Radian Group Inc.

Welcome to the Radiant First Quarter 2020 Earnings Call. My name is Jenny, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Senior Vice President of Investor Relations, John Damian. You may begin.

Thank you. and welcome to Radian's first quarter 2020 conference call. Our press release which contains Radian's financial results for the quarter was issued last evening and is posted to the investors section of our website at www.radian.biz. This press release includes certain non-GAAP measures which we will be discussed during today's call including adjusted pre-tax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity, and real estate adjusted EBITDA. A complete description of these measures and the reconciliation of 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 a related non-GAAP measure This morning, you will hear from Rick Thornberry, Radian's Chief Executive Officer, and Frank Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. Due to the current environment, all of our speakers this morning are remote. I would ask that you please excuse any sound quality or technical issues that may arise during the call. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. For discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2019 Form 10-K as updated in our quarterly report on Form 10-Q for the first quarter of 2020 and subsequent reports filed with the SEC. These are also available on our website. Now, I would like to turn the call over to Rick.

Thank you, John, and good morning. Thank you all for joining us today and for your interest in Radian. I am pleased to share with you the results of an excellent quarter for our company. These results are testament to the strength of our business model and the power of one Radian unified team. While the focus of today's call is on the first quarter of 2020, we recognize the primary interest is on how the COVID-19 pandemic will impact our business going forward, and I plan to share our latest thoughts and insights. Our goal is to provide you with the best information we have available. Before I begin, I want to take a minute to thank our team for the incredible resilience and commitment they have demonstrated throughout this time. Our business continuity plans were in place, our technology infrastructure was ready, and our employees migrated to a work-from-home model in mid-March seamlessly without missing a beat. During this unexpected and unprecedented environment, our team has continued to operate effectively at a very high level with minimal disruption to our businesses or the services we provide to our customers. I'm very proud of how our entire team at Radian has responded to the challenge. Let's start with our first quarter results. I'm pleased to report another excellent quarter for our company with a focus on several key highlights. We reported net income of $140.5 million or 70 cents per share. Adjusted pre-tax operating income was $204.6 million and adjusted diluted net operating income per share was 80 cents. Return on equity was 14.2% and adjusted net operating return on equity was 16.3%. For our mortgage segment, we wrote $16.7 billion of NIW in the first quarter and which helped grow our primary insurance workforce to $241.6 billion. For our real estate segment, we grew revenues to $28.6 million, a 24% increase compared to the first quarter of 2019. Following the sale of Clayton in the first quarter, we've narrowed our focus to growing our title, valuation, asset management, and real estate services businesses. Frank will provide additional details on the quarter and our financial position. I want to turn now to the mortgage and real estate market environment. There's no doubt that we are going through an unprecedented time in our country and across the globe. It is too early to predict the full impact that the COVID-19 pandemic will have on our customers and our company. But it remains clear that the economic fallout will have significant impact on the housing finance and real estate markets. Given the current environment, we expect to see a slowdown in purchase loan volume across the mortgage market. However, given the overall low level of rates, we are seeing a significant increase in mortgage finance clients, which will result in lower persistency across our insurance portfolio. The impact of the pandemic, including federal, state, and local requirements that have been put in place, has had a major effect on many industries and businesses and their employees, resulting in a dramatic increase in unemployment rates. With the combination of increased unemployment and the mortgage relief opportunity provided by the CARES Act mortgage forbearance programs, we expect industry-wide mortgage defaults to increase significantly during the second quarter and in future periods. These forbearance programs are designed to support borrowers during this temporary hardship, help them remain in their homes, which is clearly a positive for our company and our industry. While entering these forbearance programs will not impact a borrower's credit, Any loan that has missed two payments technically constitutes a default in our portfolio regardless of whether those payments are missed because of forbearance. Therefore, we'll see an increased number of reported mortgage defaults in our insured portfolio which will drive an increase in PMIR's capital to be held against those loans. I will address PMIR's capital in more detail shortly. Given that we are early in the cycle, it's important to remember that the absolute level Timing and duration of those defaults are difficult to predict. I believe it is very important to highlight that this economic crisis was led by a global health crisis. The important point is that unlike the last financial crisis, which was led by housing, we entered this economic downturn with a strong and healthy housing market in terms of demand, supply, home values, and mortgage underwriting and servicing standards. In addition, we believe that many borrowers are in a more sustainable homeownership position during this cycle where they have built up significant equity in their home. We expect that this will better insulate the mortgage insurance industry from claims and ultimate losses. In response to the COVID-19 environment, we've taken several actions related to our business operations. Our highest priority has been on protecting our people and managing the continuity of our business operations. As I mentioned, we activated our business continuity program in mid-March to enable our employees to safely work virtually from home, which has gone smoothly. And it's important to note that we made this transition very quickly in a time when our businesses are extremely busy, a remarkable team effort. From a customer and business partner perspective, we've been focused on staying connected through virtual tools, phone calls and web meetings, rather than in person, which has proven to be highly effective and very successful. From an MI pricing and risk management perspective, we've increased our risk-based pricing and have made adjustments to our underwriting guidelines to account for the increased risk and uncertainty in the market today. Based on the dynamic nature of our radar rates pricing model, we were able to move quickly to align our pricing to the new environment and support our customers with competitive rates. Despite these sudden and unexpected changes in our business environment, We have evaluated and aligned our business with the temporary underwriting and servicing guidelines announced by the GSEs, which we believe are appropriate and constructive. We remain highly focused on maintaining our strong relationship with the servicers of our insured loans. We are closely monitoring how they navigate through the dramatic increase in defaults and prepare to resolve these defaults through various investor and borrow workout models. In addition to the regular communication and dialogue that we maintain with the GSEs and servicers, We are also working on enhanced reporting and benchmarking related to the most recent forbearance programs. Given the current environment, there's clearly uncertainty related to the forecast for mortgage industry activity and volume. But based on what we know today, including a strong NIW commitment pipeline, we expect to write new MI business in 2020 of more than $60 billion. In our real estate businesses, we are continually refining our service delivery models to adjust to the social distancing requirements, including how property valuations are completed and how real estate transactions are closed. Our ability to leverage our data, analytics, and technology platforms, combined with our team's ability to quickly respond innovatively, have been well received by our customers. Overall, I'm proud to say our businesses are operating well. Well, with strong momentum during this unprecedented time. Given today's macro environment and the expected increase in defaulted loans, our capital position is critical. At Radian, we have remained focused on optimizing our capital position, enhancing our return on capital, and increasing our financial flexibility in order to address any volatility in market and economic cycles. As the economic impact of COVID-19 became more uncertain, We suspended our share repurchase program as of March 19th. At March 31st, Radian Group maintained a strong capital position with $648 million of available liquidity. We also have a $265.5 million credit facility, which we extended this month through January 2022. We are focused on a couple of key capital management factors, a near-term increase in our PMIR's minimum required assets from growing COVID-19 forbearance defaults and estimating the longer-term potential claims and losses that may ultimately result from these defaults. The PMIR's capital requirements implemented after the financial crisis provide a capital structure built to withstand an extreme stress scenario. With regards to our current PMIRES position, rating guarantee available assets under PMIRES were approximately $4.1 billion at March 31st, resulting in a cushion of approximately $1.1 billion, or 38% above our minimum required assets. I want to highlight that our minimum required assets were reduced by $1.6 billion at March 31st, as a result of the 68% of Radian Guarantee's primary mortgage insurance risk and force that is subject to some form of risk distribution through the reinsurance and capital markets. In evaluating our PMIRES minimum required assets, it's important to note that COVID-19 is treated under PMIRES as a FEMA-declared major disaster event, and therefore the PMIRES capital charge for loans defaulting during this event including those in a forbearance plan is reduced by 70% in recognition that these defaults are expected to have a higher likelihood of curing following the event. To date, all states in the District of Columbia have been designated FEMA-declared major disaster areas, so this capital reduction is now being applied nationwide. You may read more about this criteria in our assumptions in our 10-Q, which was filed last evening and is available on our website. Based on the most recent MBA survey, approximately 6% of GSE mortgages are in forbearance. We do expect a larger percentage in forbearance for loans that we insure, where the LTV is 80% and above. Although the ultimate level of PMIR's capital requirements related to the COVID-19 forbearance defaults is difficult to predict, based on our current projections for our financial position as of June 30, 2020, We have the consolidated resources to support a default rate as of June 30, 2020 of up to approximately 25% of our estimated mortgage insurance portfolio. This is based on our PMIR's cushion and our resources available at our holding company as shown on webcast slide 19. Turning to the estimation of potential claims and losses, it's important to remember that that private mortgage insurers do not pay a claim until title to the property is transferred, primarily through foreclosure. Whether a default ultimately will result in a paid claim will depend upon a variety of factors, including the depth and breadth of the macroeconomic decline resulting from the COVID-19 pandemic and the potential positive impact of the government and investor programs put in place to support borrowers. We believe that government programs implemented through the CARES Act, including financial assistance through the taxpayer stimulus and increased unemployment benefits, mortgage forbearance programs and loss mitigation workout options, and the suspension of foreclosures and evictions, serve to align our industry to a common goal of supporting borrowers through this temporary hardship and helping them remain in their homes. Given that we expect a timeline for developing losses and paying claims will span multiple years, Thank you for joining us. We continue to write new business today, supporting our customers and their borrowers, and we expect to continue to write through the cycle, leveraging our strong management discipline to build economic value and achieve our targeted risk-adjusted returns. The steps we have taken over the past few years to prepare for an economic downturn, such as improving our debt maturity profile, leveraging economic value to construct our portfolio, proactively managing our customer relationships, Implementing greater risk-based granularity into our pricing and increasing our use of risk distribution strategies to lower the risk profile and financial volatility of our mortgage insurance portfolio, combined with building our PMIRS cushion and rating group liquidity, have strengthened our capital and financial position and positioned us to navigate this unprecedented environment. Now I would like to turn the call over to Frank for details of our financial position.