Radian Group Inc (RDN) 2003 Q2 法說會逐字稿

Good morning. My name is Brook, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Radian Group Second 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 "" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "" key. Thank you. I would now like to introduce Mona Zeehandelaar, Vice-President of Investor Relations. Ms. Zeehandelaar, you may begin your conference.

Thank you Brook. Good morning and thank you for joining us today. With me on the call are Frank Filipps, Bob Quint, Roy Kasmar, and Tino Kamarck. 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 risks and uncertainties. Radian's actual results may differ materially from those expressed or indicated by forward-looking statements. Factors that can affect Radian's performance are described in our SEC filings. I will now turn the call over to Frank Filipps, Chairman and CEO of Radian. Frank.

Thank you Mona, and thank you all for joining us. I am pleased to be here and to be able to discuss our record quarter for Radian; a very, very good quarter by almost all measures. I will be giving you the highlights as usual. I will try to give you a strategic overview of the quarter and what we see for the quarters ahead, and then turn it over to Bob for a more detailed look at our financials. Obviously, then we will open it up for questions. For those of you who have logged on to our webcast, the slides that we posted for the quarter are provided to you as background. We'll not necessarily speak to them in any order but they are there and should help compliment the remarks that we're making. So with that, let's move on.

As I said before, we are very pleased by our quarter reporting record earnings despite some very challenging circumstances, and each of our businesses has performed very well. As a result, net income reached record levels of $112m compared to $109m last year. And a very important measure for us, I think, premium earned was up 21% to $255m compared to $211m last year. I think that's a sign of the strength of the business that we have on our books and should give an indication of the strength of the earnings power that we have in the business franchise. Such is the amount of income with a record that we are pleased with. It's also the component mix that's very pleasing especially to me. If you look at that mix, it clearly shows the success of our diversification strategy that we set in motion a couple of years back. Our net income mix for the second quarter was 63% -- produced 63% from our mortgage insurance business, 26% from our financial guarantee business and 11% from our mortgage and financial services business. That compares to last year where it was 68% from the mortgage insurance business, 19% from the financial guarantee and 13% from our services businesses. So the diversification strategy continues to be working as we had planned it. As we told you, it would. We still feel very strong and are very committed that by 2005, we'll have that mortgage insurance income to about 50% of the net. That's our goal, that's what we are working towards. That hasn't changed now in several years, and we don't expect it to change for the next several years.

For the quarter, our premium written was also very strong, up 15% over last year to $274m; and here again in total and in each of our business segments, MI and financial guarantee premium written was strong. If you look at the graph, you can see that 69% of our insurance premium came from our mortgage insurance book in total and 31% came from our financial guarantee book. We had a very strong quarter and public finance, very strong quarter in re-insurance as well as continuing strong results in our trade finance book. If you look at the graph of premium written you will see that the premium from structured products was as a percentage down a little. And that's clearly a result of decisions we made to not be as active and engaged in that business as we had been. We simply didn't like the spread in that business last quarter and did not find as many opportunities that met our return criteria. For those of you who have participated in these calls who have talk with me or Bob or others. I think you have heard that [recur] for the last 7 or 8 years. We are not going to write business that in our vernacular [hollow] and that means it doesn't provide the kinds of income levels that we demand. So you're going see business flows up and down, and in the last quarter that flow -- that downward flow within the structured product's group.

As we look to the second half of this year, we are seeing that spreads are starting to expand a bit and we are starting to see a flow of opportunities coming to us that we are finding slightly more attractive. So as an outlook, we are expecting that that might turn up a bit in the second half of this year. If you look at our earned premium mix, our earned premium in total was up 21%, mortgage insurance business was up 13%, and our financial guarantee business earned premium produced an incredible 51% increase. Again pointing to the strength of our diversified platform the commitment we have to expanding our businesses and to delivering a diversified income generating capability.

We have again continued to strengthen our balance sheet by building our reserves in total as well as in each of our business sectors, out total reserves for the year were -- for the period ending June 30, well amounted to about $653m, again a very strong position. As we look forward, we are committed to building our reserves and to strengthening our balance sheet. We would expect a couple of things. Number one, in the mortgage insurance side of the business, claims paid as we look through our inventory and as we look through our default development, we would expect that the claims paid in the MI part of our business may go up a bit, although at a slower rate in the second half then they did in the first half. We don't see anything other than the normal development there. We are not at this point expecting anything extraordinary, and I personally believe that the one thing that would change that would be a reduction in unemployment and the increase in job creation and we are hopeful or we are very hopeful that the economy will turn upward in the second quarter producing the job growth that will reduce our delinquency rates as well as ultimate claim. Nonetheless, as I said before, we are expecting that claims payments in the second half in our MI business will increase slightly.

Another area that we feel clearly points to the strength of our balance sheet as well as the strength of our overall business is in the graph which portrays our book value and our adjusted book value. You can see in both those lines that our book values continue to increase and our adjusted book value is increasing even more strongly then our book value. I am cautioned to tell you that our adjusted book value in not a GAAP number although it is explained in extreme detail and so we think it’s a pretty good estimation of value, and although it is not GAAP I can tell you that we explained pretty clearly and if you got -- if you want go through it in agonizing detail you can do that later offline please. Other things I would point to the risk [enforced] that we have in the company continues to shift, it is now 70% of the total risk in force in the company, that's $74m in our financial guarantee products and $32b or little under 30% is in our mortgage insurance business. And again, on the graph you can see the respective breakdown. This is very much expected along the lines of our business plans.

Looking at the mix of our mortgage insurance portfolio of the primary risk in force, you can see that we are still very committed to a high-quality portfolio, our BNC percentage of our portfolio, in fact, declined slightly in the quarter. For those of you who -- again, who have listened to me, that is not a portfolio product that we would like to expand in any large way. We have a very tight internal guideline there and we expect to stay within that guideline. I do not believe BNC business is a good business, I don't believe that we get paid for the risks we would undertake in BNC portfolio and therefore we will limit that very, very carefully.

You can also see the -- in the financial guarantee side of the business, the portfolio distribution, again very clear, very well distributed, no excessive concentrations, something we are working very, very diligently at and our risk management people feel very comfortable that the portfolio distribution that you see is one that is highly acceptable to us and one that will produce strong results as we go forward.

I would be remissive if I didn't talk about mortgage insurance persistency. It is now down into the low 50s, it was 52% for the quarter. As all of you know, this second quarter produced incredibly high refinance business in the mortgage origination sector and as a result, persistency in our book as well as the entire mortgage industry has just continued to decline. In the last week or two, we have seen or last several days, I guess, we have seen interest rates turn around, backup a little bit, and while that is not anywhere near the backup that will be necessary to turn persistency dramatically, it could pretend a leveling off of the refinance activity. But it will be at very, very high levels for the remainder of this year. Whenever you can refinance at somewhere between -- depending upon the mortgage you are looking at, between 4 and 6%, that is a very attractive refinancing opportunity. And there is a very high component of outstanding mortgage debt today, not only in our portfolio, but in the mortgage world that have coupon rates above 6% and above 6.5%. So refinancing will continue throughout the rest of the year and there is one school that says that as interest rates look to have bottomed or perhaps even start to turn upwards, those people who had been waiting for the bottom to refinance may rush in at this point. So that is what we are expecting for the second half of this year.

A piece of very good news as many of you have seen last week, we received our financial guarantee license in the state of California. It was the one major state for our financial guarantee business where we were not licensed to right direct business. That is a very, very good piece of news for us. California municipal bond market is obviously the largest bond -- municipal bond market in the country not having been able to participate in that market left us feeling that there was a great void in our portfolio. Having that license, we think we can now participate in that market place, and I caution you that it will take several quarters for us to start writing any business there. It is clearly a market where our name will have to be introduced, people will have to get comfortable with the company, they will have to accept our name as a financial guarantee credit enhancement company and will have to understand that there is a differentiation in our credit enhancement of the AA level compared to the rest of the industry at the AAA level.

However, we do believe that the market is big enough, is diverse enough, and has a demand level high enough so that we will be successful in the California market in the coming years. In fact anecdotally, I will tell you that having had the license for a mere week, our credit committee has already reviewed to the opening in California, and we expect that that pipeline will continue to grow throughout the rest of the year. With regard to our Radian Lien Protection products, we expect that by the end of this month we will have a decision. We have no indication that we will not receive that decision. We also have absolutely no indication of what that decision is. But I can tell you, for those of you who have been following this, that one of the largest [title] companies introduced a product that clearly is intended to compete with this product. So if nothing else, they clearly have validated our original premise as to the product, and we believe that the product will be a success at some point as I have said any number of times in the past.

If you look to opportunities in the marketplace, we think the market for mortgage insurance in the second half of this year will continue to be very strong. Although as I said persistency will not turn around very rapidly. The current forecast for the market is that mortgage originations will be somewhere between 2.2 -- sorry $3.2-3.6 trillion. Right now that is limited probably more by capacity within the industry than anything else. If you talk to any of the originators, as I do, they will all tell you that they can barely get another piece of paper into their shops. On the financial guarantee side, the municipal bond market is still producing opportunities at record levels; a $400b new offering market is not out of the range for this year. And on the structured products, as I mentioned before, we are seeing that spreads coming to us in a more attractive way. We are estimating that that market will clearly exceed $2 trillion. And the last thing I want to talk about is our international efforts; we have been telling you and are still working diligently at getting our subsidiary in the U.K. licensed as a full financial guarantee underwriter. We expected that that would have been completed by now. We are working on it, and what I will tell you is that I fully expect that by the next time we talk, we will have written business. With that let me turn it over to Bob.

Thank you Frank, and good morning. Obviously this quarter demonstrates Radian's ability to generate income from a variety of sources. Business volume's topline growth was very, very strong throughout the company. I'll start with financial guarantee where we continued to write a high-level of premiums written, a little bit more of that is coming into earned premium each quarter, and we really are developing a pattern there. We also have been able to build our unearned premiums and the present value of installment premiums, the combined total of which for the financial guarantee is over $1b right now. That represents future premiums earned on our existing book of business. I should point out that this quarter there are a few items in financial guarantee including an increase in refundings that have accelerated the earned premium growth a little bit faster then we would normally expect.

On the mortgage insurance side despite the decline in persistency, we have been able to grow our insurance and force pretty meaningfully for the second straight quarter with both strong flow volume and structured volume. The large jump in the MI premiums earned from last quarter has really resulted from a variety of things; first, it was the [four] quarter of earnings generated from that huge volume of business we wrote mostly at the end of the first quarter. Also the Alt A and A Minus business does have much higher premium rates, and thirdly, we had a significant increase in premiums earned at Radian Insurance and that's generated from the second business and the [main] business [written] in Radian Insurance. We do think we can continue to grow insurance and [force] a little bit for the rest of the year despite a continuation of very low persistency for the rest of the year.

Talk about (inaudible) [captive] pretty consistent, for the second quarter we were at 30% of our new primary insurance written in [captive] and that is 41% of the flow business, if you just look at flow and for the 6-months, we were at 27% of primary new insurance written, 45% of flow business and for both first and second quarters approximately 10% of our MI premium earned was seeded to captive. The trend there is up a little bit, but certainly not dramatically.

Our provision for losses has grown throughout the business, first on the MI side, as we projected claim increases have continued and as Frank mentioned, will likely continue for the rest of the year, albeit at a slower pace. The direction is clearly not a surprise. A few reasons, we think, certainly a slowdown in home price appreciation and an increase in the nonprime business, we just have a higher incidence of claims have contributed to that. The magnitude increase is a little bit higher than we expected, as more delinquencies have become claims. A relatively high proportion of claims continue to be paid in the Southeast, specifically, in Georgia and also throughout the Midwest. So those are areas that have continued to perform a little bit weaker than the rest of the country. Because delinquencies have behaved very, very well, [really] since the beginning of 2002, and because we are getting a better understanding of the roll rate of delinquencies into claims for the nonprime business in this economic environment, we do feel we can do a better job projecting claims for the rest of the year. As Frank mentioned we feel it will only be a little bit up from this quarter's level. In the third quarter, we are looking in the low $70m range and the fourth quarter into the mid-70s. While our reserves have remained consistently very, very strong, the provisioning for the rest of the year like always and consistently will depend on what happens with the both the magnitude and the aging of delinquencies.

On the financial guarantee side, we had another quarter building [lost] reserve and that's to support our strong business growth. Again, and this is several quarters in a row now all of the paid claims plans on the financial guaranteed side relate to the trade credit business and that is normal for the trade credit business. Reserve increase supports our goal of strong balance sheet above any sign and we will continue to build this reserve as we grow the financial guarantee business. The CDO business and some of the other FAS 133 derivative business continues to have a handful of deals that are underperforming and could produce losses in the future, although, any claims paid there would be offset against the mark-to-market reserve that already exist. We have paid nothing to-date on such business and we will clearly disclose any amount if they do get paid.

Moving to the equity affiliate and affiliate [line], again another strong performance led by C-BASS and Sherman and this quarter Primus. C-BASS had an exceptional quarter; their recurring income stream from servicing and interest which supplemented this quarter by a gain in securitization. The balance of the year looks good for C-BASS, albeit a little bit closer to the first quarter results than the second. Sherman continues to perform extremely well and they are prudently adding to their charge-off portfolio. In this quarter, Primus produced a pretty significant income for us. Those results driven mainly by the tightening of corporate credit spreads. The Primus results are what you see really the major component under the equity and affiliate line in the financial guarantee segment.

Moving to expenses, expenses have continued to grow to support the business volume growth. These expenses are in very specific areas, which are needed to support the growth in the business, the diversification in the business; and importantly, to control this business growth. Expenses have increased in the U.K. operation. Frank mentioned we gearing up to do international business that now includes international mortgage business, also our new data center Dayton which is supporting all of the Radian's operation and we have had significant increases in risk management and internal control.

Contract underwriting costs, another large component of our costs, were $15m for the second quarter and $29m year-to-date that compared to $10m for the second quarter of last year and $20m year-to-date. Last quarter, we began to show adjusted book value, Frank mentioned this, we do feel it's a very valuable number although it is a non-GAAP measure. What it does is it takes our existing GAAP book value and/or conservative estimation gives credit to the existing book of business. There is a reconciliation of this adjusted book value to actual GAAP book value that is posted on our website slides in the Investor Information section under Conference Calls.

Both, our GAAP book value and adjusted book value have grown consistently over the past several years. We look at that and point to that as a significant strength of Radian. This year's book value has grown 10% in six months to $32.40 after growing 20% last year and adjusted book has grown 11% for the six month ending June after growing 19% last year. That's all happened in a pretty tough environment for our largest business segment and all the while we have maintained a very, very strong balance sheet. So, we'd like to now turn the call over to questions.

At this time, I would like to remind everyone in order to ask a question, please press "' then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Brad Ball of Prudential.

Thanks guys. I wonder if you could comment on the mix shift. In your primary MI, you commented on the decline in your BNC business that we are seeing an increase in Alt A and A Minus. What kind of trend should we expect in terms of the proportional growth there going forward and also one of your competitors indicated that [cure] rates had been a challenge in the lower quality product and they expected to remain a challenge perhaps into '04. Could you comment on cure rates in that product as well?

The mix shift -- we are very comfortable with the mix guidelines that we set at the beginning of the year. We do not expect the BNC portfolio to go over 3% and the Alt A, Non-prime, not to go about 30%. Those are the guidelines that we have internally; those are the ones that we've stated publicly a couple of quarters ago and we are still living with them. So that's where we are. In terms of the cure rates, the cure rate is down, it's had been -- we always thought it had been traditionally in the 75% range -- 70-80% range. It's probably down into the 60's now; it’s a difficult number to actually trap. So to be totally honest, it's one that we estimate instead of using a change in inventory methodology, and that's what it looks like for some of those products. In terms of the products themselves, the Alt A product continues to be a very good performing product for us. It's a product that we led the industry into back in '95 or '96. We have a very huge database of that product's performance and are very comfortable with having that product.

The A Minus product has been a good performer, not a great performer. I think as you get into credit cycles, as we are now and you move down in the -- on the credit scale, the lesser credits traditionally perform in a weaker way than in better -- on the better part of the credit cycle. So we are seeing higher delinquency rates in the A Minus portfolio, again purely due to the part of the economic cycle that we're in and the unemployment rates being at around the 6% level. So, as that changes, you know, a then couple of months after that, a couple of quarters after that, we would expect that you'd see the A Minus delinquency rate to change.

Thanks. Just to clarify the guidance, the not above 30%, is that a long-term target or is that an '03 target?

That's our current working target.

Okay, thanks.

Your next question comes from AJ Grewal of Smith Barney.

Yes hi. You had mentioned that C-BASS should be more in line with the first quarter in the second half. Is that to say that you expect 9 cents of [per quarter in the second half? And second, your peers showed, you know, it looks like an 8% increase in claims paid. And looking at your numbers, there is like a 26% increase in claims paid this quarter. It seems to be you’re that your claims paid are running ahead of some of your peers. Could you comment on that, please? Thank you.

First, I'll speak about C-BASS. We certainly are not capable and don't give specific guidance. You know this is an exceptional quarter they did have it [beyond] securitization, so now we're nearly pointing out that we don't expect the continuation of the results of this quarter. The first quarter contained mostly recurring items, so we believe the second half will look more like the first quarter but will be -- continue to be very strong. You know obviously, the pattern has been up, you know, for a while and this quarter happened to be a quarter where we, you know, we've paid a lot, you know we cleared a lot out of our inventory, and that could generate from quarter-to-quarter a trend that, you know, you might see that really might not be there in the overall, you know, scheme of the business. So, I think you really have to look at patterns over a longer period of time than just one quarter. You know the other thing is we do have -- we have in the past had some second businesses that has been included in the claims and has been more material to our claims because we wrote more of it than perhaps others. So that is included as well.

Thank you.

Your next question comes from Geoff Dunn of KBW.

Good morning guys. Can you update us on your projections for your [paid-to incurred] over the next 18 months? You had previously guided sort of 80-90%, where is your mindset now?

You know, Geoff, I think that's probably fairly close, but we have seen a couple of things happen this year. We saw the first quarter where delinquency has actually declined. And obviously in that environment the, paid-to incurred is going to be either close to 100% or potentially paids can even be higher than the incurred. In a pattern like this quarter where delinquencies have increased a little bit, I think we've shown a very consistent history of incurring -- incurred losses to paid losses. And I think you always -- the incurreds are going to be dictated a lot by the delinquencies, not just the amount of delinquencies but behind the scenes aging of delinquencies and that’s what you really don’t see. But we would expect to remain consistent. If delinquencies go up, we are going to post additional reserves and the measure that we look at reserve for delinquency reserve per risk in force have all stayed within a relative range for a long time and we should continue to see that.

Okay and then what was the premium from Radian Insurance this quarter?

We will give that to you offline.

Okay and then the last question. Your-- you've talked a lot about your pays and a lot of cleaning out of inventory this quarter. You were flat on your pay claims in prime and off days. Was there any sort of delay that was caused in the first quarter that might have accelerated itself into the second to really boost up the severity in increase more than the trend line really is?

Claims, you know, are not -- don’t always come in regularly. Sometimes a given large servicer can hit us with a lot of claims all at once or sometimes they can come in more regularly. There is no real pattern. So, you know, on the non-prime side, you've got, you know, specific to the A Minus, you've got a lot of services out there who have only been using mortgage insurance for the past, you know, year or two may be and we've had some surprises with the magnitude of claims in a given period. So that clearly can happen, there are also, you know, there is also a time that we have before claims must be paid. So, yeah, there is definitely some of that going around and that could, you know, that could throw us off from our expectations to some extent. And obviously, in the non-prime it happens more than on the prime.

Okay. And just last question. Is Primus sustainable or should we be thinking a zero kind of line and be surprised in the future?

It is very hard to project, Jeff, you know, a lot of it is spread [really], Primus is doing very, very well in achieving their goals and we are happy with the results, but a lot of the income this quarter was generated by our corporate spread type.

Great, thank you.

Let me amplify that for you. The Primus portfolio is up over 6b now, which was their goal for the end of this year. So they are actually running ahead of schedule. A lot of the income that was produced in the second quarter was, as Bob said, a mark-to-market gain, some of it was recurring income. We would not expect the second and third quarter to produce results as high, but we would expect them to be profitable.

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

Good morning. I wondered if you guys have any -- can you tell me why it seems be your persistency of in force hung on a little higher than what the industry average has seen and do you think there may be just some kind of delayed reaction there in your book or is there something else taking place there?

We have noticed that as well and we've scrutinized our cancellations very, very closely to make sure everything is accurate and we -- there are couple of theories, but they are not hard and fast, I think obviously the non-prime business has a higher persistency, the prime is the lowest persistency. That's running away the fastest. It could be that our non-prime business is a little younger and some of the other non-prime business in the marketplace has hit its two and three-year adjustment periods where persistency might be a little bit lower. And then the other thing is that there are certain mortgage vendors out there in the country that are pushing refinance a lot higher and may have a lower persistency on their books of business and our book of business may not have or may not contain as higher proportion of those vendors and as some others. But it's a tough one to really pin down. Obviously, directionally, it's the same, but it is a couple of points away.

I see, okay. The premium margin, again you have experienced, so a big rise [during] the quarter same [are at] what we have seen at certain other companies in the group again I think they may have seen that earlier than you did, same reasons I assume [both] pricing driving that up?

Yes, I think I mentioned, you know, last quarter we grew insurance enforced by 9b or something like, a lot of that business was written at the end of the quarter, and that's the trouble with using averages sometimes you come out with the wrong numbers. So, we had a full quarter of earnings on that, plus the Radian Insurance and I will give you -- get that number because, that number is included in mortgage insurance, premiums earned but no one includes in the denominator when they do the average premium rates. So it something we really need to tell you about.

Okay. Fair enough thank you.

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

I mean, just the follow up on Chris's question is on that jumping premium, I mean if you [loaded] on that -- lot of that prime [books] at end of the year last year, you still get almost like a five or six basis point jump on average on back of the envelope calculation. I mean is it completely driven by when the timing of the book last quarter or is it could be because you know your shift in Alt A, A Minus is going up?

Well, you know the combination and obviously we've done reconciliations. The combination of the large amount of business done at the end of the first quarter, the Alt A and A Minus business has much higher premium rates clearly in that business you know, has gone up as a percentage of the total and the Radian Insurance business is included in the mortgage insurance segment premiums earned. Those are the [roof].

Is that a good run rate to use going forward Bob. The 63 [best] are in that area?

Absent A -- you know a major shift in business. It's probably good it, you know it might be a tad high because again we got the benefit of that first quarter business.

And second question is on your financial guarantee business in the trade credits, I know you have mentioned in the past that that's where most of your losses are coming from and it is a business that you really, you know, that it is a business that you might exit at some point, any thoughts on that?

No, there is no plan to exit the business at this point.

Okay, thanks a lot.

What we said to clarify is that if -- that is a cyclical market and if we see that market turning down we are going to participate in it, commensurate [inaudible]. Right now, it -- they have -- reinsurance market for trade credit has been remarkably strong. So we see the numbers that you do.

Thank you.

Your next question comes from David Hochstim of Bear Stearns.

You know, I wonder, could you just talk a little bit more about re-insurance in the financial guarantee, I guess my impression was -- whenever it was, a few months ago when you got downgraded that we were going to see more capital shifting to primary and yet reinsurance line remains very strong each quarter, so just wondered is the market just still incredibly attractive and it doesn't matter [EEA] or--?

Yes David, I think what's happened is what we talked about a couple of quarters ago was that capacity has been withdrawn from that market in general by many of the multi-line reinsurers, and as such the demand for financial guarantee reinsurance has continued to be pretty hot, and so we are committed to that business as we are committed to all of our businesses as [Carney] just said with the trade credit, as long as we are able to achieve the desired returns and results that meet our hurdles and right now that business is producing those returns. So, we will continue to participate there, but our strategic growth in the financial guaranteed business longer-term we believe is higher. The opportunity is higher on the direct side of the business then on a longer-term basis it would be in the reinsurance side of the business.

Okay, but it is just taking a while to transition I guess?

Yes, you know, you sort of cut hay when the sun shines and right now the sun is shining on the financial guarantee reinsurance business. So we are going to cut as much of that hay as we can.

Okay great. Keep it up.

Your next question is from Kevin St. Pierre of Sanford Bernstein.

Yes, good morning. It appears to us you gained a significant amount of market share on the flow business and the MI business. Could you update us on any new agreements in the first half and if you feel the level of market share is sustainable or can you improve on that from here?

As we mentioned at the end of last year, we had won a couple of major accounts for this business year. And I think what you have seen now is that those accounts have started to kick in and are producing business at pretty good run rates. They are among the -- the accounts are among the largest originators in the business; and in this kind of a record origination year, we are seeing the result of that in our MI pull through. You know probably for the near term, we would hope that those run rates would continue.

Thank you.

Your next question comes from Bruce Harting of Lehman Brothers.

Hello. Can you -- first, I just wasn't clear on the trade credit. I mean -- so the losses were all from trade credit. So that's running at a loss right now because the premiums earned were less than what looks like to be losses. And then--

The paid losses were from trade credit. Paid losses were only something like $5m.

Okay.

Earned premium on trade credit is much higher than that.

So you are still [ergo] the profitability level and your remarking about that still being a profitable area for you.

Yes.

And then can you talk about what's in the structured direct, you know. You are doing a lot of business there and are very profitable good growth. How much is that -- what are some of the major segments in the quarter? Is auto one of the bigger segments?

Yeah I think that the most accurate thing to say there, Bruce, is that as we all know, spreads have come in substantially in the corporate credit markets and so the synthetic [CDOs] that we were seeing -- where we were seeing very attractive opportunities in prior quarters do not look so attractive to us now. And we are therefore continuing to pursue -- like really I think you'd have to view as the long-term core business of structured products, which is asset-backed structured financing, some times executed on the funded basis, some times on the synthetic basis. But in terms of within that broad sector of asset-backed, saying that there is a trend with respect to autos or cards or whatever, I don't think there is any clear trend. There are a lot of opportunities in all of those sub-sectors of asset-backed.

And then just you know can you give us a ballpark on you know the claims rate and the cure rate differentials and the severity rate differentials between the primary versus the Alt A versus the A Minus, you know, just roughly thanks. And where you think those numbers are headed, thanks. That's it.

The -- obviously the numbers are going to be headed you know in wherever the economy takes us. So if the economy improves, that can improve a little bit. It does look like the non-prime cure rates are a little bit lower then the other two rates.

Your next question comes from Mekiko Coakley (ph.) of Endeavor Capital.

Hi good morning. Can you give us the severity of claims of the product segment?

The average claim paid in the quarter was about $27,000.

All pay is much higher, [Makiko]. We can give that to you, but that's the reason that our average claim is higher than the industry because we have a higher percentage of all pay and all pay is a bigger loan balance. So that skews the numbers quite a bit. That's very specific. The all pay is I believe in the mid-30s, and you know the regular prime is down in the lower 20s.

And the premiums that you earned this quarter from Radian Insurance. The Radian Insurance was the one that used to write second equity -- the home equity insurance right. Are you still writing those or what are these -- I thought you [stuck] to writing those insurance?

No, we do write seconds among other things than Radian Insurance. Yes, we clearly the second market is very large and we participate in a very small way compared to the total market, but it has become more meaningful for us to do this business.

It's mostly second business that Radian Insurance is writing.

Mostly.

Second than Ipps (ph).

Yes.

Okay thank you very much.

Next we have a follow up question from AJ Grewal of Smith Barney.

Yes, just a housekeeping question, the -- where does the contract underwriting revenue show up on your P&L and the expenses show up? It is -- I am sorry-- in your segmented reports?

We saw in mortgage insurance, but it's -- the contract underwriting is another income in the mortgage insurance segment. That is predominantly the -- all of what is another income in the mortgage insurance and the expenses are in both other operating expenses, mostly in other operating expenses and some in policy acquisitions, again both in the mortgage insurance segment.

Okay. And in the mortgage servicing it looks like expenses were up two times versus the first quarter. Could you give us some color on what is driving that? I don't know if I have missed that. Thank you.

Yes, we have spoken about this in the past. We -- there is -- there are services performed for Radian by C-BASS for the partnership that owns C-BASS and typically where we are accruing larger operating expenses for those services in quarters when C-BASS's earnings are higher. So that's pretty consistent with what we have done in the past.

Thank you.

And then the other, you know obviously the other part is Radian Express expenses.

Thank you.

Your next question comes from Howard Shapiro (ph) Private Investor.

Hi. Good morning. Just a question on your financial guarantee business in California, could you at least preliminarily quantify the opportunity in California for us? And then also given the budget difficulties in the state as a whole, how are you monitoring and protecting yourselves against any potential risk?

Well our -- our experience in California so far has been on the direct side of the business has been zero. Our experience in California has always -- has only been on the reinsurance side of the business and that's written through the primaries. So we have a reasonable knowledge base about California municipalities and their performance. We are clearly aware of the financial difficulties in the state that is affecting the state. It has not had as dramatic an impact on the local level municipalities, although it probably will trickle down and we are going to be very, very diligent about participating in that market. We clearly understand that we are the new kid on the block and the [bullies] are going to try and take advantage of us. So knowing that going in, we are going to not let them. We are not going to write business just to write it in the state. We are going to be very diligent in our underwriting as we always have been and you know we are going to just work very hard. In terms of sizing it, it’s a very, very big market, you know its 30-40% of all municipals issued in the country and it offers a huge opportunity but don't underestimate the length of time it will take to get our name introduced and accepted to both the issuers and the investors in the state of California.

What do you think the ramp up the period would be?

It will be, you know, probably next year before we start to see any significant amount of business and as you know in the financial guaranteed direct business, if we wrote a $1m of premium you know we would be earning that over a 15-year life, so we'd be talking about $30,000 of net income next year so that's just the nature of that business. So it's going to take long time to develop and actually produce material increases in earned premium.

Thank you.

At this time there are no further questions. Do you have any closing remarks?

Thank you, I think it's been its really been a great quarter for us. We are extremely proud of the results that we've been able to produce and we are hoping that we'll beat it next quarter.

Thank you. It concludes today's Radian Group's second quarter conference call, you may now disconnect.