Radian Group Inc.
Q4 2012 Earnings Call Transcript

Published: 11 Feb 2013

[Operator:]

Ladies and gentlemen, thank you very much for standing by. Welcome to today's Radian Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded, and I would now like to turn the conference over to our host today, Emily Riley, Vice President of Financial Communications. Please go ahead, ma'am.

[Emily Riley:]

Thank you, and welcome to Radian's fourth 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 Investors section of our website at www.radian.biz. During today's call, you will hear from S.A. 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 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 2011 Form 10-K, as well as subsequent quarterly and other 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 S.A.

[Sanford A. Ibrahim:]

Thank you, Emily. Thanks to all for joining us and for your interest in Radian. Today, I will first provide a few highlights from our fourth quarter and full-year 2012 results then I will focus my comments on the priorities we set for 2012. First, how we, at Radian, continue to grow our mortgage insurance franchise and capture a larger amount of new high-quality business. Second, what we're doing to mitigate our mortgage insurance legacy losses. Third, how we are reducing our risk exposure in financial guaranty to provide an important capital support to the mortgage insurance business. And fourth, how we are positioning Radian for success as the housing market recovers and for a return to MI operating profitability this year. 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 loss for the fourth quarter 2012 of $177 million or $1.34 per diluted share. For the full-year, the net loss was $452 million or $3.41 per diluted share. At December 31, 2012, our book value per share was $5.51. The fourth quarter net loss was driven in part by an increase to our IBNR, a component of our large reserve that consists primarily of estimated denial reinstatements. Bob will discuss this impact to our incurred losses in more detail. It is also important to note that the typical seasonal default and cure patterns that we mentioned in our third quarter call, as an expectation for the fourth quarter, did not materialize, which is a positive indicator of our improving portfolio. Additionally, in January, new defaults were down 28% from January 2012; and cures were 109% of our new defaults. The January 2013 new default rate was the lowest monthly rate we have seen since December 2005. Radian Guaranty's risk-to-capital ratio was 20.8

[C. Robert Quint:]

Thanks, S.A. I'll be updating you on the P&L activity and trends for the fourth quarter of 2012, our capital and liquidity positions as of year-end 2012, and some expectations regarding 2013. The MI provision for losses was $307 million this quarter, compared to $172 million last quarter and $333 million a year ago. The increase in incurred losses compared to the third quarter is due primarily to the increased trend of denial reinstatements that occurred this quarter. Based on this experience, in the fourth quarter, we increased our IBNR reserve for future reinstatements. While the historical reinstatement rate for denials is clearly in the 50% range, as depicted on Slide 21 in the webcast slides, we have taken into account a very recent reinstatement activity and prudently increased the initial estimated denial reinstatement rate to approximately 60%. That initial 60% rate declined over a 12-month period, as the outstanding denials age and actual reinstatements occur. We will continue to monitor this rate closely in 2013. The reinstatement rate remains at 60%. No further net adjustments to reserves would be necessary over time. If the rate were to rise unexpectedly to 75%, the impact to total loss reserve as of 12/31, would have been approximately $100 million. The net increase for the total IBNR this quarter was $61 million, resulting in year-end figure of $323 million. You will see on Slide 11 that a large component of incurred losses this quarter were from the existing default line, which reflect the impact from both actual reinstatements, as well as the IBNR increases during the quarter, and the normal aging of delinquent loans. The amount in our year-end balance sheet, representing future denials and rescissions, was $455 million. The composition of the new default line continues to be at least 75% repeat default, which we consider positive. And historically, repeat defaults have had a much lower claim incident than first time default. In addition, defaulted loans moved to foreclosure at a stable rate throughout 2012 and loans submitted as claims were relatively low in the fourth quarter. Both of these items are critical to determining future paid losses. For 2013, we continue to expect a much smaller incurred loss line, driven by an estimated decline in new defaults of approximately 24%, with no material expected changes to default composition or net roll rate expectation. Paid claims in 2013 are estimated to be between $900 million and $1 billion. The 2009 and subsequent vintages continued to be profitable, and are growing as a proportion of our total business as depicted on Slide 18. Radian has written a meaningful volume of single premium business over the past few years, as we have successfully marketed the product as a competitive product to FHA. While discounted, such single premium business appears to be very profitable, with loss ratios in 2012 that are similar to those from monthly premium and other business written during the same time period. Radian Guaranty's year-end risk-to-capital ratio is estimated to be 20.8

[Sanford A. Ibrahim:]

Thank you, Bob. Before we turn to the operator, I would like to summarize 4 important points. First, we wrote more new MI business each consecutive quarter in 2012 and ended the year with $37.1 billion in NIW, a number we expect to surpass in 2013. Second, since 2008, we reduced our Radian Asset risk exposure by 71%, while paying $384 million in dividends to Radian Guaranty and releasing $425 million in contingency reserves. Our statutory surplus stands at $1.1 billion. Third, at the end of fourth quarter, our risk-to-capital ratio was 20.8

[Operator:]

[Operator Instructions] And our first question will come from the line of Douglas Harter with Crédit Suisse.

[Douglas Harter:]

You guys disclosed the combined insurance ratio, that being -- risk-to-capital ratio, sorry, of being close to 30x. Can you just tell us what type of impact that has versus the 25

[C. Robert Quint:]

Doug, this is Bob. The only risk-to-capital ratio that matters for writing new business is Radian Guaranty's, which is 20.8

[Douglas Harter:]

Great. And then, if you guys could talk about from a competitive standpoint, saw Arch Capital buying the PMI platform, and NMI getting approval to write new business. So I guess, how are you guys viewing the competitive landscape with those potential new entrants?

[Sanford A. Ibrahim:]

Doug, let me answer that. First, we believe that the entry of such large amounts of new capital shows that a lot of people believe that the Mortgage Insurance business is going to be attractive and profitable going forward, which for us already in the business is good. Second, we believe that new capital coming in and the strengthening of the mortgage insurance industry will play well with Capitol Hill because it validates the mortgage insurance business model, with policy makers who are starting to deliberate the future of the housing finance industry. Third, the new entrants announced bring the number of participants in the mortgage insurance industry to the same number that existed prior to the downturn, and we have competed with that number in the past, the major difference being, we now will be competing with the same number of players from a stronger position in the market, particularly given the number of new customers that we have added in -- added to Radian, and are continuing to bring into Radian. And finally, the mortgage insurance market could increase in the future as the FHA pulls back, and as the housing market returns to more normal level, driven by more purchase than refi. So that is a comprehensive view of the new competition and the competitive environment.

[Operator:]

Next, we will hear from the line of Craig Perry with Panning Capital.

[Craig Perry:]

I just had a couple of quick questions. The first is just in relation to your commentary about making operating profitability this year. Is there any way you could help us understand kind of, seasonally, when you would expect that profit to occur? Based on my numbers and based on kind of the January number, it appear that Q1 would be a profitable quarter. The second question, somewhat related is, any update that you care to provide to the market about the actual profitability of the new business you've written? I'm looking at Slide 18, and I think, in the past it's sort of 15% ROEs, that seems extremely conservative relative to the performance of the portfolio you've written 2009 onward. I know your competitors, Genworth, kind of have used sort of a 20% plus figure. Maybe you could just provide some commentary there? And then third and lastly, Bob, could you just help us understand the deferred tax asset of almost $1 billion? Why is it that if you achieve operating profitability this year, you wouldn't be in a position to write that backup sooner. I just know from my experience with some of the regional banks that I think it's sort of 3 or 4 consecutive quarters of profitability are enough or sufficient to cause a write back of that asset. Could you just walk us through kind of what conditions have to be met to write that asset up?

[C. Robert Quint:]

Okay, I'm glad you didn't have a fourth one. The -- okay, so as far as the first question, we've talked about the whole year achieving this marginal MI operating profitability. Certainly, the first quarter, from a seasonal standpoint, is typically our best quarter. We've gotten off to a very good start, as you can see from our January results. So we're on our way, for the first quarter. But we're really talking throughout the whole year. And as we saw the fourth quarter, which is typically, from a seasonal standpoint, the worst from a new default and cure standpoint, really wasn't that way. So that's a reflection of our changing composition and our better book of business. Your second question regarding the vintages, the 15% ROE, which is really, a modeled ROE that we use over a cycle, clearly, it appears that the 2009 and subsequent vintages from what we can see so far, will be better than that, perhaps significantly better than that. It does look like 2010 is better than 2009, and 2011 is better than that. So these books can very conceivably end up being north of 20%, perhaps significantly. The 15% that we use is really over time, over a cycle. And the third question, regarding the DTA, that's still -- the 2015 is still our expectation. There are a variety of tests that you need to go through. There are cumulative income or cumulative loss tests that need to be observed, as well as a return to profitability. So there's no hard, fast, exact rule. But based on what we can see, just a return to profitability in 2013, or even 2014, won't necessarily get to the point where we can book reversal to the valuation allowance. We'll keep updating this but at this point, some or all of the reversal in 2015 appears the most realistic.

[Craig Perry:]

Got it, okay. But it is conceivable that it could happen sooner as well depending on how things develop?

[C. Robert Quint:]

It's conceivable but we would not expect it at this point.

[Operator:]

Next we will hear from the line of Steve Stelmach with FBR.

[Steve Stelmach:]

S.A, you noted that in 2012, the book has finally started to grow again. Yet premium revenues were down in '12. When can we start to expect to see Premium revenue on an annual basis start to grow similarly as the book is?

[Sanford A. Ibrahim:]

You mean proportional to the book growth?

[Steve Stelmach:]

Yes, or just growth at all. I mean, I know there may be some sort of a lagging component also the single premium component was a higher percentage overall mix historically than it's likely to be going forward to the purchase commentary you gave. But should we start to see total premiums begin to grow year-over-year at this point?

[Sanford A. Ibrahim:]

Yes, yes. You should expect to see that. Obviously, you also need to factor in the numbers that we showed and I referenced, the impact of reinsurance.

[Steve Stelmach:]

Yes. And then just sort of dovetailing into that, you mentioned staying below 25

[C. Robert Quint:]

Yes, I think what we're looking at is for the next year, we expect to stay below. We're writing significant volumes and we think over time, the mortgage origination market is going to come back strong, the purchase market is going to come back. So it could be that the volumes of new insurance written drive the risk in force significantly higher. So that's why we're really not commenting on beyond 2013, but it's important to know that for 2013, we expect to stay below, and that will allow us to keep writing.

[Steve Stelmach:]

Okay, great. And then just lastly, on Page 18, is that call it $256 million roughly of sort of 2009 and more recent premiums earned. What percentage of that was single premiums? And what's more of the monthlies with annuity type aspect?

[C. Robert Quint:]

I don't have the exact numbers. Most of it was monthlies. So for the past couple of years, we've written -- this year, we wrote about 1/3 in singles. Now that's going to be more in the premiums written as a component than it is beyond. So it's still mostly monthlies that make up the premiums earned.

[Operator:]

We'll go next to the line of Jasper Burch with Macquarie.

[Jasper Burch:]

I guess, starting off with on the 2013 profitability guidance, could you give us a little bit more color in terms of what you're sort of the base case assuming for the change in NODs and for NIW?

[C. Robert Quint:]

Yes, Jasper, it's Bob. We -- I said that we expect a 24% decline in new defaults year-over-year. Now, January was 28%, just as a initial comparison. But that's a number we expect, and that's a number we expect to drive the incurred losses, as well as no material changes in the net roll rate assumptions.

[Jasper Burch:]

Okay, that's helpful. And that factors in changes to HARP and sort of burn off on that?

[C. Robert Quint:]

It factors in. Certainly, we expect HARP will continue this year, but there's not a material component of the expectation regarding HARP. But it does -- that does help the composition of the portfolio for sure.

[Jasper Burch:]

Okay. And then, you guys spent a little bit of time talking about the competitive landscape and sort of -- to a lot of people it looks a lot like a homogenous product -- sorry. And so how do you sort of compete, other than on pricing, to really gain market share or continue to grow relative to your competitors?

[Teresa Bryce Bazemore:]

This is Teresa, and we've been very focused on working with our customers to help them grow their business and for us to grow with them. We've been very sort of customer-focused. We've also helped with training, feedback on how the -- their portfolios are performing from a risk analytics point of view. And we believe all of that has sort of enhanced the relationship. S.A.'s talked in the past about our training. We believe that that's another thing that adds value in terms of the customer, as well as improving the portfolio of business that we're seeing from them. So we believe that that, along with the increase in the number of customers that we're working with, positions us well going forward.

[Jasper Burch:]

Okay. That's helpful. And then just lastly, S.A., you mentioned the transition from really a refi-driven market to more purchase volumes, at least relative in terms of issuance. I was wondering, is there a real difference in terms of the profitability of writing, either refi versus purchase volume in terms of either the premiums or, I guess, the persistency on the book or just the returns you would expect?

[Sanford A. Ibrahim:]

On the surface, the profitability per product is very similar, but when you take into consideration that the purchase business typically has a larger component of monthlies versus single, the composition should yield higher profitability.

[Operator:]

Next we'll hear from Jordon Hymowitz with Philadelphia Financial.

[Jordon Neil Hymowitz:]

Two quick things because most of them have been answered. First of all, you talked a 15% return on equity. If we're sitting here 2 years from now and you get the DTA back, you have equity only about $14, and then you'd be making about a $2 number on that. Is that mathematically correct, not predicting you're going to make that or not, but is that the way to think about it?

[C. Robert Quint:]

You can certainly arrive at those numbers based on the trajectory of earned premiums and then down to a normalized loss level. So you can get there but certainly, we're not providing those projections.

[Operator:]

We'll hear next from the line of Geoffrey Dunn with Dowling & Partners.

[Geoffrey M. Dunn:]

First question, just technical. For your consolidated risk-to-capital, does that include CMAC or just the Radian Guaranty umbrella?

[C. Robert Quint:]

All of the MI companies, so yes.

[Geoffrey M. Dunn:]

And then Bob, can you help us think about your paid claim guidance. Basically, it's another year of kind of flat outgoing cash flow. Can you add some color to that with respect to Freddie's directive to clean out your pending claim inventory? And in a multi-year scenario, are we basically looking at several years of billion dollar kind of claim payments to clean out the inventory, and really no acceleration at this point?

[C. Robert Quint:]

Yes, I mean, I think certainly, the component of the Freddie agreement is taken into account in our projections. And I would say claims paid will be elevated for the next several years. We do expect them to come down a little bit next year, and probably thereafter, but still remain elevated because of the prolonged timeframe, everything that we know about.

[Geoffrey M. Dunn:]

So you're looking at more, "we've already reached peak on outgoing claim payments" versus down the road, a pick up or sustaining these levels?

[C. Robert Quint:]

Yes. We think 2011 was the peak, and we think they're going to remain elevated. So they may not come down very quickly, but we don't think they're going to go up.

[Operator:]

We'll hear next from the line of Jack Micenko, I believe, with SIG.

[Jack Micenko:]

I wanted to talk first about the mix of single and monthly. I think you're down about 65-35. Where could that mix ratio go to in a more robust purchase market with the FHA increases continuing? Where was that back in sort of prior points in the cycle where you sort of switched over to purchase? And then how do we think about the ROE differential between single versus monthly pay?

[C. Robert Quint:]

So, with an increase in the purchase market, certainly, the single percentage can come down, perhaps to the 20s, which is, in our minds, that's an ideal mix. The modeled ROE for monthlies is in the mid-to higher teens. The modeled ROE for singles is in the area of low double digits. But remember, that's based on assumptions and based on a duration assumption, that if its longer, it's going to be better for the monthlies and not as good for the singles. If it's shorter, it's going to get better for the singles and vice versa. But we look at the mix combined, and we say that if it's a little bit longer than our expectations overall, the book is going to be better because we're still writing more monthlies. So we'll -- we like the mix. We'd like it to be a little bit lower than the current mix of singles, and we expect that, that will happen as the purchase market picks up.

[Jack Micenko:]

Okay. And then on the denial reinstatements, I mean, can you show us what's potentially happening there? Is there something on the servicing side that's more sort of industry-wide? Is it a single servicer anywhere tied to some of the recent settlement completion of the foreclosure of yours?

[H. Scott Theobald:]

This is Scott. It's probably not related to anything like that, but we have been working with our servicers to identify efficiencies and processing reinstatement requests. The goal is to either -- quickly, it's either finalizing denial or reinstating the claim. So it's more about getting things done sooner.

[Operator:]

Next, we'll hear from the line of Matthew Dodson with JWest.

[Matthew Dodson:]

You guys have done a great job with your risk-to-capital ratio, and you've also done a great job with the capital. Can you talk a little bit about if you take out the 13 that you have due and then the 55 that you have left, you have about 200 at the holding company. And I mean, that looks like you guys have made it to the other side, so how do you think about potentially raising capital again at the holding company? And how should we think about that?

[Sanford A. Ibrahim:]

Clearly, we believe that capital liquidity have been a critical factor for us, and we also believe that financial strength will continue to be an important differentiator going forward. Therefore, we've been, and we'll continue to evaluate opportunities for improving our capital and liquidity positions on terms that are favorable and acceptable to us.

[Operator:]

Next we'll hear from the line of Bose George with KBW.

[Bose T. George:]

Actually, first a political question. It looks like the GSE first loss resharing product is probably going to happen fairly soon. I was just curious if that's a market that you guys could potentially participate in.

[Teresa Bryce Bazemore:]

This is Teresa. There continues to be a lot of discussion around that, as well as kind of whether there would be more movement on sort of the FHFA, talking about deeper MI coverage. But right now, that seems to not be moving forward at the moment. So we don't really know what the timing is going to be in that regard. We continue to have discussions about how we can participate in the strategic plan that the FHFA has.

[Bose T. George:]

And then just, next question, you'd noted earlier that you expect 2013 NIW to be higher than 2012. Do you have an expectation for growth in insurance in force by either yourself or the industry?

[Teresa Bryce Bazemore:]

I think at this point, we don't have an estimate that we could share with you. But I think we do expect a couple of things. One is we expect the penetration for the MI product to be up, because particularly the growth in purchase transactions that we're expecting, as well as the FHA announcements. They have a price increase coming in April. And they're also planning in June to eliminate their cancellation of MI premium going forward. And we think those things will both help the MI, private MI industry, write more business. So we think at the end of the day, that will help with kind of the growth of NIW in 2013. And we feel good about sort of where January ended in that regard.

[Operator:]

And we will hear next from the line of Steve Stelmach with FBR.

[Steve Stelmach:]

Just a follow-up, I think, it's probably for Teresa. HUD put up their disparate impact language I think on Friday. One, are you guys subject to disparate impact? And two, if not, and disparate impact sort of complicates lenders' abilities for the risk-based price, does that create an opportunity for mortgage insurance?

[Teresa Bryce Bazemore:]

Steve, we're sort of just looking at that, just in the way that you are. We are certainly subject to HUD's views on disparate impact. So I don't know whether I can comment at this point about whether that creates any opportunity for us. But we certainly will be looking closely at that.

[Steve Stelmach:]

It's certainly not a negative, but neutral to maybe, possibly, positive. Is that the right characterization you would sort of give to that?

[Teresa Bryce Bazemore:]

I don't think I can characterize it any way at this point. But I would say that we've always been subject to the fair lending guidance of HUD, and so it's something that we always had an eye to. So if anything, we'll be looking to see if that -- this changes anything going forward, or gives us any opportunity going forward. But I can't say that we know that at this point.

[Operator:]

And our final question today will come from the line of Jordon Hymowitz with Philadelphia Financial.

[Jordon Neil Hymowitz:]

Sorry, one more follow up question, please. The AGO ruling last week against Flagstar, I know that was nonagency, primarily, but it is also a precedent setting, I'm just wondering, if that is reaffirmed on appeal, do judgments like that -- are they factored into your rescission guidance at this point?

[Sanford A. Ibrahim:]

We have always said in the past with similar kinds of actions, taken by financial guarantors, that really, it's apples and oranges when you compare their remedies and their contracts versus our remedies and our contracts. Our process is looking at loan by loan, getting a claim, determining whether it was underwritten properly or fraudulently or serviced properly, and doing what we have been doing.

[Jordon Neil Hymowitz:]

I understand, but they also endure statistical sampling in his ruling. So that's a little bit different. But you still have a little bit of nonagency, if I'm correct. But independent of that, wouldn't it make it easier if there's an increasing move towards accepting denials and rescissions? Wouldn't that even give you more impetus to look or there's more of a process going forward to make these guys re-look at look at some of the things that have been sent to you over time?

[Sanford A. Ibrahim:]

All I can say is we look at all of those decisions and evaluate them against our -- what we are doing. But we also understand that our business and our relationship with our servicers and lenders is on a different contractual basis.

[Operator:]

And I'd like to turn the conference over -- back over to S.A. Ibrahim. Go ahead, please.

[Sanford A. Ibrahim:]

Well, I'd like to thank everybody for participating in our call and for the robust questions. And with that, I'd like to conclude the call for this quarter. Thanks.

[Operator:]

Thank you very much. And as you heard, ladies and gentlemen, that concludes our conference today. We appreciate your participation and your using AT&T Executive Teleconference. And you may now disconnect.