Radian Group Inc (RDN) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Radian's third-quarter 2012 earnings call. For the conference, all the participants are in a listen only mode. There will be an opportunity for your questions. Instructions will be given at that type.

(Operator Instructions)

And as a reminder, today's call is being recorded.

With that being said, I will turn the conference over to the Vice President of Financial Communications, Ms. Emily Riley. Please go ahead.

Thank you and welcome to Radian's third-quarter 2012 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today and is posted to the investor section of the website at www.radian.biz. During today's call, you will hear from SA Ibrahim, Radian's Chief Executive Officer, and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce-Bazemore, President of Radian Guaranty; David Beidler, President of Radian Asset Assurance; Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty; and Derek Brummer, Chief Risk Officer and General Counsel of Radian Asset.

Before we begin, I would like to remind you that comments made during this call will include forward-looking statement. 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 2011 form 10-K and subsequent reports and registration statements filed with the SEC. These are also available on our website.

Now, I would like to turn the call over to SA.

Thank you, Emily, and thank you all for joining us and for your interest in Radian. I will start off today offering highlights of our quarterly results and the strong progress we have made against our goals and then focus my comments on the topics we believe are most important to you.

First, how we at Radian continue to grow our mortgage insurance franchise and capture a large amount of new high quality business while effectively mitigating losses in our legacy portfolio. Second, what we are doing to mitigate our mortgage insurance legacy losses and reduce risk exposures in financial guaranty to provide important capital support to our mortgage insurance business. And third, how we are managing our capital and positioning Radian for success and a return to operating profitability. Bob will then cover the details of our financial position and I will provide a few closing comments before we open the call to your questions.

Earlier today we reported a net income for the third quarter of $14 million, or $0.11 per diluted share, which is comprised of $31 million of income in the mortgage insurance segment and a $17 million loss in the financial guaranty segment. This includes the impact of fair value and other financial instrument losses of $42 million, as well as net gains on investments of $85 million. At September 30, 2012 our book value per share was $6.85.

In the third quarter, Radian Guaranty's risk to capital ratio improved to 20.1 to 1. The improvement in our risk to capital ratio this quarter was primarily driven by investment gains, partially offset by a small level of operating loss. We have taken, and continue to take, many actions to maintain a competitive risk to capital position, including internal and external reinsurance, reductions and commutations of risk exposure and by realizing investment gains. As a result, in 2012, we do not expect to exceed the 25 to 1 risk to capital limit imposed by certain states and believe that Radian is positioned to continue writing new high quality mortgage insurance business uninterrupted.

Now let me turn to the topics that we believe are top of mind. First, we continue to write more new high quality mortgage insurance business that can generate strong returns. We have successfully grown and diversified our customer base, which is evident in our new business volume. In the third quarter, we wrote $10.6 billion of new business and $25.4 billion year-to-date. This is projected to generate $7.5 million in positive after-tax contributions over its life per each $1 billion in NIW. Our volume has increased substantially over the past year. In fact, we wrote more new business in the third quarter alone than we did for the entire first nine months of 2011. In October, we received more requests for mortgage insurance than in any other month this year, reaching a five year monthly record NIW of $4 billion. And here I need to take a moment to thank our customers for choosing to do business with Radian.

We are attracting new customers and increasing our market penetration, particularly among community banks and independent mortgage lenders and by expanding our geographical presence. In 2012 alone, more than 250 new customers chose Radian as their MI partner and new customers bring new volume- 20% of our NIW in 2012 came from customers new to Radian beginning in 2011.

Last quarter I mentioned our outstanding sales team as one of the drivers behind our NIW success. This quarter, let me mention another driver -- our unmatched customer training capability. Radian has trained more than 44,000 customers since 2009, with a focus on product and technical training that anticipates and addresses trends in the industry. Our training has gained popularity over the past few years as our customers discover the value of our courses and knowledgeable training team. In 2009 we had nearly 7,000 individuals take advantage of our training. In 2012, so far this year, we have trained more than 12,000.

Turning now to Radian's mortgage insurance book of business and slide 19 on our webcast presentation. It is important to note that, as of the third quarter, the 2009 through 2012 books grew to more than 40% of our are primary risk in force, and the most problematic 2006 and '07 books are now down to under 28%. If the pace of our new business volume continues, we expect that by mid 2013 our book of business written after 2008 will be larger than the book written in 2008 and prior. In addition, the success of the latest HARP program has helped to further improve the credit profile of our legacy book. Approximately 8% of our risk in force has been improved through a HARP refinance and this, combined with a newer quality of book business, represents a strong portfolio that has grown to 48% of our total primary mortgage insurance risk in force. By the end of the year, this combination of HARP, plus the 2009 through 2012 book, will represent more than 50% of our total risk in force. This is one of the primary drivers of expected return to MI operating profitability in 2013.

Second, we continue to focus on mitigating losses in our mortgage insurance portfolio. There are positive trends and improving results in our legacy book as the total number of defaulted loans continues to decline, as you can see on slide 24. The default rate on our primary book fell further in the third quarter to 12.6%. Lost mitigation remains a top priority at Radian with regard to loan modifications. While the reporting we received from services remains limited, we have seen a steady number of completed loan mods. Although the HAMP program peaked last year, many of those borrowers who did not complete HAMP, instead transitioned to a private modification program and achieved success. In fact, one quarter of the completed private modifications that were reported to us began as a HAMP trial. Our lost management team works tirelessly to increase these numbers, helping to educate and connect borrowers with services that can offer a loan modification or other program to increase their likelihood of home ownership success.

For example, earlier this month we begin offering a unique program called the responsible homeowner, or RH Reward, designed to increase borrowers who recently modified their mortgages to remain current on their new mortgage payment. This program is administered by Loan Value Group and pays rewards to eligible homeowners for making their mortgage payments on time. The reward is paid in cash when the mortgage is refinanced or paid off and participation is free. Loan Value Group has demonstrated success with this program and we are pleased to be a partner. We remain committed to supporting efforts focused on responsible, sustainable home ownership.

As we continue to work through our legacy books of business, we maintain $3 billion in loss reserves, representing three times the claims we expect to pay in 2012. And our primary reserve for default increased slightly this quarter to $28,561. You will find the details of our rescission and denial activity on slide 20 of our webcast presentation. These rates remain elevated as we work through the legacy books where errors in underwriting are common. We also continue to review each claim carefully to ensure that the servicing standards referenced in our master policy have been followed. Where warranted, we may curtail the claim payment based on servicing negligence. What is most important to remember; however, is that we continue to pay appropriate claims and have paid in excess of $5 billion since 2008, while enforcing our rights on poorly underwritten, fraudulent or negligently serviced loans.

Third, our financial guaranty business continues to serve as an important and unique source of capital for Radian Guaranty. Our financial guaranty team in New York is solely focused on surveilling our existing exposure and pursuing opportunities for commutation and risk reduction. Based on their tenacity and strong relationships, we have successfully reduced our net bar exposure from a peak of $115 billion in June 2008 when Radian asset stopped writing new business, to $39 billion in the third quarter of 2012, primarily through a series of successful commutations. This represents a reduction of our total financial guaranty risk exposure of 66%, or two-thirds, including many of the riskiest segments of the portfolio, as you can see on slide 27.

Since 2008, Radian Asset has paid Radian Guaranty a total of $384 million in dividends and expects to pay another dividend of approximately $40 million to Radian Guaranty next year. An additional $291 million in contingency reserves remains to support Radian Asset's existing risk. This represents an opportunity over time to add to Radian Guaranty statutory capital as the exposure is ultimately reduced and contingency reserves are released. As of September 30, 2012, Radian Asset maintains statutory surplus of $1.1 billion.

Fourth, while the challenge and volatility of our economy and legacy portfolio clearly remains, based on our performance and trends, we continue to project a return to a very small level of MI operating profitability in 2013 with our updated forecast projecting close to break-even on the consolidated a basis. Our industry continues to slowly but steadily regain share from the FHA as the FHA has increased prices and tightened guidelines to help our industry return to a more traditional and sustainable balance between government and private mortgage insurance.

On Capitol Hill, we continue to hear resounding support in Congress for a larger role for private capital, including private mortgage insurance, in the future, as Capitol Hill takes on the future of housing finance. The Qualified Mortgage definition outlined in Dodd-Frank is still expected to be released no later than mid January with QRM to follow.

Now I would like to turn the call over to Bob for details of our financial position.

Thanks, SA. I will be updating you on our P&L activity and trends for the third quarter 2012, and our capital and liquidity positions as of September 30, 2012.

The MI provision for losses was down to $172 million this quarter compared to $208 million last quarter and $277 million a year ago. The improved loss development this quarter continues to be driven by the lower level of new defaults as the credit composition of our in force book keeps improving. The credit composition has been helped by the significant volumes of very high quality new business, plus the continuation of the recent surge in HARP volume. Primary new defaults, which are the main driver for incurred losses, were down by 23% for the third quarter compared to the third quarter of 2011. In addition, the impact to net incurred losses resulting from the composition changes and other items in our default inventory, was minimal this quarter. For the fourth quarter, we are expecting a larger MI operating loss as the negative impact of seasonality on both new defaults and cures is expected to result in significantly higher incurred losses for the quarter.

The amount in our September 30 balance sheet, representing future expected denials and rescissions is $477 million. We account for approximately 50% of currently outstanding denials as anticipated reinstatements, and to quantify the sensitivity to this number like we did last quarter, if the reinstatement percentage unexpectedly shifted significantly to 75% the resulting addition to our total loss reserves would be about $121 million. We have disclosed the historical reinstatement rate by denial quarter in a new webcast slide, number 21. While some quarters have been be below the 50% average and some above, our overall estimate is based on this actual experience, which is updated quarterly. Please note that when denials are subsequently reinstated the majority of these reinstatement's take place in the first six months after denial.

Radian Guaranty's risk of capital ratio is estimated to be 20.1 to 1 with approximately $200 million of excess statutory surplus above a 25 to 1 risk to capital ratio as of September 30. The primary driver of the improvement in our risk to capital ratio this quarter was the statutory investment gains we booked during the quarter, partially offset by our small operating loss in both MI and an FG and an increase in net MI risk in force.

In the financial guaranty segment, we booked a $24 million statutory loss in the quarter for the final settlement of all of our Greek exposure. Radian Guaranty ended the quarter with $1 billion of statutory capital, up 11% from last quarter. Our current projections have Radian Guaranty remaining at a risk to capital ratio below 25 to 1 through year-end without any capital contributions. For the fourth quarter, we expect our strong new insurance volumes will continue to increase Radian Guaranty's gross risk in force with net risk in force decreasing as a result of additional internal and external reinsurance that is planned, but which is still subject to regulatory approval. Operating losses in the fourth quarter are expected to decrease our capital level. There are minimal remaining embedded investment gains in our current portfolio.

As always, slide 9 depicts our current balance sheet fair value positions, along with the expected net credit losses or recoveries on fair valued exposures. The net credit recovery, again, consists mainly of the amount we expect to ultimately recover with regards to the TRUPs commutation. If our projections are correct regarding the future credit loss payments and recoveries, we will see an addition of approximately $245 million, or $1.83 to pre-tax book value over time as the exposures mature or are otherwise eliminated. That number is derived by taking the net balance sheet liability of $187 million and adding the present value of credit loss recoveries of $58 million. Both of these numbers are shown on slide 9.

As of September 30, 2012, the valuation allowance against our deferred tax asset is approximately $918 million, or $6.87 per share. We believe this amount will be realized in the future; however, the realistic time frame when we can potentially reverse some or all of the valuation allowance is expected to be sometime in [2015]. We are projecting a very small MI operating profit in 2013 based in part on our expectation that new defaults will continue to decline significantly in 2013.

Operating expenses for the third quarter are up from last quarter primarily due to an increase in our stock based compensation accrual. We have approximately $330 million currently available at the holding company and our remaining 2013 debt outstanding is $79.4 million, which is due in February. As mentioned earlier, we expect a Radian Guaranty will not breach 25 to 1 this year; nonetheless, contributions from the holding company are still possible during the rest of 2012 and beyond. There is also potential use of some holding company cash when our IRS issue is finalized, which is now unlikely to occur in 2012. And we have $250 million of debt maturing in June of 2015.

I'd now like to turn the call back over to SA.

Thank you Bob. Before we turn to the operator, I would like to summarize four important points. First, we wrote $10.6 billion in NIW in the third quarter, which was more business than we wrote in the first nine months of last year. Our momentum continued in October as we recorded our highest month of NIW in five years of $4 billion. Second, since 2008, we reduced our Radian Asset risk exposure by 66% while paying $384 million in dividends to Radian Guaranty and releasing $270 million in contingency reserves. Our statutory surplus stands at $1.1 billion.

Third, at the end of the third quarter, we improved our risk to capital ratio to 20.1 to 1 and we do not expect to breach the 25 to 1 risk to capital ratio this year. Fourth, we maintained $330 million of currently available holding company liquidity after taking advantage of opportunities to continue reducing our 2013 debt, which now has a remaining balance of $80 million. And finally, what excites us at Radian is that we're building towards what we expect will be a profitable future that will be fueled in part by the size and the earnings power of the profitable new MI business we are writing.

And now, operator, I would like to open the call to questions.

(Operator Instructions)

Mark DeVries, Barclays.

Yes, thanks.

So, S.A., it sounds like your NIW is growing quite fast, faster than overall mortgage activity. And I think as you pointed out, 20% of that is coming from new customers, but it also seems like part of that's also gaining market share with existing customers. Can you give us a little better sense of what these customers are saying to you? Why they are bringing you new business, or why they are bringing you a larger share of their existing business?

As you know, Mark, one of the factors has been that there has been reduced number of suppliers or mortgage insurance providers in the industry in the short term. But more importantly, on a long-term basis, we have been building deliberately for this success by continuing to find ways in which we can improve our relationships with customers, add more value, and as, Teresa's fond of saying, positioning ourselves as a must-do business with MI player.

In addition to that, as I mentioned, and we are just getting moving on it in a bigger way, we are expanding into geographies that hither to were geographies that were very strongly dominated by Old Republic and some of the other players such Texas and Oklahoma and so on. And we continue to hire more mortgage insurance salespeople. In fact, even as we speak, we're looking for strong people to hire. So this is part of a sustained momentum and strategy with a training program, with investment in the operational side, with the two principles that we have, which is we will not compromise credit quality and we expect to get an acceptable and attractive return.

I don't know if, Teresa, you'd like to add more to that?

I think that says it very well.

Okay, great.

Another question, Bob -- do you know what the remaining unrealized gain position is in your securities portfolio right now?

Yes, I said it was minimal.

Minimal. Okay.

Separate question -- what caused the rescissions to increase in the third quarter, up a decent amount from where they have been the prior three quarters?

Scott?

This is Scott Theobald.

The majority of the claims being resolved continue to come from the problematic 2006 and 2007 vintages. As such, we continue to ask origination and servicing docs necessary to support our investigation process. It services on -- it will provide the documentation of denial results. If we received the docs we investigate and pay all appropriate claims, we rescind when have corroborated evidence of underwrite negligence and misrepresentation. Having said that, we do expect rescission denials received over time as the problematic vintages age and runoff.

And, Mark, remember -- because of the process-intensive nature of rescissions, it inherently is a lumpy process, so you'll see months where the number goes up and months where that number goes down.

Okay. Got it.

And then just one last thing -- you guys indicated you do not expect to see 25 to 1 risk capital in 2012, and also are looking for an operating profit in 2013. What is to stop you from extending that and saying, we realistically just do not expect to exceed 25 to 1?

Well, that is only part of the equation, Mark. You also have to look at the risk in force and, thankful for us, we are writing a lot of great new business. That is increasing our risk in force. So that is going to be part of the equation in capital [inverse] to capital.

Okay.

And then -- can you, Bob, talk about how your new reinsurance agreement is impacting the growth and risk in force relative to growth in insurance in force?

Well it's going to be the 20% quarter share, so the net risk in force is going to be 80%, essentially. And that is the way it works. So if I think, a fairly easy calculation, this is something that we used to manage the capital which is very important to our success in writing.

And, Mark, as we look at ways in which we continue to manage our risk to capital ratio, we are very focused on not stopping the momentum we have in writing new business, because we believe that eventually when the legacy wears off our Company's valuation will be based on its franchise valuation. So it is very important for us, while we're still dealing with the legacy issues, to continue to deal with and focus on building as strong a franchise as possible because that is what is going to fuel our future success in valuation.

Okay. Got it.

And then just finally -- is that netting impact of the reinsurance reflected in the risk in force numbers reported in the earnings release?

Not the -- there is a gross risk in force that the primary risk in force -- that is going to be the gross, and then the net risk in force would be the risk in force that we calculate the risk to capital based on.

Okay. Got it. Thank you.

Jason Stewart, CompassPoint.

Thank you.

S.A. -- you, in your prepared remarks, talked a little bit about the FHA; and I was wondering if you could expand on your comments and talk maybe more specifically about what the impact to private mortgage insurance would be if the FHA was required to draw more capital?

Teresa is best for this question.

Yes, I think that as we look at that issue, with there being clearly a focus on trying to move more business to the private sector in particular -- private mortgage insurance versus FHA, and you have seen that through a number of moves that the FHA has made over the last couple of years in terms of increasing their price. We do think that if the FHA has issues in terms of not only having not reached their cushion requirement but being under the insurance -- having a negative in their insurance fund, that, that should benefit us in terms of seeing more business come our way. And also even bolster the view that private capital through mortgage insurance is a better solution going forward for low down payment loans.

Okay, thank you.

And just a follow up on the previous question about net risk in force -- is that, just to clarify, does that include the existing reinsurance contract? Or the new one that is still subject to approval?

It wouldn't be netted until the business is written and [seated].

Okay. Great. Thank you.

Jack Micenko, SIG.

Thanks.

Wondering if you could talk a little bit about transition of the mix shift from single-pay to monthly over the last year or so in the midst of some of the market share take you have been seeing?

Sure. So we have been very focused, as you know, on increasing the amount of monthly pay that we receive. And one of the things we did was, we improved our pricing on the monthlies in the summer of 2011 -- increased some of our singles pricing after that. We've also changed our incentive plan so that our sales folks are incented to bring in monthlies. And so I think you see that shift based on all the actions that we took to bring that share down.

However, our position remains that the best strategy is to have a piece of both. It's just that with the view that interest rates may finally be going up, we are positioning ourselves to do, on the margin, few less singles and few more monthlies; and we have gotten our strategy to a point where the numbers of levers we can push, including the new lever we have, which is changing sales commissions to incent product that we believe are attractive to us from time to time.

I would just add one other thing, which is that we do believe that the return on that business, the single business, is an appropriate return. And I think that is an important point as well.

Great.

And then, on past calls, we have talked about cure assumptions on that late-stage bucket and I think there were some slides. Historically, I may have overlooked them. I don't know if some of those were included -- just update your thoughts for us on what your assumptions on the cure is for that late-stage default bucket would be.

Yes, I think the ultimate cure rate with a non-payment of claims on the late stage has not changed. We have been consistent. You can see on the 12 payments or more, we are expecting a 57% gross roll rate, which means that 43% will not be submitted claims for a variety of reasons. We did see a tick up in the cure percentage coming from the 12 payments or more this quarter; but ultimately, we expect a lot of those not be paid claims for a variety of reasons that we have detailed in the past.

Okay. Thank you.

Ian Glastein, Monarch.

Hey, S.A.

Just a question to follow up on Mark's question about gross versus net risk in force. It looks like the gross total risk in force is around $35 billion and the net risk in force this quarter is around $20 billion. So it seems there's around a $15 billion difference between gross and net. I understand that $1.4 billion of that is the quota share and around $4.4 billion of that is the delinquent risk in force, but can you tell me where the other $9 billion is hiding?

Yes. Bob will.

It's going to be -- the gross to net's going to be the external reinsurance, which is not limited to the quarter share because we have Captive Reinsurance and we have Smart Home Reinsurance still outstanding. We also have the delinquent risk in force, as you pointed out. And then the third component would be internal reinsurance, where we routinely reinsure the business that we write in [leaving] guarantee with other internal and MI subsidiaries.

So does that mean $9 billion is internally reinsured as well?

It doesn't, because you're $1.4 billion on external reinsurance was only the quarter-share treaty and does not include some of the other stuff. So it's approaching that, but it's closer to $8 billion.

So $8 billion is internally reinsured?

A little less. Yes.

And can you talk a little bit about where the risk to cap is on the internal captives? So your internal reinsurance, obviously, has [compensatory] capital guidelines as well and risk limits. Can you talk about --

Well, all of the subsidiaries to which we reinsure internally meet the necessary surplus requirements in the state they are domiciled. Obviously, that is something that we pay very careful attention to. We also work with Pennsylvania, our down South states, where most of our subsidiaries are domiciled to make sure that those subs also have appropriate risk to capital ratios that are not within the Pennsylvania law but something that we arrange with them to keep the risk to capital down to the appropriate level.

Great. Thanks, Bob.

And then just a question on the projected default to claim rate -- just a follow-up. It looks like the net rate for your 12 payments and more is 47% and for pending claims is 86%. Can you help us reconcile that with the 3.9% cure during the quarter? Is it just going to take years for the 53% to cure? Or how do you see that playing out?

Part of it is -- and we've gone through this in the past -- part of it is going to be the cures, which are going to take a long time, obviously. We've talked about modification programs and situations where the borrowers will ultimately not be in a situation where there will be a foreclosure in a claim. There are also situations where foreclosures that are not submitted to us as claims; there are also the documentation issues and servicing issues that are very well-publicized that we believe will result in some of these loans not being claimed. So we do have some slides that we have begun to show you that depict the number of delinquent loans for which borrowers made payment but remain delinquent. That is a fairly significant level. The aging of the delinquent loans -- there's a lot of evidence that leads us to conclude that many of these won't become claims.

Okay.

And then just a final question -- do you expect RMAI to receive approval from Freddie Mac to continue to be able to write insurance before December 2012? It seems like they're sort of leaving you to the last minute here. Do you expect anything to happen like what happened with Magic, where they sort of forced more money from the holdco to the guaranty business?

This is Teresa.

We have started engaging in conversations with Freddy to extend the approvals for RMAI. And at this point, we don't see any reason why we wouldn't get those approvals. And I can't address the issue around whether or not there would be any additional requirements.

Keep in mind that we have shared with you our risk to capital projections for the year, so we don't anticipate crossing the 25 to 1 risk to capital limits; and the fact that we believe we continue to have very strong relationships with the GSPs as well as our regulators, which have been very helpful and instrumental in having us continue growing our business and continue to serve the housing market.

Thanks, S.A. Thanks, guys.

Howard Amster, Ramat Securities.

Congratulations on a very good quarter.

I was wondering -- do you have ability to recapture some of this reinsurance business? I remember reading that. Could you maybe elaborate?

We do, Howard. The existing transaction -- the first transaction -- we have the ability to recapture two-thirds of the business after three years. The new agreement, of which we just agreed to terms and is subject to Freddie Mac approval -- we'll disclose the terms of that when the deal is finalized.

Thank you.

(Operator Instructions)

Bose George, KBW.

Thank you. Actually, this is Ryan Ostein on for Bose.

Just one week question on denials. For the servicer that accounts for the bulk of your denials, do you use the same 50% on expectation of reinstatement for that servicer? And also, how have actual reinstatements for that one servicer trended versus your expectations?

The reinstatements for that servicer are within the history that we used to calculate the number. So, yes.

Thank you.

And to the presenters, we have no additional questions in queue.

Well, in that case, Operator, I would like to thank everybody for participating on this call, and look forward to seeing you all for our next quarter and full-year earnings call. Thanks.

Again, ladies and gentlemen, we do appreciate your participation on the call. You may now disconnect.