Q3 2020 Radian Group Inc Earnings Call
Welcome to the <unk> third quarter 2020 earnings call. My name is Tony I'll be your operator for today's call at this time.
All participants are in listen only mode. Later, we will conduct a question and answer session. During the question and answer session. We have a question. Please press Star then one on your Touchtone phone.
This conference is being recorded.
I will now turn the call over to John Davis, Senior Vice President of Investor Relations Mr. Davis, you may begin.
Thank you and welcome to Radians third quarter 2020 conference call.
Our press release, which contains radians financial results for the quarter was issued yesterday evening and is posted to the investor section of our website at Www Dot Radian Dot com.
Press release includes certain non-GAAP measures, which will be discussed during today's call, including adjusted pre tax operating income adjusted diluted net operating income per share adjusted net operating return on equity and real estate adjusted EBITDA.
A complete description of these measures and the reconciliation to GAAP may be found in press release exhibits F and G and on the Investor section of our web site <unk>.
In addition, we have also included a related non-GAAP measure real estate adjusted EBITDA margin, which we calculate by dividing real estate adjusted EBITDA by GAAP total revenue for the real estate segment.
This afternoon, you will hear from Rick Thornbury, Radians, Chief Executive Officer, and Frank Hall, Chief Financial Officer also on hand for the Q and a portion of the call is Derek Brummer President of Radian mortgage due to the current environment all of our speakers. This afternoon, our remote I would ask that you. Please.
Excuse any sound quality, our technical issues that may arise during the call.
Before we begin I would like to remind you that comments made during this call will include forward looking statements. These statements are based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially for a discussion of these.
Risks. Please review the cautionary statements regarding forward looking statements included in our earnings release and the risk factors included in our 2019 form 10-K as updated in our quarterly report on form 10-Q for the second quarter of 2020, and subsequent reports filed with the SEC.
See you.
These reports are also available on our web site now I would like to turn the call over there.
Thank you John and good afternoon. Thank you all for joining us today and for your interest in radio.
Our quarterly results were again impacted by the pandemic economic environment. However, we are encouraged by signs of improvement in the economy. The strength of the overall housing market. The continued positive default trends within our portfolio.
I'm proud to say that our team at our businesses continue to operate well with strong momentum during this approach for the time.
We provide a few highlights of our financial results for the third quarter we.
We reported net income of $135 million or 70 cents per diluted share and adjusted diluted net operating income per share of 59 such.
Book value grew 11% year over year to $21.52 per share. We wrote record volume of new primary mortgage insurance business of $33 billion, we saw 67, and a half or so decline at our number of new defaults quarter over quarter and a decline in the <unk>.
New and the default rate to 5.9%.
Revenues in our real estate segment increased 28% from the second quarter of 2000 $20 billion to $33 billion.
Turning to a couple of highlights for October we executed our fourth mortgage insurance linked notes reinsurance transaction for $390 million, which further enhance our capital efficiency and strengthened our risk profile, resulting in 74% of our risk in force being subject to some form of risk Mr.
Sure.
In terms of default trends, while economic uncertainty continues to persist I am pleased to report that we saw a decline in the number of new defaults and an increase in the number of cures reported to us that October resulting in a net decline of outstanding default, so 5% ending.
Ending with 59604 total defaults at October 30 Onest.
Moving now to the broader mortgage and real estate market during last quarters earnings call. We had noted some rebound in the U.S. housing market following a slowdown in the purchase loan volume due to the economic strain of Carbonite team positive.
Positive momentum continued in the third quarter was September existing home sales, increasing 9% from the prior month, representing the fourth consecutive month of growth.
And based on the latest data from our own Radian home price index over the last 12 months Theres been a strong housing demand.
And relatively limited supply in the market, which has helped lead to an increase of 8% increase in home prices across the country.
The increased purchase loan demand combined with the strong refinance volume from continued low interest rates drove our record volume of new primary mortgage insurance business in the third quarter well.
While the high volume or refinancings during the quarter did drive persistency lower it is important to note that our high quality $245 billion insurance portfolio grew approximately 4% year over year, and 2% quarter over quarter and our monthly premium insurance in force grew 10% year over year. So.
Also worth noting that in September we saw another monthly NPW records of the year with nearly 70% of our volume coming from purchase loans.
In fact, the $23 billion of new purchase loan business. We wrote in the quarter represented 32% increase from our previous quarterly purchase on record set in the third quarter of last year.
Given the current environment the strong anti w. during the third quarter and a significant commitment pipeline heading into the fourth quarter. We now expect to write new business in 2020 of more than $100 billion.
And our real estate business since we reported a segment revenues of $33 million compared to $26 million for the second quarter of 2020 and $30 million for the third quarter of 2019, we continue to see growth in our title business with a strong sales pipeline of large customers. However, as I mentioned last quarter, our traditional appraisal.
Oreo businesses are experiencing slowdowns as a result of the Coca 19 environment. Despite.
Despite the growth in our real estate segment revenues, we experienced an operating loss, which is the result of staffing up for our growing title business, where we have 157% increase year over year and open orders and our continued investment in data analytics and technology across our real estate businesses strategically, we see growing market demand.
For technology, driven solutions, and we believe we are well positioned to participate and will lead the markets digital transformation.
Turning to our capital position there continues to be a level of uncertainty in the overall economic recovery path.
With $1.1 billion of available liquidity at Radian group and a strong pmires position. We believe we are well positioned well prepared to leverage our strong capital position and navigate this environment through the cycle, Frank will provide more details on capital, including our P. Myers position.
Part of our overall capital management process, we continue to monitor index access the reinsurance and capital markets when economically attractive to our company the strength of our capital position combined with our ability to effectively aggregate manage and distribute risks.
Has enabled us to continue writing significant levels of high quality mortgage insurance business through the cycle.
As we've said in the past we remain focused on leveraging our strong risk management discipline of a low than customer level to deploy our capital on business that we believe will generate the most economic value for our shareholders and achieve our target of risk adjusted returns in the mid teens.
Now I would like to turn the call over to Frank for details of our financial position. Following Frank's remarks, I will provide a regulatory and legislative update.
Thank you Rick and good afternoon, everyone.
To recap our financial results issued last evening, we reported GAAP net income of $135.1 million or 70 cents per diluted share for the third quarter of 2020.
Compared to a net loss of 15 cents per diluted share in the second quarter of 2020, and net income of 83 cents per diluted share in the third quarter of 2019.
Adjusted diluted net operating income was 59 cents per share in the third quarter of 2020.
As compared to adjusted diluted net operating loss per share of 36 cents in the second quarter of 2020.
And adjusted diluted net operating income per share of 81 cents in the third quarter of 2019.
I will now turn to the key drivers of our revenue.
As Rick mentioned earlier, our new insurance written was $33.3 billion during the quarter compared to $25.5 billion last quarter and $22 billion in the third quarter of 2019.
Our third quarter 2020 volume is our highest level of quarterly new insurance written on a flow basis.
Primary new insurance written for Refinances was 30% of total new insurance written for the third quarter of 2020 compared to 44% in the second quarter of 2020, and 19% for the third quarter of the prior year.
Direct monthly and other recurring premium policies, where 90% of our new insurance written this quarter, an increase from 85% for the second quarter of 2020, and 85% for the third quarter a year ago, which also means that single premium policies were down significantly to.
Only 10% of our third quarter 2020, new business.
In total borrower paid policies were 99% of our new business for the third quarter.
Primary insurance in force increased to $245.5 billion at the end of the quarter as compared to $241.3 billion in the second quarter of 2020 with year over year insurance in force growth of approximately 4%.
In addition to the elevated policy cancellations due to the current low interest rate environment. We also experienced an increase in single premium policy cancellations during the third quarter as part of our ongoing service or monitoring and reconciliation process.
These additional cancellations represented approximately $2.9 billion of insurance in force.
Our 12 month persistency rate of 65.6% decreased from 70.2% in the prior quarter and 81.5% in the third quarter of 2019.
Our quarterly annualized persistency rate was 60% this quarter a decrease from 63.8% in the second quarter of 2020 and 75.5% in the third quarter of 2019.
The quarterly annualized persistency rate of 60%.
Was materially affected by the single premium reconciliation mentioned earlier and would have been approximately 65% absent that activity.
Which would have been a small increase from the 63.8% reported in the second quarter of this year.
The year over year decline in quarterly annualized persistency is driven by the continued high level of refinance activity given continued low mortgage rates.
Given the current mortgage rate environment. It is expected that near term persistency will remain below long term trends.
Moving now to our earned premiums.
Net premiums earned were $286.5 million in the third quarter of 2020 compared to $249.3 million in the second quarter of 2020 and $281.2 million in the third quarter of 2019.
The increase of 15% on a linked quarter basis is primarily driven by the impact of the adjustments to accrued profit Commission recognized in the second quarter of 2020 due to the increased loss provision in that quarter as well as an increase in single premium policy cancellations in the third.
Quarter of 2020.
Net premiums earned increased 2% as compared to the third quarter and 2018.
This increase is primarily driven by higher single premium acceleration.
Our direct enforce premium yield as noted on slide 10 was 43.2 basis points this quarter compared to 44.3 basis points last quarter.
And 47.4 basis points in the third quarter of 2019.
As noted in previous quarters, we expect our in force portfolio yield to continue to decline due to the difference in credit mix and associated premium rates of today's new insurance written relative to prior vintages.
Recent trends of lower persistency and higher levels of new insurance written have also contributed to a faster rate of change in the yield of our mortgage insurance portfolio as the portfolio has turned over.
The timing and magnitude of future portfolio yield changes will continue to depend on several factors, including the volume mix and pricing of new business relative to the volume and mix of cancellations and prepayments in our portfolio and the pace of future refinance activity.
Our level of premium yield driven by single premium Cancelations increased to 10.7 basis points compared to 8.2 basis points in the second quarter of 2020, and 4.6 basis points of yield in the same quarter a year ago.
The continued high level of single premium cancellations is primarily due to higher refinance activity driven by the low interest rate environment.
Approximately three basis points of the yields related to cancellations was due to the previously mentioned service or reconciliation activity that occurred in the quarter.
The negative yield impact of ceded premiums net of profit Commission was 7.3 basis points as compared to 11.5 basis points in the second quarter of 2020.
And 4.5 basis points in the third quarter last year.
This improvement on a linked quarter basis is primarily due to higher profit commission, which increased to $20.4 million in the third quarter compared to a negative $10.6 million in the second quarter as noted on press release exhibit ALS.
The yield impact of reinsurance remains higher when compared to the third quarter of 2019, primarily due to the elevated level of single premium cancellations observed this quarter and associated ceded premiums under our single premium QSR.
Other components of our revenue include total real estate segment revenues of $33.3 million for the third quarter of 2020, representing a 28% increase compared to $26.1 million for the second quarter of 2020.
And an 11% increase compared to $30.1 million from the third quarter of 2019.
Our reported real estate adjusted EBITDA for the third quarter of 2020 was a loss of $1.4 million.
And finally.
Our investment income this quarter of $36 million was down 6% from the prior quarter and 15% from the same quarter prior year due to lower investment yields which were partially offset by additional investments from underwriting cash flows and proceeds from our May 2020 senior debt offering.
At quarter end the investment portfolio duration was approximately 4.6 years up from 4.1 years in the prior quarter.
Due to both portfolio reallocation and longer duration on recently purchased securities.
Moving now to our loss provision and credit quality.
As noted on slide 13, the provision for losses for the third quarter of 2020 decreased to $87.8 million compared to $304 million in the second quarter of 2020 and $29.1 million in the third quarter of 2019.
Our ceded losses, which are a benefit under our reinsurance programs were $10.2 million in the third quarter of 2020.
Compared to $39.6 million in the second quarter of 2020.
And point $8 million in the third quarter of 2019.
As shown on slide 14, we.
We had approximately 21000, new defaults in the third quarter of 2020 as compared to approximately 63000 in the second quarter of 2020, and approximately 11000 in the third quarter of 2019.
Also as shown on slide 16, approximately 77% of these new defaults were reported to be in a forbearance program as of September Thirtyth 2020.
It is important to note that these new defaults were from recent origination vintages and as a result, the average risk written on these policies is higher than our recent average claims paid experience, which have been more heavily concentrated in older vintages.
These new defaults were the primary driver of our provision for losses during the third quarter as the reserve development on prior period defaults was not material.
The default to claim rate assumption on new defaults remained at 8.5% for the third quarter of 2020.
Unchanged from the second quarter of 2020, and an increase from 7.5% for the third quarter of 2018.
[music].
It is important to remember that our reserve estimate.
Is based upon the best available information, we have at the time, which includes both external economic metrics and the outcomes of our own proprietary models.
As we have all observed since the beginning of this pandemic the variability and frequency of change and many economic estimates has been elevated and continues to vary widely.
Since our loss reserves are at a point in time estimate it is subject to change at each reporting period based upon available information at that time.
Keep in mind that we are estimating the amount of future claim payments, which under normal circumstances, we will not be realized for several years.
We have shared additional information on forbearance program mechanics, and participation rates for our portfolio on webcast slide 16.
As noted on the slide 77% of our new defaults and 76% of our total default inventory are in forbearance programs.
Forbearance programs are positive for our industry and for homeowners as they are intended to keep people in their homes, thus delaying or preventing claim payments.
Included in our earnings release is an update for October operating statistics, which shows a further decline and our primary default inventory as both the number of new defaults decrease and cure activity increased compared to prior month.
Our October cure activity represented 160% of the new defaults reported in the month.
Now turning to expenses.
Other operating expenses were $69.4 million in the third quarter of 2020 compared to $60.6 million in the second quarter of 2020 and $76.4 million in the third quarter of 2019.
The increase in operating expenses in the third quarter of 2020 compared to the second quarter of 2020 was driven primarily by an adjustment in the second quarter, which reduced share based incentive compensation expense for that period.
Moving now to taxes.
Our overall effective tax rate for the third quarter of 2020 was 16.2%.
The decrease in our effective tax rate for the third quarter was primarily due to the effect of a one time discrete item recorded following the successful completion of an IRS exam of our 2015 tax year.
Our annualized effective tax rate before discrete items remains generally consistent with the statutory rate of 21%.
Now moving to capital and available liquidity.
Radian Guaranty had p. Myers available assets of approximately $4.5 billion and our minimum required assets were approximately $3.5 billion as of the end of the third quarter of 2020.
The access available assets over minimum required assets of $970.3 million represents a 28% pmiers cushion.
We have also noted on slide 19, our P. Myers excess available resources on a consolidated basis of $2.3 billion, which is fully utilized represents 67% of our minimum required assets as of September Thirtyth 2020.
As of September Thirtyth 2020, we have reduced radian guaranty's, P. Myers minimum required asset requirements by $1.3 billion by distributing risk through reinsurance, which includes insurance linked note transactions and traditional third party reinsurance execution.
And as noted on press release exhibit out.
For Radian group as of September 32020, we maintained $1.1 billion of available liquidity tone.
Total liquidity, which also includes the company's $267.5 billion credit facility was $1.4 billion as of September Thirtyth 2020.
It is important to remind our listeners that most of the cash flows at the parent company are funded by long established regulator approved expense interest and tax sharing agreements with its subsidiaries and now through dividends from subsidiaries.
This provides us with an enhanced level of certainty and predictability and parent company cash flows.
And subsequent to our third quarter end in October 2020, Radian Guaranty entered into a fully collateralized reinsurance agreements with Eagle re 2020 dash to limited this.
This reinsurance agreement provides for up to $390.3 million of aggregate excess of loss reinsurance coverage for the mortgage insurance losses on new defaults on an existing portfolio of eligible recurring premium policies with initial risk in force of third.
$8 billion that were issued between October Onest 2019, and July 31 2020.
Eagle re 2020 dash to limited financed its coverage by issuing mortgage insurance linked to notes and an aggregate amount of $390.3 million to eligible third party capital markets investors in an unregistered private offering.
Overall.
Despite the increased risks and uncertainties posed by the COVID-19 pandemic the.
The quality of our mortgage insurance portfolio and the steps we have taken in recent years to enhance our financial strength and flexibility have positioned us well for an economic downturn and we believe will help us weather any further macroeconomic stresses ahead.
And while the strategic and systemic defenses in place we will not provide complete immunity to the expected near term negative effects to our financial results.
We believe that we are in a better position than ever before to absorb the impact of economic stress and will emerge from this crisis strong and we remain ready to fulfill our mission.
I will now turn the call back over to Rick.
Thank you Frank turning now to regulatory and legislative matters Cardless of your political leanings I think we can all acknowledge that the level of voting we saw during the election, while in the midst of a pandemic.
Was inspiring for our country at Radian, we cleared our calendars of scheduled meetings to ensure our employees have sufficient flexibility to exercise their right to vote.
As to the outcome of the election. It is important to highlight that the private mortgage insurance industry has successfully providing first loss credit protection.
Through numerous administrations of economic cycles for more than a half a century.
We are a permanently dedicated source of private capital in the mortgage system protecting taxpayers, while ensuring the dream of homeownership for low and moderate income borrowers we have written business uninterrupted through the great recession and now at a record level during the COVID-19 crisis are.
Our business model is proven and continues to both evolve and improve with strong and consistent capital standards dynamic risk based pricing efficient operations and an emphasis on credit risk management, including programmatic risks distribution. We believe this was recognized on both sides will be.
And that we are well positioned to continue to fulfill our important role in the housing finance system.
In terms of areas of focus the CFPB recently announced an extension of the QM patch for GFC eligible loans until the Finalization of its new QM definition, which is expected sometime soon the CFPB appears committed to UQM definition focus on pricing and while we would like to see.
See an increase in their proposed safe harbor to capture more credit worthy borrowers, we would not expect a material impact on our business. If the rule was adopted as currently proposed numerous comments have been submitted to the FHLB face New proposed enterprise capital framework, including importantly questions.
Regarding the rationale for the level of cash.
Capital required and the diminished value of credit risk transfer under the proposal.
We understand the FHLB is in the process of considering these comments and the <unk> as they look to finalize some new capital framework we.
We also want to note that the FHLB recently issued a new proposal on the process for evaluating new GFC products, including pilot programs and important step in our mind for ensuring a healthy balance among government and private interest from the housing finance system.
Finally, I want to emphasize how proud we are a radio being able to support the real estate and mortgage markets. During this tremendously difficult time.
The pandemic has not reduced the need for affordable mortgage options or the may desire for many Americans to realize the dream of home ownership and to begin the important journey of building sustainable well.
Our real estate and title teams have been advancing creative solutions to help people get into home safely such as digital valuation tools and remote remote or even drive through closings once.
Once in the whole of our mortgage teams have been supporting homeowners are affected by the pandemic by aligning our policies and procedures with the mortgage forbearance and loan modification alternatives that have been so critical in helping borrowers navigate to some proceeds on the environment.
We look forward to continuing the insurer ensure the American dream of homeownership for many years to come.
Now operator, we'd like to take questions.
Thank you and we have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key.
Using a speaker phone you may need to pick up the hit from PEPFAR pressing the numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from Douglas Harter from Credit Suisse. Please go ahead.
Thanks, Okay can you talk about.
The pricing you got on the most recent I'll end transaction ammo.
Risk is being priced by those investors.
Yes. This is Frank why don't I start and then Derek can add some additional color the pricing that we are seeing on the last on a blended basis on all the bonds with a spread of 483 basis points and that compared to to the issuance or last issuance.
Earlier in the year of 186 basis points, so the spreads widened.
Quite a bit but.
But but we still think if those levels. It was a attractive cost of capital for us and overall enhancement to our financial strength or dare to date anything.
Yeah, I would just add that that continues to be obviously significant appetite I think investors do see the U.S. housing market and kind of see that trend that we're seeing in a very positive light. So I think that you know as we've kind of gone through.
Crisis, I think were generally just seen kind of a bit of tightening in the structure, So which is consistent with what youre seeing also in the market on some of the non CRT pricing as well.
And then I guess.
Just on that point of the strength of the housing market can you talk about home price appreciation.
How how that might impact kind of the current default population and.
And.
Ultimate severity of.
Those claims.
If and when they get there.
Sure. This is Derek so in terms of.
Home price appreciation.
Price that held up and continue to appreciate and a much more rapid pace than we would have anticipated.
Several months ago, so depending on the index, you're looking at you are seeing home prices going up year over year, and kind of that 5% to 8% range and which is somewhat unusual given kind of where unemployment rates have been so in terms of that first and foremost really has a positive impact in terms of that.
The propensity of.
One loans to roll to default and then to roll from default to claim because what it does with a positive equity thats been built up an easy continue to have that appreciation in equity. It allows homeowners kind of different excess pounds to get out of delinquent status. So I think thats. One reason, we're certainly seeing very positive.
Kind of cure or to new default and also why we're seeing our peak our default rate go down I would say sooner and more rapidly than anticipated and then certainly takes a obviously a period of time.
Our average.
Defaults and default for about 36 months before it rolls to claim, but thats, where it will be a period of time before you see those roll and ultimately go to claim that can have a positive impact also in terms of the severity.
Great. Thank you.
And our next question comes from Randy Binner from B. Riley. Please go ahead.
Hey, Thanks, I wanted to ask one on premium yield is a little bit better than we expected this quarter and.
In light of the reinsurance agreements.
In understanding of course that it would trend lower because.
Yes.
This product in the mix, but could there be an offset from the reinsurance deals and kind of good underlying performance there.
Sure I think as you look at the the impacts of that overtime. The reinsurance is certainly a.
An item that has become more material and more variable there I just want to be careful about.
The overall prediction about the premium yield on the portfolio itself sort of ex Singh.
Single premium cancellations and an axe the.
The reinsurance I mean, we have we have careful to guide that as the portfolio turns over with new vintages older vintages that are higher priced are coming out that we do expect to see some decline over time, but the the dynamic in the performance of the.
Reinsurance.
Is something that is variable and is largely dependent upon the pace of the single premium policy cancellations, which.
Which is what our QSR program is.
Sorry.
So as as goes into single premium policy.
Policies. So goes the the variability on the QSR programs for us.
All right. That's helpful. And then I guess the related follow up is just in.
In regard to pricing.
Yes, we are hearing from yourself and other mines that.
Businesses, lower price, which makes sense, how how would you characterize pricing competition in the market.
Hi, This is Derek I think it's probably half segment in terms of what you're talking about per segment. So if you look at kind of our radar rates pricing and black box pricing, we'd indicated when you raise pricing pretty early on compared to some of the competitors last quarter is and you pretty much saw across the board everyone raise their rates and so yes.
Being an increase I think you've seen through Q3 those increases hold up for the most part I think it kind of distinguish there.
Bulk bid pricing, so where we have seen more competition is on that side and you've seen I would say some of the bulk bids from a pricing perspective, I think we've seen recent ones price below even some of the pre coded levels.
We don't participate in those we Havent historically participated certainly that's you see that reflected we tend not to have as much volatility in our market share as compared to some of our competitors. So that's probably where we've seen the competition kind of early fourth quarter. I think we are seeing some indications of a competitor or two.
Kind of picking spots, where we'll have a bit of the increase that you maybe saw.
Going in at the peak of the crisis, I would say, which isn't terribly surprising certainly if you look at kind of at the beginning when koby cat the economic uncertainty and the deterioration that obviously factors into everyone's models.
And thats kind of where I see some upward pricing as probably at this point.
All right thanks for that.
As a reminder, if you have a question. Please press Star then one on your Touchtone phone.
Our next question comes from Mark degrees from Barclays.
Go ahead.
Thank you.
There are obviously some strong tailwind this quarter for the real estate business.
And some headwinds as you called out but.
But yet that business still not really generating any any meaningful cash flow can you just talk about what kind of conditions you need to see there.
To really improve performance.
At the same time when you are also seeing healthy bids and valuations.
For those types of assets out in the marketplace is would you consider potentially divesting some of those assets.
Value for shareholders.
And Mark. Thank you. This was this was you reckon I appreciate your question and I think to him.
Here's what I would say about our our real estate segment, and which really includes our title business in our kind of real estate businesses and to we are seeing growth, where we expect to see growth. We're seeing growth two of our title business I think as I mentioned in my script the year over year orders are up so.
Inefficiently and we're seeing the title business.
Very strong pipeline of customers and the process would be implemented it not so much even just from a sales cycle. So we saw just split my comments between title and the other real estate activity. So in our title business, we're really effectively scaling that business from a very small level and growing that that requires us to hire.
Pull in advance and kind of builds capacity as we start to implement these customers on a quarter by quarter. So some part of the revenue growth is from title. Some part of the expenses you building up capacity ahead of those new clients entering so that's all part of kind of taking something and scaling that from a start.
Look like size to an industrial shrink size and I think we feel very comfortable with the pattern of growth opportunity. We see around title. It is very accretive to our lender relationships and the and the kind of blue chip customers that are becoming customers of our title business are are are important right. So thats. So on the title side I think.
You can kind of that growth opportunity is one that we feel strongly in the real estate side interesting your comment about some of the other other valuations that you see because we feel strongly that we have are very unique and valuable set of assets that play towards a digital future across mortgage and real estate.
We we are we continue to have a very unique set of assets around real estate information, specifically about property conditions property valuations.
With with the data we have accumulated over 20 plus years.
You go through the statistics, but we think we have very unique set of assets again from a valuation point of view play towards a future of where the world is going versus where it's been in more traditional appraisal world, but we also think it has broadened relevance across the real estate.
The transaction and so we continue to.
Grow those businesses from a revenue point of view, but we're also investing from a technology data and analytics point of view to continue to mature those businesses much like you see from a fintech prop tuck perspective, and so they are they are there is some startup aspects like I referred to them as industrial shrink startups.
And so I'm, a little bit less concerned about a couple of millions plus or minus of EBITDA versus the value. We see building in those businesses through our investments in things like the I am.
Machine learning and robotic process automation through the process and how we are building proprietary technology. So to your question about how do we think about the valuations we do consider and think through the best way to optimize value for our shareholder and I think you know just as we have this just this week.
Demonstrated through our capital planning of our in our stewardship of Investor Capital I think you can assume that we do think we're very aware of situations in the market and we do.
Understand the inherent value of the assets, we have in those businesses and continue to manage them.
Manage them to optimize value so feel very good about where we're at feel very good about the progress being made by the team. We've got an incredible team focused on us as a standing next to a now my business is always very hard for these kind of startup to industrial strength kind of businesses, but we like the assets, we have and have refined continued.
To refine down where we see value.
Okay got it thank you.
And our next question comes from Jack Smith from ESI Jay. Please go ahead.
Hi.
First one for Derek.
Going to us for your explanation.
I think either in a prior question or comment around the it sounds like what you're saying on the reserving this quarter was more of a severity.
Issue not a frequency issue that we're looking at frequency, saying it's coming.
Volumes are coming down your credit is improving very.
Well, maybe a little quicker than Buddy also but the mix is that the right is that what does that the message you're trying to convey.
Well the question was kind of looking out in the future and Savannah really talking about reserving and how that factored in in terms. Our reserving. So if you kind of look at it we didn't make any significant changes in terms of our approach from a reserve perspective, so any movement, you're seeing kind of an add per reserve default, it's going to be driven really by.
Where loans said, so obviously they age so we had more in that two to three mess payment bucket last quarter because of age. So you have that kind of pushing in that direction, So thats, where youre going to see more of that movement and then on that new defaults, what we're seeing on new defaults. Those are starting to look more like though the way they did pre cobot balanced.
Being a bit lower.
The FICO being a bit lower so it's really driven by the inventory as opposed to any change in terms of our reserve assumptions.
Okay and then.
Year to date to half.
That was unchanged from last quarter.
Your peers are at seven I think once eight on incrementally this quarter.
I know you don't know their models what do you what do you think to do what do you think the differences between radian the view of the World currently and you know.
What the others in your industry, you're looking at just in particular, given how consistent they were last quarter around the 70, you guys were an outlier being more conservative.
Jack This was this is Rick I'll take this one I take look you know as we as we walk through last quarter I think it continues this quarter. We're you know as we look forward in the economic scenario, there's uncertainty still exists and I think as we did in the second quarter and as we've been in here in the third quarter we.
We have to we go through quantitative analysis, we go through.
Thoughtful research on the government a thought about the government programs that are in place and kind of how this all plays for that looking at historical scenarios and then we apply judgment.
And so we felt like from quarter to quarter, you know there there's not enough of a track record to see a change I would say the trends have continued to be positive.
But I would also point out that all you see the difference between whether it's 78.5% or just different management teams applying a judgment factor around the scenario and the forward scenario and I feel good about where we blend that I would also remind you.
When you have an 8.5% default to claim rate that that assumes that 91.5% of them sure so whether 91.5% or 93% share I mean, we're talking about really in significant differences between different companies, but I would say we applied our judgment, we felt like the level of uncertainty in the market.
Warranted, some caution and we're going to continue to monitor the market and and navigate through the scenario.
As as we see it versus being swayed by how others approach and apply their judgment.
Okay looking at the secure.
Secured a default rate I mean, you're running I think 160% in October and that's kind of a high watermark.
Post pandemic, if you will we win when do I guess when do you think we're sort of out of the woods on.
When you get more comfort and maybe getting a little more aggressive on the claim rate.
Is it after that.
Forbearance period ends or just kind of thinking about how that how you guys are looking at for risk perspective.
Yes, Thats a great question, and we do have blood, Derek and Frank chime in as well, but I think.
The way I would look at is really need the good news is our total default rates going down and.
As we.
Let's also our October numbers as you just pointed out look really strong continue to look strong. So four months of good trends are invert learn very early in my career be careful how you know how many data points you need before you make a decision about something so I think we're not there yet, but I would say that the trends look very good but you got to separate.
New defaults or new defaults right. So we've seen.
The good trends there is we've seen a trend where new defaults have come down materially right and it materially the cures, though I'd say.
Their comment on US you know that.
The trend is that really where were we we expect cures to occur they are occurring and we're monitoring how they're developing how those cures are developing.
How they go back the current economy going to loss mitigation and maybe Derek you want to just comment on the trends we're seeing there.
Yeah, I mean, I think it does need a little bit more time I think we'll also what we're seeing obviously loans in forbearance those kind of transition people essentially have a bit of an option not to pay so at this point I think again, giving it a little time to see development as Rick said, we're talking about very small differences here, so whether you're at seven.
In in a half for six and a half or eight and a half. These are very small and it takes a period of time for those kind of carriers to develop out so and a lot of its going to be driven I think on terms of what we see on the macroeconomic side. So more certainty in terms of that and where things are going.
Because from an economic perspective still uncertainty around.
Hi, good situation. So I think that that's really what we'd be looking at do we see stability. There are underpinning the very positive trends, we're seeing thus far and also continuing to see home price appreciation going up year over year.
It's just it's a bit early to make a change at this point okay.
Okay. Appreciate it thank you.
Im sorry, Jack I, just wanted to add I want to add one more thing to kind of complete your question, which is you know.
From a few from how does how do our reserves evolve in the future and I think it's so important to remember that when we put the default to claim rate that really is our expectation for how that book of business will proceed through time right. So if we got it right Theres no operating adjustments, we monitor trends both to the positive to the negative and Thats, where you are.
See adjustments in the future. So those are things that again play out in our scenario driven based on performance, but we apply judgment on every new default assuming that we get it right from the get go in those adjustments don't occur obviously things change as we go through time. So I just want to highlight for you from a reserving point of view.
Great. Thank you.
And as I remind you have a question. Please press Star then one on your Touchtone phone.
Our next question comes from Boston charge from KBW.
Hey, guys good afternoon.
I just wanted to be.
Any comments on the on competition.
Just in terms of the bulk market I know you guys are active in it but I'm just curious whether there is obviously a big player thats been trending gross there that's active in that market with the lender side, whether you see that market growing and sort of impacting the other players even if you're not directly participating in it.
Yes, I have to say I mean does that market's been there for.
Years, and the dynamic in terms of where we see the relative value had been there for years. So when we talk about not participating in that market thats been a consistent for like I said at quite a period of time and for US. It's really just a question of relative value. So while there.
Al you in terms of the business, just given kind of where the housing market is where generally pricing as you can see value in all sorts of different segments in terms of where you're writing business for us. It's really looking at where is that kind of the optimal use from an economic value perspective, where do we put our capital to work and we look at on a relative basis as.
Suppose an absolute those are just not the highest value.
Value opportunities for us and obviously lenders look at relative pricing and this all kind of matters, but I would say in terms of percentage of the market Thats going both bid the percentage of the market Thats in Black box, we havent seen I would say significant changes over the last year year and a half once black box pricing really got embedded in them.
Market so.
It's a little hard to speculate as to whether that would go but there is no kind of secular shift that would cause me to think it's going to shift dramatically one way or the other.
Okay. That's helpful. Thanks, and just in terms of the size of the roughly the percentage thats going into bulk markets you have a feel for that.
Yes, it's a little I'm, probably not going to characterize that I'm not exactly sure what it would be this quarter saw probably demeanour on on that one and also since we're not participating or not and kind of the best position I can kind of tell you what our pricing breaks down and so it's a little tough to.
Speculate.
Okay. Thanks, a lot.
Thank you both.
Last question comes from me here Bobcat from Bank of America.
Hi, Thank you for taking the questions just wanted to start a clinical back just real quick on the real estate segment discussion.
I understand that you're managing the business for the long, but can you help us just remind us on the run rate revenue and EBITDA because you all had some targets a little while back but then I know there's been some restructuring and stuff is that has that changed I know recently and also the size of the traditional appraisal business that you think.
You mentioned, you're winding down in terms of just thinking as we think about headwinds, but planning for anyone.
Growth if you will.
Yes, Hello. Thank you for the question that I think look we.
I think we had given guidance two years before before we.
Sold off the Cleveland business.
We've kind of been focused on really putting these businesses on the right track from a value creation point of view and so we have not provided those those stakes in the ground in that guidance going forward at some point you, though we'll consider it again, but I would say that.
So where we sit today.
We feel very confident about the trajectory that they're they're on and and we understand.
Kind of where we see value in how our lenders or are receiving that value I will say that we we feel today, we feel the benefits of these businesses aside for long term value are the the competitive differentiation they give us in terms of our relationship with customer some part of strategic.
Differentiation in terms of kind of how we're thinking about markets and obviously from a data and analytics point of view that we see across whether it's real estate information or just general market trend, so, but I would say as weve.
As Weve come a row Weve continued shifts businesses, which include kind of our announcement of the wind down of our AMC business, which I think your question was kind of the financial aspect of it we would expect.
No material.
The impact from a financial point of view as a result of that line down.
And we really see the market our ability to leverage our data and analytics around property valuation Sabina core strength and value in our franchise and we felt like the AMC business and our team really has done a great job on that business, but we felt like it's a little bit more traditionally more commodity like and we're focus.
Okay.
Wanting to make sure. These business are aligned towards growth opportunities around more digital kind of data and analytics and technology. So.
The AMC business. So we don't see any kind of net financial impact on our kind of segment piano go forward.
Great. Thanks, and then just one last question just on the capital side.
Off the island and you obviously know the excess capital position is there anything youre targeting in the Scotland and mom and been dosed with how much you want to how much excess capital about 30 miles. If you will you want to have or is it just a matter right. Now now is the time to preserve capital and we'll see what it looks like as the outlook improves.
Sure This is Frank.
I think when it comes to Pmires, we are managing it and the context really of what our expectations are.
Or delinquency inventory and and how those migrate there are a couple of moving parts that.
That impact P. Myers right now.
So for instance, the capital charge benefit that we get through through the forbearance programs for that cares Act represents a fairly sizable portion of.
Myers benefit.
So we just want to be careful arounds.
Things that could be happening to us now.
Your term and so yeah, I think your characterization of preserving it is.
It's certainly an accurate statement, we also maintain.
Very healthy.
Level of cushion at the parent company, which is not reflected in the in the.
And the operating company, so with over $1 billion, they're supported as well we feel we feel that we're in a good position I think you'll remember earlier in the year. We also issued $525 million in new senior debt.
That was tended to.
Serves a defensive purposes. So so yeah I would say right now the the preservation of capital from that perspective is the right way to Orient your thinking around our management of it.
Great. Thank you.
That is all my questions. Thank you.
Thank you.
And we do have one more question from Phil Stephano from Deutsche Bank.
Yes, thanks, and good afternoon.
I know, it's early days, but I was wondering are there any lessons out of concern.
Umer behavior around the forbearance programs that have in any way translated to changes in your pricing over serving.
So early to tell I think the thing to keep in mind with that forbearance programs and then the assets are just the response I would say that the industry and from a government policy perspective, that's certainly positive. So as you kind of think about that and we think about previous downturns and not rest of elevated differ.
Faults and elevated claims in a downturn I would say certainly one of the things we'll have to see this play out in the data is compared to certainly the financial crisis, and I would say how quickly and proactive the government and also how much better it kind of from a servicing perspective, so a real impetus on the forbearance side to keep homeowners in their homes, which is.
Good for homeowners. It's good for obviously am I companies don't pay claims until actually goes through the foreclosure process and then just to exit patents that have been given in this crisis. So options like payment deferrals, where essentially you take the amounts that were paid in tax amount at the end of the mortgage I would say provides much better path.
And over time, all things being equal ends up putting making.
Making it more positive and less likely that those in default ultimately roll to claims, but nothing that I would certainly factor in a significant way from a pricing perspective, it's a little early to kind of see all of that.
Play out at this point.
Got it is it maybe drawing on that is it fair to think about what we think about a 15 20 year cycle for the industry and its historically been severely pressured for a couple of years that we had a recession, maybe maybe those lows don't look nearly as bad as we have those programs and then of course you have to layer on.
So that the benefit of reinsurance that we havent had in the past and and.
Thank you thinking about the lows being.
Adjusted upwards, a couple standard deviations.
Well look I think that the business is fundamentally transform im certainly as you go back to the financial crisis that led.
Well in the past, where we bought we kind of held that risk we had that volatility from a loss ratio and earnings perspective, now, having a model, which we're aggregating managing distributing that risk. So thats certainly cuts off the tail risk you have much better underwriting quality and that's held up during that call. The crisis as we see in our Q C. diff.
Fault rates continued to be very positive a much higher credit quality and then you have these mitigating effects on the backend in terms of better et cetera patents have parties. So all of those things I think you're right does decrease that historical volatility in terms of those lows make trades for more stability certainly.
Message, we've been talking about for a number of years and I think we're going to see this as this kind of I would the first downturn, we've seen since we made that fundamental transformation as an industry.
Okay.
Hey.
I think I would just I would add that you just derricks last sequential because I think it's important.
Since I've been in this industry the number of times I've heard we going to see the mortgage insurance industry go through a recession or some sort of a downturn and so I think what you really see as this industry is showing that strength all based on the factors Derek went through plus the mortgage industry kind of factors of the offline and so I think.
I always hate to see taken and then stride, but we're we're serving the purpose we were month to service, which as you know the pay claims on our losses and continued on the right high quality business through the cycle. So we're doing record levels of business through a pretty pretty difficult economic scenario working with the industry and I think the other factor is.
Politically socially.
Economically everyone understands the incentive to try to keep borrowers in a home where there is an economic.
And outside of their control right normal normal activity, we kind of move through normally but this this is really highlighted the fact that we as an industry and we as a country can support homeowners through a crisis and give them to the other side now there will be a day directly which is why we have reserves and why we have capital.
But I do think it's very different than the mining industry showing the strength was a permanent source of private capital supporting us kind of risk and I think thats, a big factor for for the industry and the investors to see.
Got it got it and just going back to hear his question is around the the real estate segment.
Hello.
How do you want us to judge the success of this business what metrics do you do you want me to focus on.
That I can see or appreciate the value creation that is happening there.
Yeah listen, it's a great question and I think.
Appreciate that so on and I know it's.
It's always top of mind, and I talked to a lot of investors about it and I think.
These are businesses that we have accumulated very small businesses, where we've really begun to scale businesses. We got rid of things that we think so really fit that digital model I think to the question earlier about how do we think about that in the context of the kind of the fintech property valuations that we see.
Dr. We really do believe we have strong value and I think what you can hear from me in which you can see from our team is we're going to continue to kind of.
Develop these businesses in Ics Deloitte the value I would see the title business growing either just from a growth point of view, we're not here to give any guidance today, but I will take your question into consideration, but I think you can see that business growing from a revenue point of view and I think the same is true for our other real estate activities.
But our investment into those businesses from a data and analytics and technology point of view are are important to what we think can be very disruptive. So we'll I'll take your question because I think it's so important question and we'll we'll think about how we can help.
To the market and investors better understand that as we go forward.
Alright, thanks, looking forward to be well guys.
Yes.
We have no further questions at this time I would like to turn the call over to Rick for Mary for final remarks.
Thank you and thank you all for your questions before we wrap up I'd like to mention an important organizational assures our mission of enabling protecting homeownership. The MBA opens doors foundation at Radian. We recently completed our annual fund raiser for the foundation, which helps families with critically ill or injured children to read.
Being in their homes, while their children are in treatment.
With the help of so many of you we raise money through our everyday heroes campaign, which encourage people to donate to the foundation, while sharing stories of someone in their lives so making a positive impact.
As we have with other organizations during the quarter to 19 pandemic, we matched all donations to to one which brought the total to more than $166000 to support the incredible work and be open stores. So thank you all to for those of you who contributed and for joining US today, we look forward to speaking to you.
Next quarter, if not sooner, but be safe b well and.
We'll talk soon thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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