Radian Group Inc. · NYSE:RDN
Radian — Barclays Global Financial Services Conference 2019
40 slides from Radian's conference presentation, Sep 10, 2019
Slide 1: An Investment Thesis in Radian
An Investment Thesis in Radian Barclays Financial Services Conference NYSE: RDN September 10, 2019
Slide 2: Safe Harbor Statements
Safe Harbor Statements All statements in this presentation that address events, our ability to successfully execute and implement our capital legal and regulatory claims, assertions, actions, reviews, developments or results that we expect or anticipate may plans, including our risk distribution
Slide 3: Table of Contents
Table of Contents 1. Who is Radian? 2. Investment Thesis 3. What is Private Mortgage Insurance? 4. The Three Pillars of Private MI 5. Common Misconceptions about Private MI 6. Radian is Unique Among the Private MIs 3
Slide 4: Who is Radian?
Who is Radian? NYSE: RDN Radian Mortgage Insurance promotes responsible and sustainable homeownership and allows lenders to offer affordable mortgage financing options to prospective homeowners. Our products also facilitate the sale of low-down payment mortgages in the secondary market and enable ho
Slide 5: Investment Thesis
Investment Thesis Risk Value Distribution Represents Strong Actively Aggregates, Relative Value for Manages, and Returns on Capital Distributes Risk Industry Uniqueness Strong Industry, Radian is Unique Economic and Among Peers Regulatory Backdrop 5
Slide 6: What is Private Mortgage Insurance?
What is Private Mortgage Insurance? Private mortgage insurance (Private MI) helps potential homeowners, often first-time homebuyers, obtain a mortgage by reducing the size of their required downpayment, thereby reducing the risk to the investor. WITHOUT Mortgage Insurance WITH Mortgage Insurance For
Slide 7: What is Private Mortgage Insurance?
What is Private Mortgage Insurance? For more than 60 years, Private MI has provided a first layer of credit protection against mortgage credit losses, helping to reduce risk in the mortgage financing system through private capital versus taxpayers and the federal government. Congress established the
Slide 8: Private MI is a specialized industry with high barriers to entry
Private MI is a specialized industry with high barriers to entry Formidable Capital Requirements State and GSE Regulations PMIERs is a risk-based capital framework that A private MI company requires a minimum level Operational typically needs to obtain of assets to be held in Large Initial Complexit
Slide 9: The Three Pillars of Private MI
The Three Pillars of Private MI Today’s private MI industry is strong, stable and reliable, supported by three key pillars Modern Private Mortgage Insurance Pillar I: Strengthened post- Pillar II: Risk-based Pillar III: Managed crisis mortgage origination capital requirements risk exposure landscape
Slide 10: Pillar I: Strengthened Post-Crisis Mortgage Origination Landscape
Pillar I: Strengthened Post-Crisis Mortgage Origination Landscape Private MI covers a specific segment of the total mortgage market. Today, loans covered by Private MI are very high quality, primarily due to the greater risk discipline of the Private MI providers and the loan requirements for a Qual
Slide 11: Pillar I: Strengthened Post-Crisis Mortgage Origination Landscape
Pillar I: Strengthened Post-Crisis Mortgage Origination Landscape The Private MI industry has significantly evolved over the past several years… Past Present Exposure-based Capital (Statutory) Risk-based Capital (PMIERs) Less granular, relatively static pricing More granular, risk-based and dyna
Slide 12: Pillar II: Risk-Based Capital Requirements
Pillar II: Risk-Based Capital Requirements Over the years, Private MI capital requirements have evolved from a “risk-neutral” to a risk-based capital framework. PMIERs 2.0 – loan-level, risk-based PMIERs 1.0 (~14:1 risk-to-capital ratio) – loan-level, risk-based State Regulations (25:1 risk-to-capit
Slide 13: Pillar III: Managed Risk Exposure
Pillar III: Managed Risk Exposure Private mortgage insurance covers only a portion of Assuming a $240,000 the risk associated with a mortgage loan. Home Purchase Borrower Equity 5% of Purchase A typical home purchase is made up of borrower and lender Price = $12,000 provided funds. For conforming lo
Slide 14: Pillar III: Managed Risk Exposure
Pillar III: Managed Risk Exposure Risk distribution is a means to optimize our retained exposure Factors considered when Radian expects to continue to and benefits Radian in a number evaluating risk distribution leverage multiple forms of risk of ways: opportunities and structures: distribution: D
Slide 15: Pillar III: Managed Risk Exposure
Pillar III: Managed Risk Exposure The Impact of Radian’s Reinsurance Programs on PMIERs Minimum Required Assets (MRA), by Vintage $ in millions, as of June 30, 2019 64.4% $1,000 62.3% $800 0.0% 17.1% $600 9.1% $400 17.7% 14.3% $200 20.2% 28.9% 0.0% 0.0% 6.4% $0 <2009 2009 2010 2011 2012 2013 2014 20
Slide 16: Pillar III: Managed Risk Exposure
Pillar III: Managed Risk Exposure Radian covers its new business via various risk distribution structures that reduce volatility by protecting against stress loss events. These risk distribution structures have been sized to achieve significant credit under the PMIERs. 2018 Radian Monthly Premium Bu
Slide 17: Common Misconceptions about Private MI
Common Misconceptions about Private MI There are many misconceptions regarding the Private MI industry and the market we serve. The impact of interest rate fluctuations, including mortgage rates, on Private MI The impact of the total mortgage origination market on Private MI volume Fluctuations in h
Slide 18: Common Misconceptions: Interest Rate Impact
Common Misconceptions about Private MI The impact of interest rate fluctuations, including mortgage rates, on Private MI Modest changes in interest rates have a limited impact on affordability, and rates are still historically low. Interest Rate Trend 12% 10% 8% 6% 5% 4% 2% 0% 1990 1991 1992 1993 19
Slide 19: Common Misconceptions: Origination Market Impact
Common Misconceptions about Private MI The impact of the total mortgage origination market on Private MI volume While the total mortgage origination market has experienced small declines in recent years, purchase mortgage activity is the primary driver of new Private MI. Purchase transactions are 3-
Slide 20: Common Misconceptions: Origination Market Impact
Common Misconceptions about Private MI The impact of the total mortgage origination market on Private MI volume Purchase originations account for 84% of new Private MI since 2013 Total Private MI NIW has grown by 66% from 2013 through 2018, with purchase MI growing 118% during this time While refina
Slide 21: Common Misconceptions: Home Prices and First-Time Buyers
Common Misconceptions about Private MI Fluctuations in home prices affect a first-time homebuyer’s plans to own a home Modest changes in home prices also have a limited impact on the demand for Private MI, which typically comes from first-time homebuyers. These homebuyers generally use a low downpay
Slide 22: Common Misconceptions: The Value of the Insured Portfolio
Common Misconceptions about Private MI The value of the insured portfolio Our largest asset is not on our Balance Sheet. Insurance In Force: Off Balance Sheet Value Generator Insurance in Force (IIF) is the largest earning “asset” for Radian Future Earnings The estimated undiscounted GAAP earnings O
Slide 23: Common Misconceptions: The Value of the Insured Portfolio
Common Misconceptions about Private MI The value of the insured portfolio Economic Value is an economic concept utilized for managing our pricing, portfolio management and has some application for estimating Concept used in other insurance lines, mostly life insurance (“Value of In Force”) enterpris
Slide 24: Future Earnings: $2.5 Billion or $11.80 per share
Common Misconceptions about Private MI The value of the insured portfolio Each vintage of NIW is expected to generate a significant amount of future earnings. For example, a $50B vintage of NIW (with assumptions as shown below) is expected to generate $725M in lifetime GAAP net income. Total lifetim
Slide 25: Economic Value: $1.3 Billion
Common Misconceptions about Private MI The value of the insured portfolio In addition to discounted Future Earnings, our Economic Value framework considers the cost of holding required PMIERs capital to support the outstanding risk in force. Total lifetime cost of capital Estimating Cost of Capital
Slide 26: Portfolio Performance in a Stress Scenario
Common Misconceptions about Private MI How the portfolio will perform in a stress scenario Home Price Index Both Future Earnings and Economic Value are 300 sensitive to economic assumptions, primarily house 250 price appreciation, unemployment, and interest rates. 200 150 As shown at right, Future E
Slide 27: Private MI Valuation Relative to Other Financial Sectors
Common Misconceptions about Private MI How Private MI company valuations compare to other financial sectors Private MI provides attractive valuation relative to other financial sectors. Price / Book Value Price / NTM EPS 14.1x 1.69x 1.43x 1.23x 9.5x 9.8x 1.08x 7.5x MI P&C Banks MI P&C Banks Source:
Slide 28: Radian is Unique Among the Private MIs
Radian is Unique Among the Private MIs Our broad set of mortgage and real estate capabilities enable us to be an important and trusted business partner to mortgage market players Solutions Across the Mortgage and Real Estate Spectrum Real Estate Asset Management Real Estate Data and Analytics Single
Slide 29: Radian is Unique Among the Private MIs
Radian is Unique Among the Private MIs Our established relationships span the mortgage and real estate ecosystem providing valuable strategic insights into market needs 1,200+ 300+ 35,000+ Mortgage Mortgage and Real Estate Lenders Real Estate Brokers and Investors Agents These relationships provide
Slide 30: Creation and Management of Excess Capital
Radian is Unique Among the Private MIs Creation and Management of Excess Capital MI Returns OpCo / Organic & Inorganic Growth PMIERs Risk Cushion Excess Distribution Capital & HoldCo Other Investment Consolidated Risk Income GAAP ROE HoldCo Pricing Excess Margin Capital Delevering Hurdle Rate Return
Slide 31: Statutory Capital
Radian is Unique Among the Private MIs Statutory Capital Common stock and paid in capital without December 31, December 31, March 31, June 30, further action will stay flat 2017 2018 2019 2019 $ in millions RIF, net $ 36,793.4 $ 40,711.3 $ 41,283.5 $ 42,154.0 Surplus Note may be redeemed Common Stoc
Slide 32: Radian is Unique Among the Private MIs
Radian is Unique Among the Private MIs For more than 40 years, Radian has been a solid business partner. We demonstrated resilience and strength during the worst economic downturn in recent history. And today, we are a best-in-class mortgage and real estate risk management company that stands out fr
Slide 33: An Investment Thesis for Radian
An Investment Thesis for Radian Radian is a company with strategic focus, business momentum, customer relationships and a high-quality insurance portfolio that has achieved strong year-over-year growth. $231 Insurance in Force ($B) Adjusted Net Operating Return on Equity (1) 19% 9% growth from prior
Slide 34: Investment Thesis
Investment Thesis Risk Value Distribution Represents Strong Actively Aggregates, Relative Value for Manages, and Returns on Capital Distributes Risk Industry Uniqueness Strong Industry, Radian is Unique Economic and Among Peers Regulatory Backdrop 34
Slide 35: Radian
radian
Slide 36: Appendix: Consolidated Non-GAAP Financial Measures Reconciliations
Appendix Consolidated Non-GAAP Financial Measures Reconciliations 36
Slide 37: Use of Non-GAAP Financial Measures
Use of Non-GAAP Financial Measures In addition to the traditional GAAP financial measures, we have presented “adjusted of our investments that are classified as trading or equity securities. These valuation pretax operating income”, “adjusted diluted net operating income per share,” and adjustments
Slide 38: Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income
Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income 2019 2018 ($ in thousands) Q2 Q1 Q4 Q3 Q2 Consolidated pretax income $209,545 $216,136 $176,485 $184,688 $180,571 Less reconciling income (expense) items: Net gains (losses) on investments and other 12,540 21,913 (11,70
Slide 39: Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share
Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share 2019 2018 Q2 Q1 Q4 Q3 Q2 Diluted net income per share $0.78 $0.78 $0.64 $0.66 $0.96 Less per-share impact of reconciling income (expense) items: Net gains (losses) on investments and other 0.06 0.10 (0.
Slide 40: Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity
Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity 2019 2018 Q2 Q1 Q4 Q3 Q2 Return on equity (1) 17.8% 19.0% 16.4% 17.4% 26.7% Less impact of reconciling income (expense) items: (2) Net gains (losses) on investments and other financial 1.3 2.4 (1.4) (0.5) (0.9) instruments
Radian Group — Barclays Global Financial Services Conference 2019 on 6ix