KBW Mortgage Finance Conference

Transcription

1 KBW Mortgage Finance Conference Bob Quint, Chief Financial Officer June 5, 2012 NYSE: RDN 1

2 Safe Harbor Statements All statements in this presentation that address events, developments or results that we expect or anticipate may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of In most cases, forward-looking statements may be identified by words such as anticipate, may, will, could, should, would, expect, intend, plan, goal, contemplate, believe, estimate, predict, project, potential, continue or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: changes in general economic and political conditions, including high unemployment rates and continued weakness in the U.S. housing and mortgage credit markets, the U.S. economy reentering a recessionary period, the lack of meaningful liquidity in the capital or credit markets, changes or volatility in interest rates or consumer confidence and changes in credit spreads, each of which may be accelerated or intensified by, among other things, further actual or threatened downgrades of U.S. credit ratings; changes in the way customers, investors, regulators or legislators perceive the strength of private mortgage insurers or financial guaranty providers, in particular in light of developments in the private mortgage insurance and financial guaranty industries in which certain of our former competitors have ceased writing new insurance business and have been placed under supervision or receivership by insurance regulators; catastrophic events or economic changes in geographic regions, including governments and municipalities, where our mortgage insurance or financial guaranty insurance is more concentrated; our ability to maintain sufficient holding company liquidity to meet our short- and long-term liquidity needs, including in particular, repayment of our long-term debt due in February 2013 and additional contributions that may be required to support our mortgage insurance business; a further reduction in, or prolonged period of depressed levels of, home mortgage originations due to reduced liquidity in the lending market, tighter underwriting standards, general reduced housing demand in the U.S., and potential risk retention requirements established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ); our ability to maintain adequate risk-to-capital ratios and surplus requirements in our mortgage insurance business including, if necessary, our ability to write new mortgage insurance in excess of risk-based capital limitations imposed in certain states through waivers of these limitations or through use of another mortgage insurance subsidiary; our ability to continue to effectively mitigate our mortgage insurance and financial guaranty losses; the ability of our primary insurance customers in our financial guaranty reinsurance business to provide appropriate surveillance and to mitigate losses adequately with respect to our assumed insurance portfolio; a more rapid than expected decrease in the level of insurance rescissions and claim denials from the current elevated levels which have reduced our paid losses and resulted in a significant reduction in our loss reserves, including a decrease resulting from successful challenges to previously rescinded policies or claim denials, or caused by the GSEs intervening in mortgage insurers loss mitigation practices, including settlements of disputes; the negative impact our insurance rescissions and claim denials may have on our relationships with customers and potential customers, including the potential loss of business and the heightened risk of disputes and litigation; the need, in the event that we are unsuccessful in defending our rescissions or denials, to increase our loss reserve for, and reassume risk on, rescinded or denied loans, and to pay additional claims; any disruption in the servicing of mortgages covered by our insurance policies and poor servicer performance; adverse changes in severity or frequency of losses associated with certain products that we formerly offered that are riskier than traditional mortgage insurance or financial guaranty insurance policies; 2

3 Safe Harbor Statements (Continued) a decrease in persistency rates of our mortgage insurance policies, which has the effect of reducing our premium income without a corresponding decrease in incurred losses; an increase in the risk profile of our existing mortgage insurance portfolio due to the refinancing of existing mortgage loans for only the most qualified borrowers in the current mortgage and housing market; changes in criteria for assigning credit or similar ratings, further downgrades or threatened downgrades of, or other ratings actions with respect to, our credit ratings or the ratings assigned by the major rating agencies to any of our rated insurance subsidiaries at any time, including in particular, the credit ratings of Radian Group Inc. ( Radian Group ) and the financial strength ratings assigned to Radian Guaranty Inc. ( Radian Guaranty ); heightened competition for our mortgage insurance business from others such as the Federal Housing Administration (the FHA ), the Department of Veteran Affairs and private mortgage insurers (in particular, the FHA and those private mortgage insurers that have been assigned higher ratings from the major rating agencies, that may have access to greater amounts of capital than we do, or new entrants to the industry that are not burdened by legacy obligations); changes in the charters or business practices of, or rules or regulations applicable to, Federal National Mortgage Association ( Fannie Mae ) and Freddie Mac, the largest purchasers of mortgage loans that we insure, and our ability to remain an eligible provider to both Fannie Mae and Freddie Mac; changes to the current system of housing finance, including the possibility of a new system in which private mortgage insurers are not required or their products are significantly limited in scope; the effect of the Dodd-Frank Act on the financial services industry in general, and on our mortgage insurance and financial guaranty businesses in particular, including whether and to what extent loans with mortgage insurance are considered qualified residential mortgages for purposes of the Dodd-Frank Act securitization provisions or qualified mortgages for purposes of the ability to repay provisions of the Dodd-Frank Act, and the possibility that the ultimate definitions of qualified residential mortgages and qualified mortgages could reduce the size of the mortgage market and potentially reduce the number of insurable loans; the application of existing federal or state consumer, lending, insurance, tax, securities and other applicable laws and regulations, or changes in these laws and regulations or the way they are interpreted, including, without limitation: (i) the outcome of existing, or the possibility of additional, lawsuits or investigations; and (ii) legislative and regulatory changes (a) impacting the demand for private mortgage insurance, (b) limiting or restricting our use of (or increasing requirements for) additional capital and the products we may offer, (c) affecting the form in which we execute credit protection or (d) impacting our existing financial guaranty portfolio; the amount and timing of potential payments or adjustments associated with federal or other tax examinations; the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance or financial guaranty businesses or premium deficiencies for our mortgage insurance business, or to estimate accurately the fair value amounts of derivative instruments in determining gains and losses on these instruments; volatility in our earnings caused by changes in the fair value of our assets and liabilities carried at fair value, including derivative instruments, and our need to reevaluate the possibility of a premium deficiency in our mortgage insurance business on a quarterly basis; our ability to realize the tax benefits associated with our gross deferred tax assets, which will depend on our ability to generate sufficient sustainable taxable income in future periods; changes in accounting principles, rules and guidance, or their interpretation, from the Securities and Exchange Commission or the Financial Accounting Standards Board; and legal and other limitations on amounts we may receive from our subsidiaries as dividends or through our tax- and expense-sharing arrangements with our subsidiaries. For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 and Item 1A of our Quarterly Reports on Form 10-Q filed in We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date of today s investor presentation. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements made during today s investor presentation to reflect new information or future events or for any other reason. 3

4 Who Is Radian? Segment Overview Radian Group Inc., headquartered in Philadelphia, provides private mortgage insurance and related risk management products and services to mortgage lenders nationwide through its principal operating subsidiary, Radian Guaranty Inc. Total Statutory Claims Paying Resources $ 4,341.6 million (1)(2) $2,029.7 million (1)(2) (1) As of March 31, (2) Includes $1.1 billion of Financial Guaranty statutory surplus. 4

5 Mortgage Insurance Business Key Priorities Write New, Profitable MI Business Benefiting from customer diversification and competitor pull back Continue to improve statutory capital position Focus on Loss Mitigation Pay valid claims Enforce rights on poorly underwritten and serviced loans Participate in Debate on Future of Housing Finance Help shape regulatory/legislative changes Ensure favorable outcome for Private MI industry Support homeownership for first-time and low- to moderateincome borrowers Rationalize Expenses Optimize efficiencies in light of weak mortgage industry forecast 5

6 Mortgage Insurance Customer Diversification and Expansion 100% 95% 1% 2% 2% 4% 4% 4% 4% 7% 7% 8% 7% 6% 8% 7% 8% 0% 1% 1% 2% 9% 11% 13% 14% 15% 16% 15% 15% 90% 8% 85% 10% 10% 11% 10% 10% 12% 10% 9% 9% 80% 75% 70% 11% 11% 11% 11% 10% 9% 9% 11% 11% 11% 11% 9% 9% 10% 10% 65% 60% 81% 80% 80% 80% 79% 77% 78% 74% 71% 69% 67% 67% 55% 65% 64% 63% 62% 50% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Existing Customer Customer in 2008 New in 2009 New in 2010 New in 2011 New in

7 High-Quality Business Written Since 2008 Primary Mortgage Insurance 2012 Performance by Vintage as of March 31, 2012 (in millions) Vintage Premiums Earned (1) Incurred Losses (1) Net 2005 and Prior (25.2) (42.6) (9.9) (1) Represents premiums earned and incurred losses on first-lien only, before giving effect to any reduction for ceded premiums and losses recoverable through our reinsurance transactions. 7

8 Improved Composition of MI Portfolio Mortgage Insurance Primary Risk in Force % Other Vintages 37.5% % Q

9 Default-to-Claim Rate and Current Reserves Primary Loans in Default March 31, 2012 ($ in thousands) Projected Default to Claim Rate (1) Gross (2) Net Cure % During Q Reserve for Losses % of Reserve Missed Payments # % $ % 3 payments or fewer 16,178 16% 24% 22% 33.9% $169,658 6% 4-11 payments 26, , payments or more 42, ,104, Pending Claims 17, , , % 57% 48% $2,610, % IBNR 184,912 LAE and Other 72,483 Total Primary Reserves $2,867,501 (1) Represents the weighted average default to claim rate before consideration of estimated rescissions and denials for each category of defaulted loans. (2) Net of estimate of rescissions and denials. 9

10 Total Loss Reserves March 31, 2012 ($ in millions) Audited annually Reviewed quarterly Certified annually by third-party actuary $4, $3, $3,000 $2,500 $2,000 $1, , , , , ,230.9 $1,000 $ ,345.5 $ st Q 2012 Mortgage Insurance Financial Guaranty 10

11 Default-to-Claim Rate and Current Reserves Primary Loans in Default March 31, 2012 ($ in thousands) Projected Default to Claim Rate (1) Gross (2) Net Cure % During Q Reserve for Losses % of Reserve Missed Payments # % $ % 3 payments or fewer 16,178 16% 24% 22% 33.9% $169,658 6% 4-11 payments 26, , payments or more 42, ,104, Pending Claims 17, , , % 57% 48% $2,610, % IBNR 184,912 LAE and Other 72,483 Total Primary Reserves $2,867,501 (1) Represents the weighted average default to claim rate before consideration of estimated rescissions and denials for each category of defaulted loans. (2) Net of estimate of rescissions and denials. 11

12 Principal Forbearance and Forgiveness Programs Continue Retention Workout and Modification Efforts Include Fannie Mae, Freddie Mac, HAMP and Private Programs Modification Report for Servicer A Missed Payments All Retention Workout Programs 0M 1-3M 4-11M 12-23M 24+ TOTAL Number of Radian Loans in Default 604 6,611 5,269 4,497 3,566 20,547 % of Radian Loans in Modification or other Active Workout Program 73% 12% 27% 16% 12% 18% 12

13 Principal Forbearance and Forgiveness Programs Continue Servicers Beginning to Identify Loans Eligible for Principal Forgiveness May 7, 2012 Bank of America has started sending letters to thousands of homeowners in the United States, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. May 8, 2012 If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25 percent of the borrower s gross income 13

14 Delinquent Borrowers Continue to Show Commitment 30% Made at Least One Monthly Payment in Q Payment Rate 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Made at least 1 Payment in 12Q1 (Mods Included) Primary Only Status at Start of Qtr 14

15 Delinquent Borrowers Continue to Show Commitment Nearly 70% of New Defaults in Q Were Previously Delinquent 15

16 Oldest Delinquent Loans Continue to Languish and Age Total Primary and Pool Defaults 12 Payments or More Past Due as of April 30, % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 43.3% 29.7% 19.5% 7.5% 12-23M 24-35M 36-47M 48M+ 16

17 Financial Guaranty Key Priorities Provide capital and liquidity support to mortgage insurance business Manage and mitigate risk exposure through commutation and other risk reduction Evaluate and consider new business solutions to create shareholder value 17

18 Financial Guaranty Net Par Outstanding by Product $44.6 billion as of March 31, 2012 ($ in billions) Reinsurance Direct Public Finance Direct Structured 3/31/ /31/2011 3/31/

19 Financial Guaranty CDO Portfolio $26.1 billion Net Par Outstanding as of March 31, 2012 ($ in billions) CDO-Corporate Assets $21.1, 80.6% CDO-Trust Preferred, $1.9, 7.3% CLO-Corporate Loans <$0.01, <0.01% Second-to-Pay CLO Corporate Loans, $0.6, 2.3% Assumed CDOs $0.2, 0.8% CDO of ABS $0.5, 1.9% CDO-CMBS $1.8, 6.9% CDO-Corporate Cash Flow, <$0.1, 0.2% Total CDO Exposure written on a direct basis is $25.9 billion (99.2% of CDO exposure) Total CDO Exposure within the assumed portfolio is $0.2 billion, representing 27 policies (0.8% of CDO exposure) 19

20 Financial Guaranty Corporate CDO Portfolio Credit Exposure to Direct Corporate CDOs as of March 31, 2012 ($ in billions) Year of Scheduled Maturity (1) Number of CDO Contracts / Policies Aggregate Net Par Exposure Initial Average # of Sustainable Credit Events (2) (6) Current Average # of Sustainable Credit Events (3)(6) Minimum # of Sustainable Credit Events (4) (6) Average # of Current Remaining Names in Transaction (5) Total 53 $21.1 (1) No directly insured corporate CDO transactions are scheduled to mature in 2015 or All of our directly insured corporate CDO transactions are scheduled to mature on or before December (2) The average number of sustainable credit events at the inception of each transaction. Average amounts presented are simple averages. (3) The average number of sustainable credit events determined as of March 31, Average amounts presented are simple averages. (4) The number of sustainable credit events for the one transaction with the fewest remaining sustainable credit events scheduled to mature in the year of scheduled maturity indicated. (5) The current average number of different corporate entities in each of the transactions. (6) The number of sustainable credit events represents the number of credit events on different corporate entities that can occur within a single transaction before we would be obligated to pay a claim. It is calculated using the weighted average exposure per corporate entity and assumes a recovery value of 30% to determine future losses (unless the parties have agreed upon a fixed recovery, then such recovery is used to determine future loss) or in the case of a defaulted reference entity pending settlement we use market indicated recovery levels. 20

21 Holding Company Liquidity Position As of March 31, 2012 Approximately $350 million of cash or marketable securities available to Radian Group Payment of corporate expenses and interest on long-term debt expected to be fully reimbursed through expense-sharing arrangements with subsidiaries $104 million of public debt matures in 2013 $250 million of public debt matures in three years in June 2015 $450 million of convertible debt matures in 2017 Potential use of cash to settle IRS tax issue and to provide additional capital support for MI subsidiaries 21

22 Radian Guaranty Statutory Capital Position As of March 31, 2012 Risk-to-capital (RTC) ratio of 20.6:1 as of March 31, RTC projected to exceed 25:1 in second half of 2012 absent additional capital support Fannie Mae and Freddie Mac approved use of RMAI as an eligible mortgage insurer Radian Asset provides capital support to Radian Guaranty -- therefore changes in the statutory capital position of both businesses impact Radian Guaranty s RTC ratio Objective is to preserve Holdco liquidity while continuing to write new MI business Continue to explore alternatives to strengthen RTC including reinsurance, commutations and investment gains In April, Radian Guaranty entered into external quota share reinsurance agreement on newly written business; expected to reduce net RIF by an estimated $ $1.6 billion by year end 2012 Further reductions of exposure in Radian Asset portfolio could benefit risk-to-capital position of Radian Guaranty 22

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