Q2 2019 Earnings Call
Upside located at Radian dots is can help you get an am I right quote find the right am I product for your borrower estimate how much your borrower qualifies for ladies and gentlemen, thank you for standing by and welcome to Radians second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session instructions will be given at that time. If you should require assistance during todays call. Please press Star then zero.
I would now like to turn the conference over to your house.
Senior Vice President of Investor Relations Ms. Emily Riley. Please go ahead.
Thank you and welcome to Radians second quarter 2019 conference call.
Our press release, which can be seen radians financial results for the quarter was issued last evening and is posted to the investor section of our website at Www Dot radian drop it.
This 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 services adjusted EBITDA.
A complete description of these measures and their reconciliation to GAAP may be found in press release exhibits F and G and on the Investor section of our website.
In addition, we have also presented non-GAAP measures are tangible book value and services adjusted EBITDA margin.
This morning, 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 Senior executive Vice President of mortgage insurance and risk services.
Before we begin I would like to remind you that comments made during this call will include forward looking statements. These statements are based on current expectations estimates projections 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 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 and for your interest in Radian.
I am pleased to report another quarter of excellent financial results for our company.
Net income for the second quarter was $167 million and diluted net income per share was 78 cents adjusted pre tax operating income grew to $216 million and adjusted diluted net operating income per share increased to 80 cents.
Book value per share grew 23% year over year to $18.42 and return on equity was 17.8% with an adjusted net operating return on equity of 18.2%.
These results reflect the fundamental strength of our business model.
The value of our customer relationships and the dedication of our team.
With regard to our mortgage insurance business.
We grew our primary insurance in force more than 9% year over year to $231 billion, our mortgage insurance portfolio, which is one of the largest solar industry is a primary driver of future earnings for our company.
It is important to note that the projected economic value of this portfolio is not reflected in the current period financial statements Snores are reflected in our reported book value.
But it is expected to be recognized over time.
As we discussed at our Investor day in May we believe the projected future earnings from this portfolio represents significant unrecognized economic value for shareholders. The economic value of this portfolio provides us with significant strategic financial flexibility.
We wrote a record $18.5 billion of it I W. In the second quarter, which is a 13% increase over our previous record volume.
Written in the second quarter of 2018, this new business volume was driven by the continued demand for private mortgage insurance products based on the strength of our current business environment.
The depth of our customer relationships and our excellent customer service at our customized pricing options.
We are operating in a healthy environment for our business fueled by low interest rates that drove our increase of high quality purchase loans as well as an increase in refinance activity.
Purchase loans are three to five times more likely to have mortgage insurance versus a refinance.
And purchases accounted for 90% of our in IBW in the second quarter.
While the overall mortgage market increase in refinance volumes contributed to a decline in quarterly persistency the impact of lower persistency was more than offset by a record level of new business. In fact, we successfully grew our portfolio by $20 billion or more than 9% year over year.
The overall housing market and economic environment also continues to be positive.
Although housing supply remains tight.
Overall home price appreciation has slowed and is better aligned with income growth, thus improving affordability and created a healthier more sustainable housing market. These trends are expected to lead to continued growth in purchase originations, particularly for first time homebuyers, who represent one third of home sales.
As you know we introduced radar rates to the market earlier this year.
As another of my pricing option available to radian customers.
While the majority of our business today is delivered through radar rates, we continue to offer various options for doing business with radian that are.
Based on customer needs and preferences and aligned with our appetite for appropriate risk and return.
And importantly, while price competition is always present.
The industry. The overall increase granularity of our pricing options allows us to shift pricing, both up and down to more dynamically shape the risk profile of our portfolio and maximize the economic value of the business. We write we believe our unique risk analytics framework focus on loan attributes and originator and servicer insights positions us to write quality business with the right customers and to drive strong risk adjusted returns.
Based on our performance, thus far in 2019, and our strong new business pipeline. We now expect to write new mortgage insurance business in 2018 that is in excess of last year's record breaking level of $56.5 billion.
As you've heard me say many times. This is a great time to be in the mortgage insurance business. The business fundamentals are very strong with guardrails in place for mortgage lending and servicing under Dodd, Frank and our mortgage insurance industry is governed by a clear and consistent and transparent risk based capital requirements under P. Myers and operating guidelines, where the uniform master policy the credit quality of our existing book of business is excellent.
As is the credit environment, we operate in today.
The number of defaulted loans in our portfolio remains a 20 year low with cure activity at a 10 year high.
Now moving to our services segment, we continue to make progress across our mortgage real estate and title services business and we are pleased to report total services segment revenues of $43 million.
In the second quarter, which represents growth of 19% from the prior quarter and 6% compared to a year ago, we remain confident in the market opportunity for our products and services the value of our customer relationships in the team we have in place to grow revenues and build value.
In terms of our capital management as we discussed in detail last quarter, we executed our second mortgage insurance linked notes transaction in April combined with our first island transaction last year in our existing quota share reinsurance programs.
These transactions have significantly reduced the risk profile of our company.
We continue to believe in the value of distributing risk by utilizing both the capital and reinsurance market. Another important element of our capital strategy.
He has been the improvement of our debt maturity profile and the focus on reducing overall interest costs, Frank will discuss our actions this quarter in more detail.
And finally, we are pleased that our strong financial position has afforded us the opportunity to return capital to our stockholders in July we completed our $250 million share repurchase program.
In total, we repurchased 11.3 million shares or 5.3% of shares that were outstanding at the beginning of the program.
We will continue to consider share repurchases opportunistically within the context of our overall capital strategy, which is designed to enhance our already strong capital structure and position. It further demonstrate our commitment to effectively managing capital for our stockholders.
Turning to the regulatory analysts legislative landscape.
With respect to housing finance reform, both treasury and have been preparing plans to reform the housing finance system and to the executive memorandum issued by the White House earlier this year.
It has been reported that these plans are nearly finalized we will be issued in the next few months.
As to the prospects for reform, we believe legislative reform remains unlikely prior to the next year's presidential election.
As to administrative reform FHLB director Mark collaborate has been vocal about his desire to see changes in the GST is including among other items increased use of private capital.
In fact director Calabria reputedly has cited the mortgage insurance industry as an example of where private capital works.
Regardless of the path to future reform may take.
Given our industry strong and consistent capital standards, our proven ability to manage and distribute risk our uniform master policies in our high operational standards. We believe that the private mortgage insurance will will remain critical acre critical component of any new housing finance system.
Turning to more recent news the CFPB issued an advance notice of proposed rulemaking last week regarding the future of the qualified mortgage definition or Q.
More specifically.
The notice focuses focus on how to address the GFC patch, which provides QM designation for loans eligible for purchase by the gses, including those with debt to income ratios in excess of 43%.
While the CFPB notice makes it clear that the GFC patch will expire in January 2021, as planned or following the short extension of this exploration Dave.
The CFPB also stated is committed to ensuring a smooth and orderly mortgage market throughout this consideration of these issues and resulting transition away from the GRC patch.
We are encouraged with the CFPB has decided to pursue this notice and comment period to solicit prospectus potential alternatives to the GFC patch, we have been actively participating in the development of alternatives through our industry Trade Association us alive.
And other trade groups and we are optimistic that there are a number of viable options.
That could improve the current QM definition and continue to serve the above 43 VTI market for credit worthy borrowers.
Most importantly, we see this as a good opportunity to level, the playing field across regulatory approaches as it relates UQM based on what we know today, we expect to see CFPB to take a comprehensive approach to redefining QM to avoid disruption to the housing market.
And to continue to ensure that well deserving borrowers have access to mortgage product.
Now I would 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 reported yesterday evening, we reported net income of $166.7 million or 78 cents per diluted share for the second quarter of 2019 as compared to 78 cents per diluted share in the first quarter of 2019, and 96 cents per diluted share in the second quarter of 2018.
As a reminder results a year ago included $74 million in tax benefits relating to the final settlements with the IRS of a long standing tax matter.
Adjusted diluted net operating income was 80 cents per share in the second quarter of 2019, an increase of 10% from the first quarter of 2019, and an increase of 16% over the same quarter last year.
Before I get into the details of the quarter I will note. Some significant changes in accounting estimates made during the quarter that impacted our reported results.
First is the earned premium acceleration of $32.9 million that was related to the cumulative effect of updated amortization rates used in calculating our unearned premium reserve, which impacts the revenue recognition of single premium policies.
As our mix of single premium policies has skewed more heavily to borrower paid policies than lender paid.
The expected lives of the policies have shortened and therefore has increased the speed of the amortization of the single premium policies.
This change also creates a $6.2 million decrease in other operating expenses as we accelerated a related portion of the ceding commissions for policies covered under the single premium quota share reinsurance program.
Second.
Is the change in accounting estimate related to our loss reserves and specifically the IB and our increase of $19.4 million related to previously disclosed legal proceedings regarding loss mitigation activities largely on pre 2009 vintages.
The combined impact of these significant items was positive to our GAAP and operating earnings per share by seven cents in the quarter.
I will now focus on some of the other drivers of our results from the quarter.
I'll start with the key drivers of our revenue.
Our new insurance written was $18.5 billion during the quarter compared to $10.9 billion last quarter and $16.4 billion in the second quarter of 2018.
Our second quarter 2019 volume marks our highest quarterly new insurance written on a flow basis.
Total Eni W increased 13% compared to the second quarter of 2018, and our monthly premium Eni W increased 24% year over year.
Direct monthly and other recurring premium policies represented 83% of our anti W. this quarter consistent with the first quarter of 2019, and an increase from 76% for the first quarter a year ago.
In total borrower paid policies represented 97% of our new business for the second quarter.
When they accounted for less than 2% of total Eni W.
In contrast, lender paid singles were less than 3% of our Eni W. this quarter, a dramatic decline from over 21% of total production two years ago.
This shift in business mix is expected intentional and designed to improve the return profile of our single premium business overall as borrower paid singles have higher expected returns relative to lender paid policies due in part to auto cancellation under the homeowners protection AG, creating shorter expected lives and lower required capital under Pmiers.
Primary insurance in force increased to $230.8 billion at the end of the quarter with year over year insurance in force growth of over 9%.
It is important to note that monthly premium insurance in force increased 12% year over year and has grown by over $30 billion over the past two years.
As I discussed at our Investor day in May the in force portfolio is the primary source of our future earned premiums and is expected to generate significant future earnings which are yet to be reflected in our financial statements and our reported book value.
Our 12 month persistency rate of 83.4% was consistent with the prior quarter and increased from 80.9% in the second quarter of 2018.
Our quarterly annualized persistency rate declined to 80.8% this quarter from 85.4% in the first quarter of 2019 and 82.3% in the second quarter of 2018.
The decline in quarterly annualized persistency compared to the second quarter of 2018 is primarily driven by increased refinance activity, which can create some volatility in the quarterly persistency metric.
However, the decline in interest rates that can drive increased refinance activity can also lead to a strong purchase environment presenting an opportunity to write additional business, but essentially offsetting the negative impact of refinancing.
While our long term expectations for persistency remained in the low to mid 80% range near term quarterly persistency may fall below this level.
Reported premium yields on our mortgage insurance enforced portfolio for the second quarter 2019, our elevated due to the $32.9 million cumulative adjustment to unearned premiums mentioned earlier.
Setting aside the impact of this adjustment our direct enforce premium yield was 47.9 basis points this quarter compared to 48.6 basis points last quarter and 48.4 basis points in the second quarter of 2018 as seen on slide 10.
Net premium yields on our mortgage insurance in force portfolio decreased from 47 basis points in the in the prior quarter to 46.4 basis points this quarter.
Enforced portfolio premium yields for the second quarter 2019 also include the impact of our most recent insurance linked note transaction, which causes a reduction in net premium yields of approximately <unk> 0.8 basis points.
Net mortgage insurance premiums earned were $299.2 million in the second quarter of 2019 compared to $263.5 million in the first quarter of 2019 and $251.3 million in the second quarter of 2018.
This 19% increase from the second quarter of 2018 was primarily attributable to the $32.9 million a cumulative adjustment to unearned premiums noted earlier as well as our insurance in force growth.
Setting aside the impact of the adjustment our net premiums earned grew 6% year over year.
Total services segment revenue increased to $43 million for the second quarter of 2019 compared to $36 million for the first quarter of 2019 and $40.5 million from the second quarter of 2018.
The increase in revenue compared to the prior quarter was due in part to the typical seasonality of the mortgage and real estate markets and the year over year increase was partially attributable to the inclusion of businesses acquired in the latter half of 2018.
Our reported services adjusted EBITDA for the second quarter of 2019 was approximately $1.4 million.
Our investment income this quarter of $44 million was flat to the prior quarter and a 17% increase over prior year due to both higher rates and higher balances in our investment portfolio.
At quarter end, the investment portfolio duration increased slightly from 3.6 to 3.7 years.
Duration is slightly shorter than our target as a result of larger cash balances held while we managed through our recent capital transactions.
It is noteworthy that our 5.5 billion dollar investment portfolio has grown approximately 13% or just over $639 million since the second quarter of 2018, a sizable increase given that we have paid off debt and repurchase shares during the period during the period.
Moving now to our loss provision and credit quality.
As noted on slide 14 during the second quarter of 2019, the provision for losses for the second quarter of 2019 includes an adverse reserve development on prior period defaults of $6.5 million.
This adverse development was driven by the previously mentioned $19.4 million IB NR adjustment, partially offset by positive development of $12.9 million driven by a reduction in certain default to claim rate assumptions on aged defaults.
Our primary default rate has continued to decrease.
It is noteworthy however that our total default count has consistently decline to very low levels and currently stands at a 20 year low of under 20000 loans with very high cure rate.
As economic indicators have continued their positive trends cumulative loss ratios on our post 2008 business internationally is historically low levels.
Now turning to expenses.
Other operating expenses were $70 million in the second quarter of 2019 compared to $78.8 million in the first quarter of 2019 and $70.2 million in the second quarter of 2018.
The reduction in expenses on a linked quarter basis is primarily driven by $6.2 million and acceleration of earned ceding commissions related to policy is covered under the single premium QSR program described earlier.
Moving now to taxes, our overall effective tax rate for the second quarter of 2019 was 20.4% and our expectation for our 2019 annualized effective tax rate before discrete items is approximately the statutory rate of 21%.
For Radian Guaranty and as previously disclosed in April of 2019, we closed on our second insurance like no transaction of approximately $562 million.
This brings the total insurance linked note.
In total we have reduced radian guaranty's pmiers capital requirements.
By $1.5 billion by distributing risk through both the capital markets and third party reinsurance execution.
We expect that this prudent risk distribution strategy and our disciplined capital management will continue to enhance our risk profile and improve our financial flexibility.
Also as previously disclosed and as a result of further capital enhancement actions and our continued strong financial performance.
In April 2019, following the approval of the Pennsylvania Insurance Department Radian Guaranty returned to $375 million of capital to its parent Radian group.
This brings the total capital return to Radian group within the past 12 months the $825 million.
It is important to also note that this return of capital is in addition to the funds received regularly by Radian group through our long standing agreements with the operating companies, which provide for the reimbursement of group interest and operating expenses.
These reimbursements have provided approximately $145 million over the past 12 months.
Radian Guaranty had p. Myers available assets of $3.2 billion and our minimum required assets were $2.6 billion as of the ended the second quarter 2019.
The excess available assets over the minimum required assets of $660 million represents a 26% pmiers cushion at a $172 million increase from the prior quarter's $488 million cushion.
We have also noted on slide 20, our P. Myers excess available resources on a consolidated basis of $1.8 billion, which is fully utilized represent 69% of our minimum required assets at June Thirtyth 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 additional benefit of future premium revenue.
And moving to the capital activities for Radian group during the second quarter of 2019, the company repaid upon maturity $159 million of its senior notes due 2019.
Radian also issued $450 million of senior notes due 2027.
Additionally, pursuant to cash tender offers the company purchased $207.2 million and $127.3 million of our senior notes due 2020 and 2021, respectively.
These purchases resulted in a pre tax loss on extinguishment of debt of $16.8 million.
At June Thirtyth 2019, there was $27 million and $70.4 million remaining principal amounts outstanding on the senior notes due 2020 and 2021, respectively.
On July 25, 2018, we redeemed the remaining $27 million of senior notes due 2020.
This series of debt restructuring transactions is intended to reduce our debt to capital ratio lower our overall cost of debt and extend the maturities of our debt.
Our weighted average debt maturity has now extended to over six years and our next significant debt maturity will be in 2024, which is also the expected timeframe for potential and returning contingency reserve releases from Radian Guaranty.
Our weighted average coupon for debt has also decreased over 40 basis points to only 4.86%.
The company has fully utilized our recent $250 million share repurchase authorization as of July 26.
The company has repurchased approximately 11.3 million shares over the course of the authorization at an average share price of $22.21.
The total shares repurchased with this authorization represent 5.3% of the shares outstanding at the beginning of the program.
And since 2015, we have repurchased approximately 14% of our diluted shares further evidence of our commitment to return capital to our shareholders, while still building capital for our future growth.
Holding company liquidity at the end of the second quarter, 2019 was $879 million compared to $723.4 million at the end of the first quarter of 2019, excluding any consideration for our $268 million credit facility.
As we continue optimizing our capital structure and evaluating appropriate uses for capital. We will continue to update update you on our progress.
At Radian, we have a strong history of taking thoughtful prudent and shareholder friendly actions and managing our sources and uses of capital I will now turn the call back over to Rick.
Adjusted diluted net operating income per share grew to 80 cents book value per share increased 43% year over year to $18.42 return on equity was 18%.
Our $231 billion mortgage insurance portfolio grew more than 9% year over year and is the primary driver of future earnings for Radian. Our services segment revenues grew 19% from the prior quarter has 6% from a year ago the $43 million.
And we made progress against our capital strategy, completing our $250 million share repurchase program and extending our debt maturity profile, while reducing overall interest costs.
Now operator, I would like to open the call to questions.
Certainly, sir ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad. If you are using a speaker phone. Please pick up the handset before pressing the numbers.
Once again, if you have a question you May press one.
Dan Zero at this time.
And one moment please for our first question.
And our first question will come from the line of Jack Ms Cenkos.
With.
Please go ahead.
Hi, good morning.
Wanted to ask a little bit about the island, obviously you completed the second in April .
Should we think about that going forward as.
An annual sort of accruals so that.
Maybe mid 2020 early 2020, we get the 19 covered.
And then.
One of your peers has.
Going backward and done some work on the back book what are the thoughts.
From you on that on as a possible strategy.
Sure Jack this is Frank.
I. Appreciate the question is that we have said historically that where a fan of the risk distribution and we're certainly.
Pleased with the the pricing in the market conditions to issue islands into so.
We do see risk distribution as a as a permanent part of our capital management and risk management exercise, so as we're evaluating different opportunities.
I think as long as market conditions permit.
It is something that you would expect to see on an ongoing basis.
As it relates to the back book I think conditions and the profile of that particular.
Set of vintages.
As a little bit different than the on the run so it's something we want to be thoughtful about.
And is certainly under consideration, but but wouldn't want to set expectations around timing.
Or frequency, but as far as it being a part of our risk and capital management programs definitely.
Okay and then on.
The services of open for any update on the guidance there I think youd.
From the 175 to 200 I guess first is that is that a segment for a consolidated number and where are we.
On that guide it seems like we're a little bit off the pace from maybe where we should be 50% of the way through the year.
Yes. So thank you. This is Rick Jack appreciate the question then.
Our services segment revenues were $43 million in the quarter.
As we so that was a growth over the first quarter, which we expect to our guidance is to achieve an annualized run rate of $175 million to $200 million of revenue and 10% to 15% EBITDA margin. So if you look at this quarter, our annualized revenue run rate was $172 million right. So very close to the bottom end of our guidance.
Our EBITDA margin was 3.3%, but excluding some things that we did from an investment point of view closer to seven.
So we expect as we look forward, we expect to achieve.
The lower end of our revenue guidance as we go through the year. So I think will be the 175, plus kind of range, we should achieve achieve and I think we're on track to do that as the year progresses and the EBITDA is a little bit more volatile just because of the law of small numbers.
Both plus and minus right. It can be driven by mix somewhat so we're that's our focus but we also make investments in those businesses from time to time to create volatility around that one metric. So we were staying with our guidance of a run rate on a run rate basis.
I think as I said in Investor Day. These businesses are driving.
Strong value to our customer relationships and the real estate data, we get from our real estate businesses is extremely valuable to our mortgage credit risk business. So today, we believe as these businesses are developing and evolving towards.
Creating a financial contribution to our overall company they are adding value to us across our business and we see that yes, I just want to add we see that from a almost a daily basis from a confirmation point of view that we're being viewed differently radian is being viewed differently by customers as a broader business partner.
I've had meetings with five of the top top lenders probably in the last 60 days and.
Each one of them kind of in their own words have mentioned that.
They begin the sea radian much different their focus is on not only how do we grow RMR relationships, which I think we demonstrated this quarter that we have the ability to do through our relationships with the fact really the focus around real estate and title capabilities. Many of these we do due diligence around securitization programs, but our information from a real estate in title point of view is highly interesting and valuable to them and they see an opportunity to work with us on a broader basis. So I think you know the one radian brand is really kind of resonating with our customers.
And as again, just as I mentioned at our Investor Day.
We do.
The guidance that we provided we continue to stick to but I think as we look going forward. These businesses, specifically real estate and title where were focused very.
Heavily on data analytics and technology are going to you know we do see value accruing ahead of earnings. So the contribution today is strategic to our EMEA business. So I think street strategic from a value creation. So.
Probably little bit more than you asked for but I think in the context of the services business just to put it in the right frame from a strategic point of view, we feel like we're on track for the areas that we see value in this business.
Okay. So it sounds like we step we step up sort of consistently in the back half of the annualized.
Segment number when we exit.
19 is where the focus should be.
Yes, I think from a pure financial contribution we're going to see that occur and I think as I mentioned the strategic aspect of the business I think is playing out well across our customer base as well.
Hi, Thanks for taking my questions guys.
Thank you.
Next in queue, we'll go to the line of Geoffrey Dunn.
Dowling and partners. Please go ahead.
Thanks, Good morning.
Morning, Frank you you outlined a capital strategy last quarter that had to do with finishing your authorization, taking carrier debt et cetera, and you manage to take care of all that inside of the three month period here. So can you give us an update you got a lot of cash at the Holdco you really addressed all the things you highlighted you want to address last quarter, what's the plan for the remaining cash.
Sure Great question, Jeff. Thank you.
I think the best way to describe it and this is consistent with how we've described it in the past is we're going to continue to look at uses of capital and the prioritization that we outlined at our Investor day, which is make sure we have sufficient capital for organic growth to make sure we have an adequate risk buffer.
Make sure that we're considering any strategic opportunities may exist and then we'll look at returns to shareholders either through.
Just the theoretical possibilities there are share repurchases and dividends historically, we've utilized the share repurchase method and over the past.
For years, we repurchase through our share repurchase programs over $400 million of shares.
So as we contemplate future actions and we don't.
As you know we announced those actions as they occur so we don't preview them.
I think certainly we're in a position where we believe that we do have excess capital and we'll contemplate returns to shareholders.
In the broader context of the capital planning activities that we do.
This share authorization to $250 million loan, which was completed im very pleased about that.
So that exhaust this authorization.
The next opportunity for an authorization will be at our upcoming August Board meeting.
And that will be a topic of discussion within the broader capital planning that we do.
And.
Am I correct that I think you indicated last quarter that the board has actively discussed common dividend as well.
The board discusses the full range of capital options also in the context of that that capital usage prioritization and I went through as well. So it is a comprehensive discussion that incorporates all aspects of our business.
All right and what state of the Boardman.
All of this will have August 14, President, Jeff So that Wednesday of the week all right and then just by the way Jeff. This is Rick I just want to add to Franks comment I think you know between management Board, we have a very thoughtful and considered kind of capital planning processes. I think Frank went through the Investor day, and as you can see from what we've done as Frank mentioned, our actions over the past 12 months have been indicative I think of.
Very thoughtful process around how we manage the capital research sources of this company and how Weve access sources of capital and how we use our capital to improve I think shareholders position. So I think you know if past performance is any indication of how we kind of manage our capital I think we've got a pretty good track record as you said, Frank and many others. In this company has been very busy over the last few months kind of knock on the Bakken a few things down here.
Okay, and then just on a different topic.
You indicated before and most of them are majority the business going through radar rates, but you do have different pricing channels available for.
Lenders are our customers needs does radio and participate in the bid rate sheet business and if you do can you talk about how you think about the returns and that.
Segment.
Sure Sara I'll take that one Jeff so as we talked at Investor day, some of that fall bid process. We traditionally have not been a big player.
There and so generally what were looking at anytime we're looking at any sort of forward commitment our customized pricing solution is making sure that it fits our risk return appetite and really what we're trying to do is focus the book of business, where we find the most economic value at a lower level of product level and at a lender level and making sure we're doing business with the right customers. So traditionally we haven't played and I would say a significant part in that all bid process and I'd say that the other thing although thats received kind of a lot of news lately, we really havent seen any changes I would say in a material way in terms of the number of lenders that are.
Healing bulk beds and also.
Yes, the scale of that I'd say overall in terms of the discounting either.
Okay. Thanks.
And next in queue, we'll go to line of Mark Devries with Barclays. Please go ahead.
Thank you.
Had a couple of follow ups on potential capital returns Frank how should we think about.
How much of the cash at the Holdco.
Is available for returns.
And then also how should we think about the capacity to seek dividends up to the holdco over the next 12 months.
Sure Great question I appreciate that the.
Yes, I think the way to think about.
Sizing our holding company cash previously we have used metrics of 300 million or sufficient for debt service for a number of years I think the reality of it is that we're trying to be opportunistic about.
The capital that we are.
There were freeing up at an operating company basis through risk distribution, and then being mindful of where that capital resides from a legal entity standpoint, and so over the last 12 months you've seen us.
Upstream about $825 million.
Primarily driven by the excess P. Myers.
Cushion that we have.
And getting comfortable with with making that request with the Pennsylvania regulators. So as I went through it in our Investor day, as we look at sort of our binding constraint as we as we manage our capital and liquidity position.
Pmiers cushion is one of those constraints holding company liquidity and then our stat capital and so right now.
Our statutory capital is really the binding constraint.
There were operating under.
And so the Holdco cash.
Is at a level that I would say certainly exceeds.
Any.
Any level of.
Previous guidance that we gave and so we're comfortable with that level and it also as I went through with Jeff the the priorities of excess capital.
We just want to make sure that we have balanced.
Our cash needs at the Holdco relative to all of those priorities that I listed organic growth risk buffer strategic opportunities et cetera.
So it's hard.
I won't guide to a specific number.
But I would just say that we do feel that we do have an excess position there I think in the landscape of all of that.
So and then also keep in mind too as we think about.
The holding company cash position.
I always like to remind.
Folks that we do have an expense and enter sharing agreement in place, which as I mentioned in the prepared remarks contributes about $145 million over the last 12 months.
Two our holding company cash position.
Okay got it.
And then I had a question about the accounting around.
Kind of the unearned premiums.
The adjustment that you made $32.9 million.
Is that meant to reflect kind of all your expectations for.
Accelerated amortization on singles.
Based on the rate me in the quarter. So in other words, if rates don't do anything.
There is no there is no additional benefit in subsequent quarters, even if.
The realization is happening and getting those prepayments is this kind of like a pull forward of all of that.
And so we would expect kind of average premium to drop back down.
Him to the level it was at and the prior quarter.
Absent the adjustment it should be relatively consistent similar to what we've got in the slide deck. The maybe let me explain it perhaps a different way that help you conceptualize it.
As we look at our single premium production overall, which creates that unearned premium reserve historically, we have had the majority of our single premium business be lender paid versus borrower paid and lender paid coverage is life of loan coverage, whereas borrower paid is subject to the hope of cancellation.
Which is about a 10 ish or so year time horizon. So what that means is that the.
The enforced period, if you will on borrower paid policies. This significantly shorter than it is on lender paid policies and when you look at the accounting literature and the recognition curves that we have for the revenue and or the amortization rates that we used for the PR, which is the other side of that equation.
The time horizon over which the the revenue recognition occurs has shortened by about one to two years. So if you have the same fixed amount of premium up fronts previously under a lender paid policy in force longer. So the revenue recognition curve would be longer whereas with the borrower paid policy. It would be that same fixed amount of premium will be recognized over a shorter time horizon and so what you've seen is that roughly.
14% of our Eni W. this quarter as borrower paid singles, which is significantly higher than it was years ago. When it was about 2%. So it's the mix of the single premium production shifting to a shorter life.
Profile, which is causing.
The the significant change in our update on estimates around the new PR.
Okay got it thank you.
Next in queue, well go line of Bose, George with K B double Yu. Please go ahead Sir.
Hey, good morning.
If you wanted to persist, but the debt to capital I guess is around 20% now can you remind us what your.
Targeting there and how you're thinking about the need for an investment grade rating.
Sure Bose. This is Frank so it's at 20.6 reported at the end of the quarter was 20.4% now after we took out the rest of the 2000 Twentys in finished off a repurchase program historically, we've said.
Low twentys.
Is typically what we were thinking about from a rating agency perspective, and I think as I mentioned, a few times recently the rating agencies don't give us a hard and fast number to manage to.
So this is our expectation of what we think it should be to be viewed favorably by the rating agencies.
Obviously, we're in a very low level now certainly relative to our history.
And we think that this should be viewed favorably by the rating agencies, but that really is their determination to make.
Okay. Thanks, and then actually I didn't if I missed this but what was the default to claim rate in the quarter.
On that I'm, sorry, I was on you're talking about the on the new business of enabling on any thoughts, yes, 8% 8%.
The and just what's the expectation.
Going forward, you think any room to move that further down or is this kind of.
The run rate.
Sure I think as we've consistently said there even though we didnt see a change on the new defaults.
Quarter over quarter, we do think that the overall economic landscape is favorable we adjusted.
Excuse me and make adjustments to it in the context.
And Mr. George does that answer your question.
Yes, the last bit faded out a little bit actually had enough. There was just my phone or.
Oh sure I'm, sorry, so the.
The default to claim rate assumption is viewed in the context of the current information.
We have each quarter and certainly the landscape the economic landscape is as positive and strong. So I would say if that continues there could be an opportunity to move that lower.
What we did do is move the default to claim rate down on our aged defaults. So it really just depends on the performance of the portfolio and economic landscape at the time, we make that assessment.
Okay. Thanks, and actually just one more from me. The can you just talk about the sensitivity of your investment income to lower fed funds.
Sure. So the lower fed funds rate, obviously is that the short end of the curve. So it really depends on what the rest of the curve does our duration is 3.6 years and I think.
Excuse me 3.7.
And that is shorter than our target in its shorter because of some of the capital actions that we took in the quarter. So we would expect to see that extend a little bit. So it really does depend on I would say just the timing of the reinvestment opportunities at a particular point in the curve and of course spreads.
What they are doing so hard to calibrate to a fed rate cut.
So it really does depend on market conditions.
Okay, great. Thanks.
Next in queue, we'll go to line of a Sam Choe with credit Suisse. Please go ahead.
Hi, I'm I'm filling in for Doug Harter today. So Oh my question regarding capital return has been answered. So I just want to shift focus to the Eni W production and.
I mean, it was great. This quarter. So I was just wondering if there was anything in the competitive landscape that you saw that you took advantage of and how much of that is replicable going forward.
So I think.
Thank you for the question, Sam and you're doing a great job filling in today. So we appreciate it.
So I think you know look we from a competition point of view, we really didn't see many changes from the prior quarter you know from a market perspective, but I think you know our AR growth quarter over quarter is reflective on you know the relationships with our sales team in the marketplace and the service we deliver.
And I think also driven by you know our risk analytics, which we do at a low level of the originator level servicer level and then how we drive you know kind of our our return focus around from a pricing point of view to produce economic value for our portfolio. So.
I really it goes in there can Frank and I and others have spent a lot of time talking about this we really feel like we are well positioned with our customers to be you know being a strong position to help them compete environment plays well to our strength.
I think.
You know I think really it's reflective of our second quarter results are really reflective of very strong competitive position, we like the environment and we're very pleased with how our team is.
Adjusted to I really think kind of a new competitive.
World, If you will where pricing is less transparent and.
Who do business with matters a great deal. So I think this is where you know as we've been saying for the last couple of years.
We're portfolio managers in a world.
Focus on.
Aggregating to managing us mortgage credit risk and I think we have to be nimble and flexible through this environment and leverage our core expertise and identify market segments, where it makes sense from a loan attribute or customer point of view to drive the targeted risk returns and when I kind of looked at our strengths in terms of our market presence, our risk analytics, our ability to leverage data and analytics to drive pricing to the right customers and do the right business at the right risk adjusted returns I truly believe placed our strength I think you're seeing that reflected in our results. Derrick. If you yeah I would just add I don't think we've seen any material changes from a competitive perspective I think in terms of the exact volumes, it's going to be again very dependent upon the competitive environment, our ability, which we had success this quarter, we continue to target.
Teen returns and so to the extent that we can find loans that kind of fit that profile and were comfortable from a risk return perspective, and it's with the lenders, we felt comfortable with that and thats going to be really kind of driving the volume I think also in this new environment, where you have more of these so called Black box pricing engines. I think there is kind of a chance at more volatility also from a market share and volume perspective, and also from a credit mix perspective, So we could see a little bit more volatility around that as well.
Yeah. Okay. Thank you. So I mean, you guys always based production off the quality of the product not market share by I mean, this was still pretty good corner. So I mean I was just wondering strategically how do you maintain that because I mean, it is a positive momentum going forward.
Yes, I think you get on X. I appreciate you, making the point because I don't think Youve heard market share mentioned in anything we talk about because we consider our role is really building the economic value in our portfolio as opposed to pursuing volume for volume's sake I think.
Well weve the combination of our relationships in the marketplace, along with the risk pricing analytics that we do I think is working well and I think either to Doug's point. This this world has changed a bit from kind of how people compete and I truly believe this place.
To our strength, both our presence in the marketplace and our ability to assess and evaluate risk and determine how best to price for that risk.
We do use.
I think its important noise the highlight we do.
Value the insights we have around origination quality that we have with our customers and how they service our risk and I think thats served us well to kind of grow our business. This quarter to drive returns that are mid teens.
And I think really put us in a position to exceed last years and I W record in IBW year 56.5 billion. So we're growing a strong portfolio remember its $231 billion.
And we think its a.
Got significant earnings for the future so.
Very helpful. Thank you so much.
You're welcome thank you.
Next in queue, well go to line of Chris Gamma commonly with Compass point. Please go ahead.
Good morning, everyone.
Good morning, Chris.
I wanted to follow up on the $2 billion of future embedded value or discussion is that a pretax or post tax number that you disclosed.
That's after tax or actually in the Investor day materials kind of went through all of the components of that do you want to take a look at that but that is where after tax earnings and.
Remind me was there any.
Conversation on kind of like the weighted average life of that expected recognition period.
I'm, sorry, if I'm Gonna again, I'm, just you know $2 billion, it's what's the weighted average life of receiving that.
Oh, I love the I'm, sorry, the no it conforms with all of the other modeling that we use throughout the company. So and you know there are there different life assumptions across different products.
Yeah, We we gave two numbers on Investor day wonderful to see an undiscounted future earnings and then also the economic value.
Oh the portfolio. So I think I think you know think of them from two two different perspectives.
And then I just wanted to follow up on one thing on the the capital priorities you mentioned before shareholder returns as strategic alternatives, what would be interested to see interesting to you right now.
From a strategic standpoint.
So this is Rick Chris Thanks for that question I think you know look we I think we've been.
Incredibly disciplined about what we think fits and what we think doesn't fit and I think you know most of the things that we've done to date from a strategic point of view have been you are really very small bolt on kind of immaterial acquisitions.
So you know today, we get flooded with opportunities and and Frank and his team have a very quick kind of review process and so we won't I don't think we will comment on specific areas of interest.
But something that we think would fit strategically or be accretive have you know meet our return hurdles.
Likely you know something that would if it were material would bring scale with it but you know these are you know we're not on the hunt for something that's a go to fix a problem. We don't house. So it would be more opportunistic and have to fit into our strategy and fit into our customer needs were.
We're in the you know us mortgage and real estate markets today, and that's our focus and.
I think we have pretty good positions, a pretty good pretty good positions or with the properties we have.
Okay perfect. Thank you so much.
[noise].
And next in queue well go to line of me here Mustier. Please go ahead.
Hi, Thanks for taking my questions. Just a couple of quick follow ups really first I just wanted to follow up on the default to claim question I think both us I just want to make sure I understand if the economy keeps chugging along you know as it is would that be enough to drive improvements in that assumption or do you need to see a leg up in the economy or housing fundamentals or something to improve the assumptions there.
Yeah. So I think I think thats hard to estimate a insofar as it were really evaluating the performance of the portfolio. In addition to the economic landscape. So it is sort of a multi factor analysis or you know it chugging along the the quality of the portfolio that Weve produced post crisis has been absolutely outstanding.
Right. So so that certainly bodes well for us.
Obviously help from the economy would a <unk> would be helpful. Overall, as well, but it but it really is hard to give the attribution analysis to a single variable.
Okay, that's fair enough I understand.
And then on the unearned premium reserve.
But you know the release that you had I just caught on the single premium amortization up if the fed wants to cut rates again would that also lead to you know and it leads to lower mortgage rates and you know that.
So does that mean that I would bet that there's potential for more on that wave or <unk> or does this kind of capture the forward view off the rate goes and the fed expectations et cetera.
Sure Great question. It is a the analysis goes beyond just a single input and certainly an input that would have the volatility of fed rate changes. There. So we try to look beyond a interest rate moves in and be the volatility associated with the refinance activity. It is it is a and inputs in the analysis that we use especially as we look at the historical performance, but it's not it's not so sensitive that it would move with each fed rate cut.
Got it. Thank you and then just finally coming back to you know capital returns.
Just can you help US you know just frame the.
I mean, I don't know if quarterly is the right timeframe, but just trying to understand I understand that you're generating a lot of capital. There are some constraints on the amount of capital you can.
Distribute up given the surplus constrains the sports statutory surplus and it's not just P. Myers <unk>, but maybe help us just frame that what that kind of constraint is yeah, I understand and ends in 23, but how much like you know do you expect to build that up too.
Sure.
Yeah, So what we've said and actually in Investor Day, We went through I think a fairly.
You know the example of it but the statutory capital levels right now are 500 ish or so million and Weve indicated that that is going to be our binding constraint for a while until until we see some of those contingency reserves free up in the 2023 2024 timeframe and then the amount that gets freed up is about anywhere from $3 million to $400 million a year. After that so if you think about building statutory capital organically. It it is not entirely flat, but a very.
A very slow rate of change from now until that time horizon that doesn't mean that we might not see some other ways to position things as we look at and organizing our legal entities and our risk et cetera, but I would just say on a on a static go forward basis that would be our expectation.
Got it. Thank you those are all my questions. Thanks.
Thank you.
Thank you we'll go line of Mackenzie Aron with Simon and Associates. Please go ahead.
Thanks, Good morning, just a quick one for well it wasn't sure. If there was yield guidance you can provide for the back half the year.
Yeah Mackenzie. This is Frank yield guidance is a is certainly difficult to do I think I missed it pretty badly a couple of years ago or so I'll shy away from it I think the reality is it depends upon a the business that's coming in and the mix of that business and the mix of the business that that's coming out as well so.
I think the guidance that I gave several years ago was that you should expect to see it come down modestly over time.
Our our mix over the last two years has shifted such that.
It did not come down, but I think it is a it's certainly something that we're sensitive to but keep in mind too that the yield guidance that we gave us on the portfolio.
And the Eni W. That we're writing is it takes a while to actually have an impact on the portfolio. Overall. So there are a lot of dependencies there but.
Yes, so I hope that's helpful.
It is and just on the island. The most recent transaction is that fully reflected in this quarter's.
It is and that's the point of <unk> 0.8 basis points on a total wireline.
Both for the 2018 and 2017 vintage the total of those two I was about 1.4 basis points.
Great. Thank you.
Thank you.
Once again, ladies and gentlemen, if there are any additional questions. At this time, please press one than zero.
Once again any additional questions. Please to press one then zero at this time.
And we'll have a question from the line of Phil Stefano.
The CIT Bank. Please go ahead.
Yeah, Thanks, and good morning, I said already.
Oh on an earnings call earlier this week one of the the reinsurers who has been active in am I said.
Fit they noticed other reinsurers seem to be bumping up against either regulatory or rating agency thresholds for the amount of my business that they could do.
Your brokers flagging this to you or any comments you can provide about maybe the sustainability of the singles quota share.
Sure. This is Derek so in terms of sustainability I mean, I think we heard.
Similar things I don't think we have reason to believe that the market is kind of backing out from our ability to distribute risk at this point, we haven't heard anything to give us an indication.
Again, when you look at the returns from a reinsurance perspective at credit quality is very good that we're bringing in the portfolio.
It's outperforming kind of our through the cycle expectations on when you look at it from that perspective. It is still a strong business. There's also I think untapped reinsurers, who haven't gotten into the market, yet as well which gives opportunities.
Okay, and the comment wasn't from a performance perspective, so Paul understand it came across the <unk>.
And maybe switching gears then a quick one on services.
So I guess I was under the impression that the guidance at least for a margin at the Investor day. They <unk> the comments of this year.
And it feels like were <unk>. This year means and exit run rate. So do we feel like 2020, we'll be able to to have tangible evidence that the turnaround is working and it has been completed or how should we think about what 2020 looks like if we're confident that leaving 2019, you know all cylinders will be firing.
Yeah, I don't think so thank you I feel this is Rick I don't think that we have a you know we're giving the guidance for 2020, but we do.
We do see progress across our businesses that we we feel very positive about both in terms of those specifically you know we can see each each of the activities across our our mortgage and real estate and title businesses growing and keep in mind each of each of these activities are all at a kind of a different level of maturity and require different types of investment and you know we.
Use an example of our title business was essentially you know kind of a startup. If you will we bought a couple of properties put them together and radian title insurance and Radian settlement services and you know, we're starting to see significant momentum on that business from a customer point of view and feel very good same thing around the real estate side and obviously on the due diligence business. The securitization market has been the expanding.
So I think you know overall, we feel good about the businesses and how they are positioned to go forward and I think you know as I mentioned that I believe the real estate and title businesses.
Probably I think I've talked about at Investor day, given the data and analytics and technology focus around those businesses. I think we are really truly building value in those businesses for our shareholders. Even ahead of earnings but earnings continue to develop them and we remain the.
Positive about the development of those businesses. So I think you know we're not here to give guidance today on 2020, but we do feel that our run rate guidance that we've.
Given I think last fall was going to be stated.
Probably in October and November Ah, we continue to stand by that guidance.
Okay. Thanks.
One quick numbers question for the Ics.
Emerges Asian of single premiums that changed and caused a couple one timers do those were one timers for second quarter. There's there's no reason to third quarter.
It would be impacted by any of that changed in the amortization schedule is that right.
I'll answer it technically technically its an accounting estimate that gets reviewed from time to time, so I'd hate to say it won't be adjusted again, but but yes, an adjustment of this magnitude I think reflects the current.
Landscape in our analysis of the portfolio. So I would I would expect any adjustments to that to be infrequent.
Infrequent immaterial, but.
At least next next couple of quarters perfect. Thank you.
Thank you. Thank you.
Because currently we have no additional questions in queue at this time. Please continue.
Okay, well first off I want to thank our team on an excellent quarter and the great momentum that the company is experiencing today.
I appreciate everybody taking time for our call today and your continued interest in radio and I look forward to seeing each of you very soon take care.
And that does conclude our conference for today, we thank you for your participation and for using the ATM T. Teleconferencing Center you may now disconnect.