Radian Group Inc (RDN) 2003 Q1 法說會逐字稿

Good morning. My name is Wes and I'm your conference facilitator this morning. At this time I would like to welcome everyone to the Radian Group First Quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Mona Zehandelar, Vice President of Investor Relations. Miss Zehandelar you may begin.

Good morning and thank you for joining us today. With me on the call are Frank Filipps, Roy Kasmar, Bob Quint, Martin Kamarck and Howard Yaruss. Before I turn the call over to Frank let me remind you that today's conference call will contain statements that are forward looking. As you know, these statements are based on current expectations that are subject to risk and uncertainty. Radian's actual results may differ materially from those expressed or indicated by forward-looking statement. Factors that can effect Radian's performance are described in our recently filed 10k. I will now turn the call over to Frank Filipps, Chairman and CEO of Radian.

Thank you, Mona and thank you all for joining us. I would like to begin as usual with an overview of the quarter and touching on some strategic highlights and then I will turn it over to Bob who will give a more detailed look into the financial results and obviously then we'll open everything up for questions. For those of you who have logged on to our website, we have posted a number of slides this quarter. I think we are up to about 20. We'll try to cover much of the information that's presented to you in those slides. However, we will not be speaking to each slide. So, therefore, look at the slides, ask us questions later but we will touch on much of the information as contained there in.

First, I think it was a very strong quarter for Radian. I think that is seen in the net income number of 105 million dollars, up slightly from last year.

And net income per share up about 3% to $1.11 from $1.08 in the first quarter of last year. I think, if we look at the mix of our net income, it is very much along the strategic path that we have set out and have been discussing with you for a number of years now. In the first quarter of 2002, the net income contributions were 73% from our mortgage insurance operations, 17 from financial guarantee and 10 from mortgage services.

As you can see in the first quarter of 2003, the contribution from financial guarantee is now up to 27%, mortgage services at 8 and mortgage insurance at 65. To remind you, our long term view is that, by 2005, we expect that the mortgage insurance contribution will be proximately 50% of our net income. That's clearly our target. That's where we are managing to. I think another important aspect of looking at net income is the contribution of -- sorry -- is the comparison of net income to operating cash flow and as you can see from the graph in the web cast, our net income of 105 million was far exceeded by our operating cash flow of 158 million dollars. A very strong quarter for operating cash flow pointing to the strength of the underlying businesses that we are in. If you look at the strength of those businesses, I think we can look at the amount of new business we have written in the quarter and that is shown by the premium written mix.

If you look at the next graph, you can see that the traditional mortgage insurance business is now 45% of the total. Non-traditional is at 20. That includes our all day and A- business. In our Financial Guarantee business that's up to about 35% of our premium written mix, 21% from structured product, 14% from our public finance sector. I think the trends that you are seeing on this graph will continue and here again, our target is that, in -- by 2005 or thereabouts, the mortgage insurance premium written mix will be somewhere 50 to 55% so it will continue to trend lower as a percentage of our total because we believe that the financial guarantee sectors will continue to grow at a faster rate. Nonetheless, I think for the mortgage insurance business, we had a very, very strong quarter in terms of new business. Our new insurance written was 21.3 billion dollars. Of that, the structured component was 10.7.

I think as I have been saying for some time now, I think that the structured piece of the mortgage insurance business, not only ours but the entire industry, will continue to remain a vibrant sector, will continue to grow in its component contribution to the industry and we expect it to continue to be an active competitor in the structured segment. I will remind you once again, however, that when we describe structured, we do not describe that as sub-prime. Our structured component is typically very high quality and, in fact, probably 3/4 of the structured business that we did in the first quarter would be considered prime business, prime quality business. So I think that that component was very strong for us. That brought then total insurance in force to 118.5 billion dollars at the end of the first quarter, up substantially from last year. And that despite a persistency rate which, at 56% is for us here at Radian record lows. And as we look out, we are hopeful that, some time in the second quarter, that will turn up. But, as interest rates remain at all time lows, we are continuing to see a very active and vibrant refinancing activity level in the mortgage industry and certainly within the mortgage insurance industry, and that will maintain persistency at very low levels for the projected near term quarters. Our premium earned for the quarter in total was up about 8%.

Again, I think representing very strong operating characteristic. We continued to build our lost reserves and so lost reserves at the end of the first quarter were at 633 million dollars. That building comes from a loss to incurred of 243 million dollars -- sorry, 68 million dollars provision in the first quarter versus 58 million dollars of paid claims. And I think Bob will have more details on that for you in his presentation. Over all in the financial guarantee business, we had an exceptionally good quarter. Net premium written for each of our business line, public finance, Muni direct and reinsurance, as well as our structured business and even trade credit were up substantially in the first quarter. In both premium -- new premium written as well as net premium earned. And, so, again, I think the quarter was very good for our financial guarantee business. In the financial guarantee side, we also increased our lost reserves and have strengthened our reserve as a percentage of total debt service outstanding. Other measures of our continued financial strength.

I think as we look at other areas of the business, we are seeing very good trends continuing. The last thing I would talk about is something that I have had lots of questions about but, unfortunately have little more information to offer to you than what you probably read about and that has to do with the decision of California insurance commissioner Garamendi to reject the decision of an administrative law judge who ruled against our lien protection product in January. You know, we think that is a very positive step. We think that, based on the review of the record, based on the review of the insurance regulations as they are written and based on a review of our product as it is formulated and crafted, created and policy formed, we believe strongly that we have a mortgage insurance product. We are very hopeful that the California department will deem the product to be mortgage insurance and lift the cease and desist order which remains in effect so that we can start to deliver the product back to the market, to the lenders who are still exhibiting very strong demand for the product and ultimately will deliver the net savings to the consumers at large. And so I think that's a pretty positive statement.

One last thing -- one new thing that we have put into our package of slides and something that we will be presenting to you on a regular quarterly basis ongoing from this point on is a calculation of our adjusted book value. In the financial guarantee world, that has always been a very traditional disclosure. In the mortgage insurance world it has not been a traditional disclosure. Although at times we have worked with various analysts in the past, we have given indications of these numbers, et cetera. What we have tried to do here is create a model by which we believe adjusted book value can be viewed and can be calculated on a regular and recurring basis. And as you can see or as you will verify as you run through your own calculation, we have taken very conservative assumptions in this spreadsheet that you see.

And based on that, we come up with an adjusted book value of $43.61 compared to our regular gas book value of $30.36. I think that's a pretty strong testimonial to the strength of the company, the strength of the balance sheet, the strength of the earnings that's embedded in the franchise. We will be giving this to you on a regular basis now and hope it provides you with some added value and insight into our company. With that, I will turn it over to Bob.

Thank you and good morning. Financial results for the quarter continue to be solid. They are balanced, they are of a very high credit quality and some of the trends we are starting to see could be a very positive positive sign for future results. We are very pleased about that. We've also have started to officially allocate our capital to those products that we view, providing us with the highest risk adjusted returns and we have also remained very disciplined in our approach to writing new business. Some of the highlights of the most important items for the quarter that I will go over. Regarding MI delinquencies and claims, obviously we saw very positive development with the reduction in the number of delinquencies this quarter.

This was a surprise to us. We feel it demonstrates the resilience of the U.S. homeowner despite a pretty difficult economic environment and we also feel that we are seeing the value of the intensive due diligence process that we go through before we write and accept structure transaction. By maintaining loss reserves on the MI side essentially flat this quarter and by providing in a manner that has been consistent for many years with the way we've always reserved and that is based on the level of delinquencies, we have essentially strengthened an already strong loss reserve position. The loss reserve per primary delinquency went from 11,400 dollars at year end to 11,800 in March 31, 2003 and that resulted from the reduction in the amount of delinquencies. We still believe that delinquencies will increase somewhat throughout the balance of the year.

Paid claims rose this quarter and I think that the pattern that we've seen for the last several quarters, we are also starting to see that increase level off and that's consistent with the leveling off of delinquencies that occurred throughout 2002 and the reduction that you saw in the very first quarter. So it is thus very likely that you will see a slowdown of the claim increases over the rest of the year. That's a positive development. Two other points on claims, we did see another uptick on seconds, claims relating to seconds. Those claims are still concentrated in a few of the older deals we did and they tend to develop very quickly so there is much less lead time for us than on first. The good news on seconds and also if we look at the balance of the year, we think it will go down, delinquencies on seconds have come down as well and that's consistent with the first and that would suggest that the reduction of claims on seconds over the balance of the year will occur.

And also regarding the MI paid-loss ratio which is paid-losses divided by premiums earned, that number for the quarter was 31.7% and that's higher than it's been but it's still below our modeled expectation, still very, very profitable for Radian and it's occurring despite the relatively low premium earned numbers that result from the low persistency. So, again, pretty positive sign when persistency picks up, the earned numbers will grow and that paid-loss ratio should come down. We had a very, very strong volume of new insurance written as Frank mentioned. Of the 10 billion dollars that was written in structured transaction this quarter, there was a 6.6 billion dollar prime transaction that Frank referred to. That's on extremely high credit quality loan but because of the deal structure, the gross exposure to Radian or the risk enforced to Radian is very, very low and thus the premium is very low.

So when you are looking at projecting out premiums into the rest of the year and into the future, you have to significantly discount this number and, despite it being a great deal and very, very high credit quality business, the premium rate was about 20% of the average premium rate on our existing book. Even without this large deal, our insurance enforce grew this quarter which is a great sign and, again, we are hopeful that persistency sort of hit bottom at the end of 2002 and has begun to slowly rise. We are not yet predicting that this is going to happen because of uncertainty on interest rate, but it looks like fourth quarter of 2002 might have been the bottom with persistency. Captive reinsurance, which is another relevant subject, represented about 25% of NIW this quarter. That loan number was really the result of the large amount of structured business we did. Premium seated to captive, about 10% which is consistent with the fourth quarter and where we think it will be for the balance of the year and at the end of the quarter, about 28% of our insurance in force was subject to captive.

Radian Express for the quarter had about 5 million dollars of income and about 5.6 million dollars of expenses, a pre-tax loss of $600,000 consistent with our expectations and obviously the future of Radian lien protection will be an important aspect of Radian Express's future. Turning to the financial guarantee side, again, premiums written were very, very strong. We continue to build unearned premium which was up by 30 million dollars for the quarter and the present value of installments which was up by 34 million dollars for the quarter and that is the building of the adjusted book value that frank spoke to. Now, a few of the assumptions we have made in the computation of the adjusted book value are non-GAAP or derived from non-GAAP numbers so you should know that but many of the numbers are taken right from our GAAP financials and we believe the rest of the assumptions are very conservative. As we projected last quarter, financial guarantee premiums earned for this quarter were only up a little bit on a sequential basis.

This is due more to the fourth quarter being unusually high, there were more refundings in that quarter and also an unusual item in the non-municipal reinsurance area that did not recur. Premiums written this quarter, again, very, very strong on the municipal reinsurance side, there were a few large transactions as well as the trade credit reinsurance area and we don't expect numbers of this magnitude in subsequent quarters in those lines of business. Premiums earned on the financial guarantee side should continue with slow, steady growth and that is essentially what we have projected. Financial guarantee losses, a great story this quarter, all of the 4.7 million dollars of paid losses related to trade credit, the balance of the provision which was 9 million dollars represented an increase to the lost reserve to support the financial guarantee growth.

With regard to our CDO's, we currently have about 44 transactions on CDO's and there continue to be two for three transactions that we are watching carefully because subordination has eroded more significantly than expected. However, we still do not expect to pay a claim in the near future on any of our CDO transactions. Consistent with FAS 133, if there were any payments to be made, they would come out of the existing marked to market reserves as opposed to the loss reserves. However, any payment will be specifically disclosed. The equity and affiliates line was again solid this quarter although down sequentially from the fourth quarter. C-BASS had a very strong quarter highlighted by much of their revenue and a significant percentage of their net income coming from recurring sources of income which are servicing and interest income. And that speaks very positively to the quality of their earnings. It has been a goal of Sea Bass to increase the recurring income strain as a percentage of their total.

We are very happy to see this improvement and we hope this dispels any ignorant notion that all of their income is derived from gain on sales because it is clearly not. Sherman also had a great quarter. Again, solid results. We are also pleased to report that we received a 12 million dollar dividend from Sherman this quarter which we used entirely to repurchase stock. The marked to market this quarter there was a loss that you'll see almost entirely consisted of the equity component of our convertible investment where declining value must be run through the P/L. That's pretty much where the marked to market was this quarter. I mentioned repurchase. We did repurchase 400,000 shares this quarter bringing our overall repurchase to 1.8 million shares at an average price of $32.

We did our debt issuance this quarter, 250 million dollars of ten-year debt, 75 million dollars of that was used to repay debt that was maturing at the financial guarantee holding company. The balance is still at Radian group at the holding company and provides us with great balance sheet flexibility as we assess the opportunities we have to deploy capital. We are also very happy to report that we have reallocated 100 million dollars in early April into the financial guarantee companies which are growing and need capital to support that growth. That came from the MI business which has generated excess capital as it's earnings have been superb and the growth has been slow because of the re-finance environment. This is a great example of how we are currently allocating capital to those products with higher risk adjusted return and greater opportunity that the marketplace has presented to us. We would now like to turn the call over to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number 1 on your telephone keypad. We will pause for a moment to compile the Q & A roster. The first question comes from Rob Ryan of Merrill Lynch.

Good morning. In recent quarters, you commented on new relationships with major lenders. Can you let us know how that's going and quantify, if possible, any market shareship that you anticipate for the full year as opposed to just one single quarter. Earlier this week Magic gave an indication of how much market share they might lose this year.

Rob, I think that the relationships that we announced to you that we had been successful in winning last quarter have just started to contribute to some mortgage insurance product for us in the first quarter. Transferring relationships because of all of the administrative and IT that has to go on between the two companies, at times is cumbersome but has to be done and takes a lot of time. So, it's starting. I don't think we saw any meaningful business in the first quarter, so I didn't see any contribution to any increased market share arising out of that. We would expect that it's likely to come in the rest of the year and it will come gradually but we are still very hopeful that those relationships with continue to generate incremental business and incremental market share in the traditional mortgage insurance business. Roy, you want to add anything to that?

I think that's exactly right. It takes a while to get all these relationships up but we remain optimistic that, overtime, we will get meaningful business from those companies so I think you should see that in the coming quarters.

Switching over to the financial guarantee side, what are you seeing in terms of the bond reinsurance market now. We've had various down grades by various players. We've had statements by the primaries that they might start to use each other as reinsurers to a greater extent going forward. What are you hearing from these clients? What's the general issue in terms of changes to seating commissions, as a result of the downgrade, that sort of thing? What's the environment like?

For us, the environment in the first quarter was pretty positive. Our reinsurance business in terms of premium written went up. We think that there is and will continue to be a demand for high quality reinsurance capacity. We provide that high quality reinsurance capacity although Radian Reinsurance is AAA rated reinsurer. We believe that's still pretty high quality. We are committed to providing that business to the primary markets and we're going to continue to provide it. As to renewals that have occurred, so far we have renewed all treaties with each of the majors that have come up in the last three, four, five six months, I think, and there has been no deterioration in any of the seating commissions to us at all. In fact, some of them have actually improved slightly. So we think we offer quality reinsurance product. We have a quality reinsurance subsidiary company. We're going to maintain offering that product through that company and we believe that the demand will continue to be strong. I would rather not speak about what any of the primaries are going to do amongst themselves. I think you should ask them that question. Martin, anything you want to add?

No, I don't think so. It is a healthy and vibrant product line for us as Frank has said. We are committed to it as long as the returns continue to be there as they have been for our shareholders, from that line of business. Rob, as you have noted, there are changes probably structural changes in the balance of supply and demand for what I will call wholesale financial guarantee capacity that will play out overtime. We don't think that the fundamentals in terms of trends in supply and demand over the long term have changed, but there will be some -- we are seeing some changes near term. Which, frankly, are for our benefit.

Thank you very much.

Your next question comes from GeoffDunn of KBW.

Good morning. First, just two clarification questions. Could you repeat the buyback activity in the quarter? I'm not sure if I missed additional details on your marked to market.

400,000 shares we brought back to bring the total to 1.8 million shares at an average price of $32. And the marked to market, I was just pointing out that there was a loss in the marked to market and that did not come from the derivative book of insurance business. It really came almost entirely from the convertible investment where we have to bifurcate in the debt component, run through equity and equity components run through P & L. There was a decline in value in equity components of the convert. And that's where you saw the P & L on the marked to market.

And in your K you disclosed that the dollar cushion on your CDO portfolio, the closest cushion had about 9 million left. Is that where that stands now after you had further developments in the quarter?

No change in that.

Lastly, can you give us a little bit more color on the severity and delinquency improvement? Was there any unusual item in the quarter that made those - surprised you essentially. Was there any effect of tax refund or anything like that that artificially improved them possibly?

No, not really. I think what you are seeing with severity and maybe the shift from quarter to quarter relates to, I think, the all day business. We do more all day business than the market does and all-day loans are bigger loans. When we pay claims on all-day, that really skews the severity of our whole book. Because the severity on an all day loan is much greater so if we pay a little bit less as a percentage than, for instance, the A minus, that would shift it back down. The A minus loans tend to be smaller, maybe even a little smaller than the prime loan. The all day loans are much, much bigger on an average. I think that's what swings it around somewhat.

Have those severity numbers on a prolonged basis for each of your credit segments?

Yeah, we do and we can get that to you.

thank you.

Sure.

Your next question comes from David Hochstim of Bear Stearns.

Can you hear me?

Yes.

Thanks. I just want to ask the same clarification again. The change in the value of the equity component of the converts, that's listed as change in fair value of derivative instruments?

Yes.

And then can you tell us about roughly the timing of that big prime structure transaction? Was it early in the quarter, late in the quarter? I guess is the first quarter average premium rate representative at all of what we should see in subsequent quarters or was that overstated because of that?

No, I think it's representative. I guess the point that we try to make was that a big chunk of that structure written is not going to have the same premium rate as the rest of the business. We wanted to make sure you understood that. It was like the middle of the quarter. That's when it it got booked. Compared to the rest of the business, it is not a big premium rate.

And if we looked at the break down of number of insured loan by type, the reason we saw a big increase in all-day and A minus relative to the decline in prime, even though you had that big transaction, was because of cancellations of normal prime business?

Absolutely.

Okay.

That's the prime stuff is the stuff that cancels much more quickly.

Okay. Thanks.

Sure.

Your next question comes from Chris Buonafede of Fox-Pitt Kelton.

Good morning. In terms of the ruling by the California insurance commissioner, what is the next step? Or I guess, where does it go from here?

The commissioner or the department has, we believe, 100 days to review the record and seek any additional evidence or input that they feel they may require to either make a final decision or determination on the validity of our product as a mortgage guarantee product. So, that's essentially it. We have -- sorry, they have another 100 days to continue their own review and research.

And after that 100 days, if they, again, rule -- I guess they could rule in favor of you for lien protection, again, I guess. Then what? Is that when the cease and desist order is lifted? How does that work out?

We presume that at the end of that 100 days if they determine our product to be a valid mortgage guarantee product under the California insurance statutes, the cease and desist order will be lifted and we will be able to start selling, once again start selling the product. But that's what we believe but I don't have anything definitive on that.

And then secondly, why were the expenses in the mortgage services segment down so significantly this quarter relative to the fourth quarter? I think that's almost cut in half.

That relates to, and I think we talked about it in the fourth quarter, relates to C-BASS, and the earnings of C-BASS where they are providing a service for us where the expenses are linked to their income. It was lower this quarter. It should pick up but that would -- when it picks up, it would be consistent with the pick-up in the equity in the affiliate line as well. Okay, thank you.

Okay, thank you.

Sure.

Your next question comes from Bruce Harting of Lehman Brothers.

Bob, can you just frame where the Fas 133 exposure? Which parts of your business have Fas 133 exposure, which parts don't? And on a go-forward basis we back it out of the operating number, anyway, so it's not that important, but just to get a sense of what that change in fair value line will look like versus the gain line, what are some of the moving parts we can expect in the future? And can you just kind of frame it for sensitivity to rising versus falling rate? Thanks.

I'm not sure I can frame it subject to rising rates. I mean, there are really two parts to it. One is our -- essentially our CDO portfolio which we view as financial guarantee insurance. It's characterized as subject to Fas 133 because that's a derivative instrument but we view it as part of our financial guarantee business. But the marked to market on that CDO portfolio is going to be run through that line. We have seen that subject to volatility and that's going to be not interest rate driven but it's going to be credit spread driven and it's going to be credit driven as well. So far, much of the swings have been credit-spread driven. When the market spreads changed, that marked to market changes. For us, we are getting premium on this business. It has a life and either we're going to pay a claim or we are not and ultimately that marked to market will cancel itself out and we'll either have paid a claim or not, hopefully not. So, that is the one big piece of it. And the volatility in that is very difficult to predict. We play typically in very highly rated traunches of these deals so there is that cushion against volatility. Certainly if we were playing in the lower sectors or sections, it would be a higher level of volatility. The second component, that's the one you saw this quarter, is just an investment grade convertible instrument that's sitting in our investment portfolio.. But Fas 133 says you need to bifurcate this instrument because it's a convert and you need to look at the value of the debt component and the equity component separately and run the equity component through the P/L. That's what you saw this quarter and, again, that's going to be somewhat volatile and subject to the equity market as opposed to the interest rate. The interest rate driven changes in the value of our portfolio run through the equity because that's our fixed income portfolio that runs through the equity, it doesn't run through the P/L.

Thank you. In the investment portfolio, can you just remind us of the weighted average, coupon and duration of that and how you are managing that going forward in the event of a rate rise?

The duration is between five and six years, something like that. That's come down a little bit and the coupon is about 4 to 4 1/2, mostly concentrated in municipals.

Thanks.

Your next question comes from Aj Grewal of Smith Barney.

What percentage of your loans that go into default then end up [INAUDIBLE].

We've never nailed that down perfectly, but we feel it's somewhere between 20 and 25%. That's where it has always been historically. It could be with the non-prime loans that it's even lower than that.

If in fact - I think you guys were surprised by the decline in loan default. Could in fact the loans in default maybe jump on the run rate based on your fourth quarter in the second quarter. Or do you think that they may rise to the current level? Your competitors have seen a rise. I'm wondering if this is a one-time event there.

We expect delinquencies to rise a little bit throughout the rest of the year. I think this quarter's event speaks to the quality of our book and the quality of our due diligence on structured transactions, so we don't think it's an accident but we do -- we were surprised by the magnitude, certainly.

And one last question. Your effective tax rate then jumping a little bit up and down in the last couple of quarters. What is a good run rate that we could use?

It's 28 1/2, I think, which is the current rate. That's a good run rate. It's going to move a little bit, not very much but it's going to be based on the investment income which is mostly tax advantage and also the equity in affiliates line which is at a higher tax rate but generally 28 1/2 is a pretty good number, within a band of a little bit lower and up to 29.

Okay, thank you.

Your next question comes from Makiko Coakley of Indeavor Capital.

Thank you very much. You said that delinquency rate will go up for the rest of the year. Do you think they will go to new highs or do you believe they already have peaked?

I'm sorry? I think the delinquency rate may go up a little. We are not, right now, forecasting that rate to go up dramatically. It could go up a little. The number of delinquencies as the size of our insurance in force increases, the number of delinquencies is likely to go up but the delinquency rate may not go up very much. It could go up a little bit, may not go up very much higher.

The rate is going to depend as much on the denominator with the grid and the business which is related to persistency as well.

And this business, the structured business this quarter, who are the beneficiaries? Fanny and Freddie?

No, it's a private market transaction.

And what kind of persistency do you expect from this?

What kind of what?

What kind of persistency.

Oh, persistency. Mostly it's Arm product so the persistency could be higher than normal or higher than we are finding in the current book. So on a go-forward basis, we would hope that this book will have a pretty good life probably three to four years.

We were conservative on persistency but we knew that we might get a positive surprise, a little longer life.

Finally on lien protection product, are you working with Fanny and Freddie while you wait for the decision? So that they are ready to accept that product when you're ready to go?

We had up until last year, we had quite extensive conversations with each of the agencies. Since we have been in a holding pattern for nine months now, we have kept them apprised of the development of the California review. But I don't know that we have -- I would say that we have had extensive working sessions with them in the interim. You know, until we get the go-ahead to offer the product it is not really on anyone's high priority list to put in operating protocols.

As of right now, they are not accepting the alternative?

As of right now, we are not selling it. So no one is accepting it. Prior to our discontinuing the sale of the product, they were accepting it on limited -- I guess what they call test case basis or very limited basis. And that was the way it was left. It was not a broad open market acceptance.

Okay. Great. Great quarter. Thank you.

Thank you.

Your next question comes comes from Paul Miller of Friedman, Billings, Ramsey.

Thank you very much. I was wondering if you could add some more color to the growth in your A minus book as percentage of your total book. I know you mentioned earlier in the call that some of that is because the A stuff is falling off your books rapidly. Somebody told me that the mortgage insurance business is getting very good pricing power in that sector. I just want to know if you can add some color to that.

Yeah, Paul, the deals we did and, again, that was much of the balance of the structured business we did in the first quarter was that type of business. We liked the returns, so, yeah, the premium rates are strong and we liked the return on the business. Obviously there is a balance between how much you can do of that. We look at the mix of our business and we pay a lot of attention to that. So we will limit ourselves from writing too much of that because of the mix of business, but the projected returns on the business are good. We feel like we have some good data on it and we are comfortable writing within our accepted limit, we are very comfortable writing that business.

Are you getting pricing power in that sector? In that segment, rather?

Pricing power? I mean we always view it, if we can't get our price, we don't do the business. So if that's pricing power, I guess.

I guess, have you seen the prices rise, I mean over the last 12 to 24 months in that A-minus segment?

We have seen it rise over the last few years, certainly.

And since you are writing more A minus, wouldn't you increase your reserves going forwards on that business? Because I notice your reserves on the mortgage insurance side was relatively flat quarter to quarter.

Remember, we reserve based on delinquencies. And so if a loan is in delinquency stage, we'll reserve for it and you are right. If you are putting business on the books, currently, the loans are not delinquent, you're not going to have reserves on those. But you can look at it another way an say all of the reserves that you have on currently delinquent loans, many of those will cure as well. And A-minus loans tend to have a very high delinquency rate but the claims having come in at that same multiple. So it could be and we are still developing data, but it could be that those loans cure more than prime loans that are in delinquency.

Remember the very nature of the A-minus borrowers is someone who has a history and pattern of missing payments on not only mortgages but credit cards etc. That's what gets them to the status of A minus that they have a regular pattern of missing something regularly. On a once a year basis, they will miss a mortgage payment or be late on a mortgage payment. The fact that we are see a higher delinquent si rate in that book is very expected but as Bob pointed out the claims rate is and has been -- in fact, perhaps even more predictable than some of the other lines of business. So, in general, as we project the returns on that business, so far, they have been coming in pretty much where we had expected them to.

Thank you very much.

Your next question comes from Kevin St. Pierre of Sanford Bernstein & Co.

Good morning, guys. I wonder if you could break out the remaining 4 billion or so in structured transaction by your credit tranche and give us a credit profile of that. Frank, in the past you've mentioned that if you had your way you probably would not write any B or C business but we see that, since September, the percentage of insurance enforced that is B or C credit rated has risen. Could you comment on that?

Sure. I still maintain my position that I would prefer never to insure a B and C loan. For the calculation that you see here, the definition of B and C is a Fico score, I believe 570 and less. Now, a lot of what comes to us in that category actually comes in to us under the Fanny/Freddie extended or approval or approval plus as they call it and so it just comes to us under the normal flow of business and we don't actually have the ability to push it back very hard. Our guideline internally is that we don't want that business to go above 3% of the total portfolio and we are working diligently in our risk management division to maintain that level. That's where we have determined our risk comfort at the 3% level and that's pretty much where we're going to manage it, to be below. So, I guess -- I hope that answers your question.

It does. Would it be accurate then to say that none of the remaining 4 billion in structured transaction was B or C credit?

Most of the rest was A minus. It was A minus and all day with the majority of that being in the A minus area. As we have said previously, sometimes an A minus transaction will have a few B and C loans. We set parameters and we typically take out a lot of loans that don't meet our criteria but there could be some loans characterized as B and C in these transactions, a very small component, but there could be.

Great, thank you. If you could just clarify something. In the 6.6 billion transactions, when you said the premiums were 20% of the premium on the existing book, did you mean the existing structured transaction book or the existing book -- existing insurance enforced?

Insurance enforced.

Thank you.

Your next question comes from Brad Ball of Prudential Securities.

Just to follow on that, you attribute the reduction in the premium weight, the average premium rate, in the quarter entirely to that 6.6 billion?

That's going to be a component of it. But there are obviously other components to the premium rate. It's going to be related to the mix of business that you are doing and the business that's falling off, the amount of captive business you are doing, a lot of different parts to it.

Can you give us a sense as to what kind of premium rates you are doing on your flow business right now?

You mean specific? No, I think, . . . .

I mean, is it consistent with what your average premium rate was for 2002?

Pretty consistent, maybe a slightly higher captive component which is going to bring it down a little bit.

Separately on the financial guarantee business, on the expense side, was the increase [INAUDIBLE] increase in expenses, was that entirely due to higher premiums written and what kind of control do you have over the expense base in that business?

We've built that business and we have supported the growth in the production with a lot of infrastructure. That's a business that is complex and we need risk management to support the production as much, if not more. So we built a strong team to support that business and that's most of the expense increases that you are seeing.

In addition, we are in the process of establishing a subsidiary in the UK. We have hired a number of people there and have obviously incurred some significant expense in terms of the legal financial review and preparation in regard to that company. So some of that is in there as well but in general, it is, as Bob said, attributed to the build-up of that business on the risk management data systems and other operating infrastructure requirements. I would not expect that that's going to reverse any time soon.

I'm sorry. So you are completed with the build-up or do you have more build-up to go? ?.

No, we are continuing to build that business. We think that that business is vibrant, is growing, offers tremendous opportunities for us in the U.S. and in Europe and we're going to continue to add infrastructure throughout the financial guarantee organization.

Great. And in just some -- so I'm clear on your view on the persistency issue, how would you say your outlook for persistency has changed versus whan you talked to us in January?

I think the term has probably been put off a couple of months from where I thought it was going to be in January. I thought in January it would probably be at the end of the second quarter. Now, it's probably in the third quarter.

I thought you mentioned earlier that it could occur in the second quarter. So you are really saying now third quarter?

You know, now, I don't think that you will see it materially affected in the second quarter at all even if they were to change, but we have not seen any turn-around -- any substantial turn around in interest rate so until we see an uptick of interest rate, you are not going to see a reversal of persistency to any material degree.

Thanks.

Just for an example, I just refinanced myself for the second time in the last two years. [ laughter ] I had to use title insurance, unfortunantly and pay one hell of a lot of premium.

Your next question comes from Jed Goer from Sanova Capital.

Actually my questions have been answered, thank you.

Again, I would like it remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We will a pause for a moment to compile the Q & A roster. Your next question comes from GeoffDunn of KBW.

My questions were pretty much answered I'll fall off line.

The next question from AJ Grewal of Smith Barney

Just want to get an idea of your risk in force. What percentage of that is bulk insurance and of that, how does the prime and non-prime break out or the sub prime?

The insurance enforce would show on the graph.

Your risk in force, how much of that is bulk and of that bulk business how much is A business and how much is B and C business?

Remember, we break out for you the quality of our business. There is a pretty good slide that tells you the risk enforced. We view bulk and flow, or structure and flow, as different channels of providing insurance to us. We don't view bulk as sub-prime or prime. There is a lot of the structure that we have done that is prime business that is higher Ficas than the flow business. We deliberately don't make that distinction on enforced but we do tell you the credit quality of the business, via that website slide.

Your website slide is based on loans, number of loans. Do you have any numbers on enforced?

It's based on enforced.

It's based on enforced?

Yes.

Okay. Thank you.

At this time, I'm showing no further questions.

Great. Thank you very much. And we'll look forward to speaking with you next quarter.

That concludes the Radian Group First Quarter conference call. You may now disconnect.