%.
Now moving to capital.
Radian Guaranty had p. Myers available assets of $3.6 billion in our minimum required assets were $2.8 billion as of the ended the fourth quarter 2019.
The excess available assets over the minimum required assets of $822 million represents a 29% pmiers cushion.
We have also noted on slide 18, our pmires excess available resources on a consolidated basis of $1.7 billion, which if.
Fully utilized represents 60% of our minimum required assets as of December 30, Onest 2019.
We expect our pmiers cushion to be sufficient to support projected organic growth as well as potential volatility such as a cyclical economic downturn before giving any.
Consideration for the substantial additional benefit of future premium revenue.
As Rick mentioned in February we closed on our third insurance linked no transaction of approximately $488 million. This brings the total insurance linked to note issuance by Eagle re to approximately.
$1.5 billion and covers originations from January 2017 to September 2019 for our monthly premium business.
Additionally, in January 2020, Radian Guaranty agreed to terms for an additional quota share reinsurance arrangement for single.
Premium mortgage insurance business with a panel of eight third party reinsurance providers in order to seed new single premium mortgage insurance business.
In terms of the new single premium QSR included 65% session of business written in 2020 in 2021.
Other terms of the new arrangement are also substantially the same as our existing 2018 single premium QSR arrangement.
The P. Myers credit for both the IR Len and QSR program remains subject to GNC approval, but are expected to be similar to our previous experience.
In total as of the fourth quarter 2019, we have reduced radian guarantees p. Myers capital requirements by $1.3 billion by distributing risks through both the capital markets and third party reinsurance execution as noted on press release exhibit L.
We.
That is prudent risk distribution strategy and our disciplined capital management will continue to enhance our risk profile and improve our financial flexibility.
In connection with the company's plan to streamline operations and reposition capital by eliminating the intercompany reinsurance agreement between Radian.
Guarantee and Radian reinsurance the Pennsylvania insurance Department approved to the following actions during the first quarter of 2020.
The termination of the intercompany reinsurance agreement, resulting in the transfer of approximately $6 billion of risk in force from Radian reinsurance to Radian guaranty.
Okay.
A $465 million return of capital from Radian reinsurance to Radian group, which was paid in joint on January 31, 2020 from Radian Reinsurances gross paid in and contributed surplus and the transfer of $200 million of.
Cash and marketable securities from Radian group to Radian Guaranty in exchange for a surplus note.
The surplus note may be redeemed at any time upon 30 days prior notice subject to the approval of the Pennsylvania Insurance Department.
After consideration of the I'll end transaction and.
The net impact of the intercompany capital actions described previously radian guarantees excess of of available asset over its minimum required assets under P. Myers would have increased from 29% to 32% or by approximately $115 million.
As of December 30, Onest 2019, Radian group maintained $653 million of available liquidity.
Total liquidity, which includes the companys $267.5 million unsecured revolving credit facility was $920 million as of December 30 Onest.
2019.
During the fourth quarter of 2019, radian repurchased approximately 1.1 million shares or approximately $25 million of Radian group common stock.
Including commissions under the August 2019 share repurchase program.
For the full year 2019, the company repurchased 13.5 million shares of Radian group common stock at a total cost of approximately $300 million, including commissions.
In addition in January 2020, the company purchased an additional 381000 shares or a.
Ultimately $9.4 million of Radian group common stock, including commissions.
As of January 31, 2020 purchase authority of Upto approximately $141 million remained available under this program.
After consideration of the shares repurchased after.
Quarter end and the net impact of the intercompany capital actions described previously radian groups available liquidity would have increased by approximately $256 million relative to the amount as of December 30, Onest 2019.
The company remains focused on optimizing its capital.
Question enhancing its return on capital and increasing its financial flexibility.
Ill now turn the call back over to Rick.
Thank you Frank before we open the call to your question. Let me remind you that net income for 2019 was $672 million or $3.
Okay, and 20 cents per share.
Adjusted pre tax operating income for the year was $855 million and adjusted diluted net operating income per share was $3.21.
Book value per share increased 23% year over year to $20 in 13 cents.
Return on equity was 18%.
Our $241 billion mortgage insurance portfolio grew 9% year over year and as the primary driver a future earnings for radio.
Our services segment revenues grew 9% from a year ago to $170 million and we made progress against our capital strategy.
In 2018, returning $375 million in capital of the Radian group repurchasing 13.5 million shares, reducing our total debt outstanding and improving our debt maturity profile as you've heard me say many times. This is a great time to be in the mortgage insurance business the business fundamentals.
Very strong our mortgage insurance industry is governed by clear consistent and transparent risk based capital requirements.
And both the credit quality of our existing book of business as well as a credit environment. We operate in today are excellent.
Now operator, we would like to take questions.
Thank you, Sir and ladies and gentlemen, if you wish to ask your question. Please press one than zero on your telephone keypad you may withdraw the question at any time by repeating the one zero command. If you are you still speakerphone. Please pick up a handset before pressing the numbers. So again for questions you made queue up by proceeding one followed by zero.
And our first question comes from Jack Micenko with ESI Ji. Please go ahead.
Hi, good morning.
I wanted to kind of walk through the services map a little bit so.
We grew that business I guess about 8% topline year over year, which is good and then.
The 175 should we just I guess take that 50 out.
The run rate I am assuming and then.
That 10 to 15 adjusted margin that you've targeted.
Should we assume that that improves.
In 2020, how should we think about modeling that forward.
Sure Jack this is Frank.
I laid out in the prepared remarks was really just the the recap of 2019 rates. So we.
We did give previous guidance that was reflective of the services segment as it existed during 2019, which was that 175 to 200 million dollar run rate annualized expenses.
The 50 represented what the 2019 revenue was.
We will.
To provide further clarity after we go through our evaluation of the businesses that will aligned to the to the segments as will be presented during 2020.
So, but just trying to give you some approximation of of what this sold businesses represented from a revenue standpoint.
In a horse in the historical context.
Okay that sounds like something we'll talk more about next quickly next quarter call.
That's correct, Okay and then.
Looking at the Kent can help to notice on the island.
You just completed the the spread execution seems much much better.
The 19, I know Theres, a couple different buckets, but.
Is that is that in your mind, a function of greater market acceptance for.
The asset class or was there a material difference in your attached each at detach or anything else structurally that really.
You know drove some of that improvement.
Sure. This is Frank so there were certainly I would say, there's certainly continues to be greater market acceptance for the product and greater investor demand. There. There were some some credit attributes that did have continued to evolve the.
The weighted average FICO for instance has improved.
On that there were some structural differences there, but I would just say it's reflective of both of just higher credit quality of what was being covered.
And also just a very strong investor demand for the product itself.
Okay I can just take one more in.
Operating expenses.
I think you taking a.
<unk> million out from Clayton that warrant reflected in the services.
How should we think about growth 2020 over 2019 any of some investments and that sort of things still going on.
Sure. So what I described in the prepared remarks was a sort of a base.
Level of operating expenses on a go forward basis, and I think as you know.
They followed us for a while there are occasional adjustments to that as there were this quarter related to compensation accruals things of that nature, but we would expect to see that same base rates adjusted by about $2 million, which were.
Tribute able to the sold businesses so moving from.
72 per quarter down to 70 would be our expectation and again to the extent there any material deviations from that expected level will be sure to call those out.
Alright, thanks for taking my questions.
Thank you very much what's going to Theres questions you may queue up at this time by pressing a one followed by.
Ill.
Again for questions. Please press one followed by zero.
Okay.
Hey, what's good for any questions you May press, one followed by zero.
And our next question comes from Mark Beury's with Barclays. Please go ahead.
Yes. Thanks.
You, obviously generate a lot of incremental liquidity.
For the holding company this quarter, but you didnt use a lot of it buybacks relatively light can you just talking about updated thoughts around the deployment of that cash holding company.
Around capital and.
And also.
How M&A may may fit with your plans going forward. Thanks.
Sure Mark this is Frank.
As it relates to the holding company liquidity I think if you look at our track record really since December of 2018.
I would describe our actions as.
Turning the capital for out optional excuse me for optimal Optionality and as the we have contributed about $1 billion from our subsidiaries into group. Since 2018. This past year, we repurchased about $300 million worth our shares at $141 million of that authorization.
Remaining.
So I.
I think is we think about holding company liquidity, our pmiers cushion in our statutory surplus which are three guardrails around our capital planning that I discussed an investor day, our binding constraint right now is really the statutory surplus number so our.
Holding company liquidity number is I think well positioned to provide us that range of Optionality that we spoke about and as is our practice to the extent there are updates as it relates to capital actions will will inform.
We'll inform the public as those occur but.
Again right now we still have a 141 million dollar authorization outstanding on our current $200 million share repurchase authorization.
Mark This is Rick. Thank you for the question I think as Frank said, we have a pretty strong truck rack track record of.
Over the last.
Last couple of years of really managing our capital in a very thoughtful.
Hey, thinking about shareholder value.
I think when you think about the debt restructure that we have to think about the risk distribution across three Ireland's our QSR it really evolving our model from a buy and hold model to a.
They manage and distribute model changing the profile this company materially.
Looking at value based buybacks were as Frank mentioned, we bought 300 million shares is $300 million worth of shares back last year in this radio reinsurance restructure we moved capital around to reposition.
I would agree and optimize the use of our capital across our insurance subsidiaries and Holdco I think really put us with a strong position. That's all consistent with the capital plan, we've been working through as a team over the past.
There are two it's out of perfect science, we either we always require flexibility I think Frank so the Investor day, it's always about capital.
Adding versus a capital plan.
And but 100% laser focus on how we enhance shareholder value and I think.
When you really look at where our capital situation persists after the radian reinsurance kind of transaction that we did.
We are the we're in a very very strong capital position both.
In terms of a strong pmires position the radian guaranty surplus, but also holdco liquidity. So I think we have significant strategic financial flexibility Anish, you will see us continue to execute as we see on the best interest to shareholders.
Okay. So this is M&A even on the radar here just think about deploying some of the.
Optionality to build.
So I think we just think about capital and uses of capital you think about returning to shareholders you think about.
M&A, you think about even things like.
Just but what we what we think of in terms of somewhat like a war chest. If you will for for opportunities I think.
The good news about where we sit today as we we have the luxury and the Optionality to think about all opportunities from a M&A perspective, it I've got a whole office full of opportunities.
None of which.
If you look back 2018, none of which did we pursue and or I'm sorry 2000.
Team.
So we always see opportunities I think we're we're very disciplined about looking for value.
As opposed to just doing M&A and I think it's safe to say, we haven't really seen things that create value, but you don't look any good stewards of capital, we're always looking for ways to optimize our.
Our our use of capital for our shareholders and think about things both from either from a strategic point of view.
But it's not it's not something that we feel like we have to do to too.
Achieve our strategy so.
Okay.
That's helpful and there was just hoping to get a strategic update on how you're thinking about the services.
Yes.
Going forward, what it was about claim that didn't didn't seem to sit anymore and and kind of how you're looking to grow that.
Yes, no. Thanks, So I think.
Look when I got here 2017, we took a hard look at what we were doing there didn't really.
Feel like we were optimizing our.
We're executing on a way that should be successful I think we started the strategic repositioning and claim that sales Clayton services and by the way our team. There that has done phenomenal work I know they'll continue to do phenomenal work for the koby This team.
But as I as you might recall.
At our Investor Day, I mentioned really our focus on data and analytics and technology, where we where we believe we can create.
Businesses that disrupt existing business models, leveraging data and analytics and technology and really driving digital models, and we and I mentioned that the high growth opportunities we see.
For our business really fall into the real estate space, including title.
So as we.
Continue to work through how best to drive value in those businesses, we have a very clear strategy, we believe the assets that remain.
From a company name Green River capital.
I will read five bridges Radian settlement services, and Radian title insurance, but more importantly, the four products title valuation asset management and realtor services in those businesses are really the higher value high growth opportunities that we're focused on building I think there's somewhat startup like because.
There are smaller scale, especially relative to our my business.
But we're extremely excited about the the assets we own the team we have on the field our customers are receiving our one radian messaging and as I mentioned at Investor day in its still true today.
We see today value in the data.
The customer relationships. So we are developing.
Deepening and in the future, we see earnings and intrinsic value building. So these are these are.
We're very excited to be able to.
Focus.
On executing our strategy in C., we continue to see great opportunity to our customers are.
Confirming that.
Okay got it thank you.
Thank you. Thank you.
And our next question in queue that will come from Bose George with KBW. Please go ahead.
Good morning.
Good Lord had a question on Clayton I mean, you guys noted it doesn't.
Having the earnings impact but.
That does this sale the sale price did that contribute to in a more liquidity at the holding company.
Bose. This is Frank Thank you for the question. It does ultimately that's where it plays through we shared with you sort of what the net effect was on the intangibles.
And that intangible adjustment happens now sort of at the at the beginning of the process there, but yes ultimately the.
The cash proceeds.
We'll.
We'll be in the holding company liquidity number.
Okay, Great. Thanks, and then you noted and response in earlier question that.
By the bank binding constraint being statutory surplus.
But just to be clear the them in liquidity at the holding company is kind of fully available for for capital return rate Thats correct. Yes, I think just to kind of pick up on Franks comment we feel like today within radian.
Yes, this the surplus.
Number Pmiers capital I mean, we feel like we have really strengthen and use the word built the moat around kind of radian guarantee from a capital structure at the same time Weve free up capital up to Holdco. So I think.
So our strategy has been really through risk distribution and capital strength.
Protect the insurance company through through the cycle, if you will and build holdco liquidity and capital from a strategic financial flexibility. So I think I think we have made significant progress to accomplish both those goals.
Okay and Bose. This is Frank I would just I'd just add one more clarify are there even though.
Holdco cash is unrestricted technically as we described in our Investor day, we do have risk buffers and tolerances around what that holding company liquidity number would be managed to.
Okay that makes front.
And internal internal Paresh.
Okay, absolutely actually just once small accounting question, the dilutive effect of stock based comp.
Number was smaller this quarter than usual just what was driving that.
I'm, sorry that usually like it's usually the.
Dilutive impact of stock based comp that usually like 5 million shares or so and as looks like it was like one and a half million this quarter.
Hold on just a moment, let me get that.
I think thats, yes that is correct and that should be that should be or in the run rate.
Okay, Thats a run rate going forward.
Yep.
Great. Thanks.
Thank you.
Our next question in queue that will come from Douglas Harter, who with credit Suisse. Please go ahead.
Thanks can you just talked about how.
How are you would think.
About the proposed changes on the QM patch and whether kind of moving away from kind of a horton barrels.
What what impact that might have on.
Credit quality or underwriting quality of loans broadly speaking in the market.
Yes. Thank you.
Doug it's this.
As Rick.
So.
I think as we went through so are prepared remarks, there are things that are happening kind of around the geo season, CFPB FHLB and the QM patch, particularly.
I think the CF PB has has.
Kind of hinted in.
In stated that they are leaning towards a non.
Kind of metric more of a pricing related metric and and we as an industry. We as a company as we've looked at all the different iterations of proposals, including US semis proposal to kind of maintain a.
Component plus.
Compensating the.
Risk kind of underwriting factors. If you will I think the way we look at it is that the CFPB and FHLB.
As well are not really looking to disrupt the housing market for qualified borrowers.
I think is.
As the proposal comes out in the comment period occurs and.
You know they will extend the QM patch for some part of next year.
No. We don't really we don't expect there to be much of an impact in terms of the kind of from a market or from a.
From a qualified borrower perspective, so we are.
I think probably more of the certainty of just knowing what the rule as so people can prepare and and.
And work towards that.
So from a risk point of view the second part of your question as I think ultimately, though we are we're in a great position given what they're in the team has done from a risk based pricing that Howard.
To really make sure that were only ensuring the risk that we're comfortable with working with customers that produce quality and service default management the quality way. So I really think the change really more just let it occur we don't expect a great deal of impact we feel we are the great position.
Manage the risks that we ensure and.
Given the quality that's in the market.
It's not top of our list of things we are concerned about they were watching that very carefully a very active in the discussion, but it's not I think we we feel like it's going to be minimal minimal impact if any.
Great. Thank you.
Thank you.
Thanks, and our next question in queue that will come from Mihir Bhatia with Bank of America. Please go ahead.
Hi, Thank you for taking my questions first I just wanted to start with Peyton.
Going back to that for a second.
I understand the 50 million revenue.
But.
Mr. But did you give a.
It sounds like there's not much earnings impact. So is there a change to your EBITDA margin targets I think you talked about 10, 15% previously how does that affect it.
Sure. This is Frank Thanks for the question I think the way.
To think about always stat is that we don't expect there to be a a net earnings impact.
Our material net earnings impact as a result of the sale.
So as we as we reconstituted and reevaluate the businesses that are in the services segment on a go forward basis will be sure to provide.
Updated guidance around.
The businesses that will remain in the services segment and in margin expectations around that but.
But but you're correct.
In the $50 million worth of revenue $2 million worth of other operating expenses.
And the remainder of that being cost of services for the most part yes.
Just to add the frakes comment as you know this past year. The services segment contributed profitably on an EBITDA basis for the year and we would expect going forward. These businesses to continue to contribute profitably from an EBITDA basis. So.
We feel very strongly about the assets we have in the way we're positioned in the market in the growth opportunity and as Frank said as we kind of.
Work post sale of Clayton services will give more information and guidance after the first quarter.
Great. Thanks, and then just switching a little.
Maybe the the on the mind side can you talk about just what what you're seeing in terms of just competitive and density I understand it's always a competitive market, but I you seeing any changes you know now you've had black box pricing out there.
Your competitors for almost a year now so you guys seeing any changes in terms of just how people are dealing with that I using <unk> like just from a tactical point of view mall price changes coming through more often or something people being more selective in what they choose just trying to understand pricing trends and just how.
Competition is evolving within the industry.
This is Derek so in terms of competition in the industry I think it's been fairly stable I would say we haven't seen any reason significant changes I think different companies are making their spots in terms of more than they want to play from a credit perspective, I think you know, we're very happy with the portfolio and putting together the business ranting finding value in.
Finding those spots. So I would say we haven't seen any significant changes anything on the credit site credit continues to be tight we don't get a lot of kind of credit competition around the edges, either so I would say pretty study.
Got it. Thank you and then just one last quick one the latest Ireland <unk>. What is the you know the exchangeable nor treat show was in there is that what is the significance of bad what drove that you know innovation I guess into that.
Brought up onto that Oh.
Offering.
Oh sure. This is Derek so that's an offering you see on the other products I think the G.S. he's offer that as well and essentially Gibson ambassador and the melody that kind of karma their traunches into their preferred kind of conscience from a cash flow perspective. So it just gets optionality to the investor I think and just kind of problems in the bayes net.
There it was based on feedback we got from or Investor community right is the things we can do to enhance the structure of the.
So we we not only look at you know how were what risk we're putting the that how that transacts, but we're also working very closely with the investor community to make sure structures worked for them as well.
Got it thank you.
Thank you very much in ladies and gentlemen, as a reminder to queue up her questions you May press one.
Zero at this time next question comes from Korea, Gamma Tony with a Compass point. Please go ahead.
Good morning, everyone.
More than a good morning.
Oh I wanted to follow backed up on the capital.
The capital situation you remind me what the limitation is was that we start capital I know you have an you know negative on on the side surplus so until contingency reserve release isn't that rebuilds, you won't get ordinary dividends, but is there some of the <unk> preclude you from asking for additional specials, if you desire to on the future.
Sure Christmas is Frank Thanks for the question you know the statutory surplus number is one that that we managed to a certain threshold and and a certain level that that we have communicated with our state regulators, there's not a hard and fast number I guess.
<unk>, we could go lower than what we're managing to but just from a a a prudent standpoint from a risk management standpoint from an overall comfort standpoint, we are we're choosing a level that is right around the 500 million dollar level.
And so what we would expect to see over the near term is there are I would say there's modest organic growth.
That occurs there prior to the release of the contingency reserves, which began to happen in 2023 and more materially in 2024, and so as we think about the forward view on statutory Capitol. We we are just we're being cautious around that <unk>.
Circular metric ahead of that contingency reserve release, so theoretically you are correct, but from an overall comfort.
And and prudent standpoint, we're we're operating at at the level that we've chosen here.
Oh sure maybe this one tour I don't know if this is frank or dare, but.
If we assume that there wasn't this that are there the surplus issue and all capital was equivalent and there was no friction between capital up and down what's your current thought on the right level P. Myers excess.
You need in the business now like the businesses more kind of I don't know a self reliant, but you know consistently executing I lands.
What's that level look like taking into account various stressed in areas, where there may not be able to be issued et cetera, I'm just trying to kind of think about yeah, where.
Real kind of capital can go above you know, what maybe or comfort level is.
Sure. This is Frank I'll, I'll start and a and Derek and add in you know, we we intentionally don't give a pmires target in there a few reasons for that.
One is as as we continue down the path of risk distribution, we expect that number to grow well beyond a level that we will we would consider to be necessary and that is because of what was previously noted on the statutory surplus. So the capital will continue to build within radion guarantee as risk distribution.
Continues and so is we think about you know an optimal level will be operating well above and optimal level, but we also take a look at it from the vantage point of what we've I think historically referred to as a gross than on that basis and because we do have the benefit.
Said, a brisk distribution through <unk>, most notably there there is a little bit of a disconnect in the P. Myers capital relative to where you get the benefit from the I.L.N. when alone becomes delinquent so you'll start requiring more p. Myers capital during a delinquency.
Period without any benefit from the islands. So we're careful to to monitor that to make sure that even in those situations, where we do have Ireland coverage, we're still well buffered from a p. Myers standpoint, so again wouldn't give you a a target <unk>, but we would.
Expect to see it grow really beyond what we think is probably necessary Derek and are now I would just add with respect to that I mean, when we're looking at the question. We're doing on on a scenario basis right. So where we have that question is gonna be impacted by that portfolio or putting on or that we're adding as well as a risk distribution structures, where they attach and also our economic projection.
Frank alluded to the fact that the other thing we're looking at is I would call me amount of hard capital relative to their credit we get from the rest distribution structure. So as we become effectively more elaborate edged might miss distribution structures that might affect how big a hard capital cushion, we hold and the other thing where factoring in in what I'm looking at an indefinite pmires capitalism.
Our own views of economic capital to support the book a business as well so it kind of all of those factors. When you combine them makes it somewhat difficult to come with a singular I would say number one percentage I think it can shift through time.
Okay, then one more for Rec out. It just you said you had an office full you know thing that you look at the only a detailed but are you looking at primarily you know businesses that we might consider more services like or are there.
Opportunities for you know in that they're more capital intensive on an on an ongoing basis.
Yeah, you know in in in by the way the the office full of pictures or just you know we get we get round Robins of investment bankers in here with host of ideas right. So I think you know we we we we certainly are open to listening you know again thinking of.
Issue for shareholders and and they do come on both sides of the phones, where there are businesses that are more capital capital like businesses are then there are services businesses and and you know I think we two things one were quick to kill if we don't feel that there's we don't see.
You are strategic fit and secondly, yeah, we have a pretty high bar from a discipline point of view of what we have to believe and I I learned from many years working with my private equity friends. You know just so simple concept what are you going to believe in how to you on the coast. It. So I think you know, we probably like many others, we see lots of ideas.
So pitches and we're we're pretty disciplined about filtering through them pretty quick.
Okay. Thank you so much.
Thank you.
Thank you at this time will turn the conference back over to <unk> for closing comments.
Thank you and the before we conclude or call I want to I will.
Pass out a very special thank you to my friend or family.
Emily for many years excellent leadership as head of our Investor Relations a team along with corporate communications.
One represents radion to the outside world better than Emily.
I'm happy to let you know that Emily is now are cheap marketing and communication officer for radium.
She's going to continue to work familiar which is either a good thing or a bad thing well, let her decide.
But she'll be responsible for spreading the one radium brand to customers business partners employees and and of course, continuing to spread the tour investors. So.
Shall be working alongside you know myself, and and Brian and Derek and Eric and others. The rest of the team to really grow this business and so I'm really excited about that and she's not going away. Her focus is just a bombing. So I want to thank her for an excellent job over the many years and many of you all to develop very good relationship.
With her and she's not going away. So we appreciate that she's going to transition the investor relations function.
To John Damien, who will be our senior Vice President Investor Relations in corporate development and you all be meeting John soon but you know I just want to.
Take a moment to think Emily and and make sure that you. All also have a chance to talk to her and congratulate or on this new row, we're excited for.
Thank you I'm blanking right. So beyond that thank you all for you're interested in Radion. We truly appreciate it we're happy to talk to you or any time and and what do truly sincerely appreciate your interests and rate in and look forward to C.N. Each of you suit take care.
Thank you very much and ladies and gentlemen that does complete our conference for today. Thank you for your participation and freezing 18, T. conferencing service you may know disconnects.
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