S.A. Ibrahim was no stranger to Radian Group Inc. when he stepped in as CEO last year.
He wasn’t green about the mortgage insurance business, and he didn’t need a cheat sheet to understand the company’s products. In fact, he knew Radian’s solutions on a different and more intimate level than did many long-time associates.
That’s because before he was named chief executive officer, Ibrahim was a customer.
“I was one of Radian’s major relationships on the mortgage insurance side of the business,” says Ibrahim, who was president and CEO of GreenPoint Mortgage Funding in San Francisco when former Radian CEO Frank Filipps announced his retirement and approached Ibrahim about taking over his position.
Ibrahim already had a good idea of what he would be getting into if he pursued the opportunity at the $1.3 billion company.
“I knew from a distance it was an innovative company with outstanding people,” he says. “I knew the company was financially strong a $5 billion (market cap), highly rated company from a credit-agency perspective and highly respected by its customers.”
When Ibrahim accepted the position and was named CEO of Radian in May 2005, he found what he expected: a business tethered to a strong legacy of success. The challenge for Ibrahim was fixing a company that wasn’t broken.
“It is more difficult to add value to a company that is not experiencing problems,” he says.
But the mortgage insurance industry had evolved drastically, and Ibrahim knew that tradition and reputation weren’t enough to help Radian maintain its edge. The company’s executives had discussed ways to capture more business, but Ibrahim needed to speed up the process.
“I found a company that was strong, but I also found a company that was in transition,” says Ibrahim. “The industry was changing so rapidly, and Radian needed to respond to those changes and reposition itself. We had to close the gap between what the customers want in terms of broader solutions and what Radian has historically offered.”
The solution was twofold: redirect what business the company went after and create a hybrid product that had the best attributes of both Radian’s financial guarantee and its mortgage insurance businesses. Ibrahim served as a catalyst to bring these changes into being, and after one year as CEO, he is guiding a more profitable business with a more competitive suite of alternative products.
Before Ibrahim joined Radian, the company had switched its growth focus from mortgage insurance to financial guarantees to diversify and protect itself from challenges on the mortgage side of the business.
“Our strategy at the time was to view financial guarantees as the growth engine for Radian,” Ibrahim says.
The plan was to build the business to compete with the largest companies in the market and go after big business deals, but it didn’t work out as planned.
“We competed head-to-head for large customers and ended up being a reinsurer as opposed to a direct insurer,” says Ibrahim.
Basically this means Radian insured the large companies, not clients directly.
“You can grow rapidly as a small player by doing reinsurance as opposed to direct business, and you can go for growth,” Ibrahim says. “But that means you add people, add expenses and focus on reinsurance.”
Ibrahim reconsidered the old strategy. Rather than relying on financial guarantees as a growth engine, he thought Radian should shift gears.
“We said we will place profit and proven credit above growth,” says Ibrahim. “Instead of being large, we need to be right-sized. We don’t want to play in the same space with (the big) players. We want to focus on unique market segments where we can be successful as a (smaller) player and make attractive returns.”
That required stepping away from reinsurance, emphasizing expenses and targeting segments in public finance and the structural side of financial guarantees. Radian needed to capture many smaller-scale customers rather than compete against the big guys for a few large clients.
So Radian stopped pursuing big business deals and instead went after opportunities where, for the most part, it doesn’t compete head-to-head with the larger players in the market. It went after a strategy that made it a big fish in a small pond, rather than the opposite.
“By being smaller, we can close more smaller deals while the big players focus on large deals,” he says. “There is nothing that illustrates our success more than the numbers.”
In 2005, the company wrote 71 percent more deals than it did in 2004.
A shifting marketplace
Ibrahim knew that to maximize Radian’s potential, he had to create products that filled a market demand.
Until recently, a standard mortgage required insurance for those who put less than a 20 percent down payment on the loan. Radian provides private mortgage insurance to fill this need, but Ibrahim knew there were more opportunities in the market.
“Historically, secondary markets penalized [lenders] for not having mortgage insurance, and there were few alternatives,” he says. “Radian had a captive market.”
Now lenders are selling loans without insurance and opting to mitigate risk in other ways, undercutting Radian’s potential business.
“The most significant factor that has reduced the demand for mortgage insurance has been the advent of the piggyback loan,” Ibrahim says.
A piggyback loan is a second mortgage given at the time of a home purchase or refinance that allows someone to buy a home with less than a 20 percent down payment but without private mortgage insurance. In most cases, 80 percent of the home’s value is financed through the primary mortgage, 10 percent through the second mortgage and 10 percent is provided by the buyer. It requires a double mortgage payment, but the second payment, unlike insurance, is tax deductible.
These loans and other alternative financing methods were becoming increasingly popular with buyers.
“I had firsthand experience on how customers found it more attractive in some cases to get solutions other than mortgage insurance,” Ibrahim says. “My background allowed us to more confidently proceed with developing a strategy that would position Radian as more than just a mortgage player.”
Ibrahim knew Radian must move quickly to capture secondary market opportunities. “Radian had always been more innovative than its peers and had already embarked on a strategy (to provide mortgage insurance alternatives),” he says, though acknowledging that the six-month search for a CEO prior to his joining the company had stalled such initiatives.
The initiatives required combining elements from both the mortgage insurance business and the financial guarantee business.
Many lenders were bypassing traditional mortgages in favor of alternatives. But some of these alternatives were offered by the financial guarantee side of Radian’s business.
The two sides of the business weren’t working together, and Ibrahim knew the company could win customers by blending the two sides.
“We are unique because we are involved in both businesses, so we can design solutions for mortgage risk protection that come from the insurance side or from the financial guarantee side,” he says.
Radian created hybrid mortgage solutions that combine the credit enhancement qualities of guarantees and the risk mitigation of mortgage insurance. Fusing Radian’s two businesses was the solution to creating that alternative Ibrahim sought as a customer.
“We position ourselves to offer customers a variety of solutions that are not just limited to the traditional mortgage insurance business,” he says. “We structured alternatives that are based more on the capital market approaches (practiced) in the secondary market.”
Radian still does a strong business in traditional mortgages, and Ibrahim says it will continue to do so. But this hybrid product mix is a third arm, and it allows the company to reach for opportunities it couldn’t satisfy with the same old products.
The results thus far have been encouraging. At the end of 2005, net income was $522.9 million, up from $518.7 million in 2004. Diluted net income per share increased from $5.33 in 2004 to $5.91 in 2005.
While Ibrahim points to Radian’s numbers to prove the success of his strategy, his plan would have flopped without buy-in from employees. The key to getting buy-in is to get employees excited about the change while allaying their fears about the new direction the company was taking. So he took to the hallways and constantly talked to people so they heard his message first-hand.
“You have to get people energized and you have to clearly articulate the vision of the company so everyone can respond to it,” he says. “You cannot make change happen until you have a personal connection with employees. The bigger the change, the greater that connection has to be.”
Even though he’s on the inside now as CEO, Ibrahim still puts himself in the shoes of his other customers shareholders.
“You can’t have a CEO who views this business as his personal piggy bank,” he says. “This is the shareholders’ company, and I have to do everything in their interest.”
How to reach: Radian Group Inc., www.radian.biz or (800) 523-1988