Radian Group Inc (RDN) 2003 Q4 法說會逐字稿

I would like to welcome everyone to the Radian Group fourth-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. (OPERATOR INSTRUCTIONS) At this time I would now like to introduce Mr. Frank Filipps, Chairman and CEO. Thank you, Mr. Filipps, you may begin your conference.

Before Frank begins, this is Mona Zeehandelaar as usual letting you know that joining me will be Frank, Bob Quint, Roy Kasmar and Tino Kamarck but I need to remind you that today's conference call will contain statements that are forward-looking, and as you know these statements are based on current expectations that are subject to risks and uncertainty and Radian's actual results may differ materially from those expressed or indicated by forward-looking statements. Factors that can affect our performance, Radian's performance, are described in our 10-K and in our other filings with the FCC. And with that, let me now turn you over to Frank Filipps, Chairman and CEO of Radian.

Thank you, Mona, and good morning everyone. As you know, the fourth-quarter was a very challenging one for us. We made the difficult decision to seize operations at RadianExpress, which resulted in an after-tax charge of about $8.4 million or 9 cents a share. And we made the decision to add $96 million to our loss reserves resulting in a charge of $62.4 million or 66 cents a share after-tax, relating to claims we expect to pay ultimately on a Conseco manufactured housing transaction that we insured.

Also as a consequence of the Conseco charge, Standard & Poor's has placed a negative outlook on our Financial Guaranty companies and on Radian Group. We believe that we have necessary capital and financial structure to warrant maintenance at our current ratings, and we will do everything within our power to work with S&P to address each and everyone of their concerns and issues in order to convince them that our ratings should be retained and that the negative outlook should be removed. We are deeply committed to this effort as a company, as I am personally, and to our Financial Guaranty businesses, as well. And I will restate we will do everything in our power possible to maintain those ratings.

I'm going to focus this morning on my comments on the fourth-quarter results, other than the two events that we talked about already. So that I would like to give you a good understanding of the underlying results, I would also like to address some other areas of interest for the quarter and our outlook for the year. Then I'll turn it over to Bob for more details on the financials, and then we'll obviously take some questions.

For those of you who have logged onto our webcast, there are slides there. Those slides are provided as background and although we will refer to them, we may not speak to them in the order in which they are presented. They are to be used as background and as complementary to today's remarks.

The highlights of the fourth-quarter include a strong revenue growth, 20.5 percent up on a consolidated basis, strong written premium production, up 16 percent on a consolidated basis. And there you can see the results in the slides 4 and 5. Our Financial Guaranty business had an increase in net premium written quarter-over-quarter of 37 percent, and despite a very challenging mortgage insurance environment, mortgage insurance premium grew by 6.6 percent. Our earned premium is also strong, showing a consolidated increase of about 22 percent, continuing to show the growth of the balance and the results of diversification.

Also of note in the quarter, persistency in the mortgage insurance business is improving. I will talk a little bit more about that. Credit trends in the mortgage insurance business developed pretty much as expected, and we had very strong results contributed from C-BASS and especially Sherman. We continue to add loss reserves during the quarter in total, as well as in each of our operating businesses. And as such have maintained a very strong balance sheet.

An area that we feel points to the strength of the balance sheet and also to the business is the adjusted book value calculation, which has grown consistently over the past several years. We believe, and we talked about this in the past, that the adjusted book value is a measure of the strength of the company, the underlying strength of the Company. And although it is not a GAAP measure, there is a reconciliation of the adjusted book value that as we have calculated it to actual GAAP book value posted on our website for you to review.

This year's book value grew by 17 percent to $34.31 after growing 20 percent last year. Adjusted book value this year grew by 17 percent to $49.48 cents after growing about 19 percent last year. Adjusted book value is strong. One of the primary reasons is the growth in the unearned premium reserve, which now totals about $625 million and that is up $120 million from last year. That is primarily a result of the Financial Guaranty business that we have written, and as you know, most of that is set aside into the unearned premium reserve to be earned out over the life of the respected individual insurance transaction.

Turning to the mortgage insurance business, the current environment and the outlook today is better than it was six months ago for the mortgage insurance business. We've seen persistency rise. Persistency for the fourth-quarter was 54 percent annualized and 46.7 percent for the full year. That has been quite a wild run for us over the last year in terms of persistency. We hit a low, just to give you points of reference; we hit a low in persistency at 37 percent for the month of September. And then we have seen it rise each month since then, just to give you points of reference, the points of reference, the persistency trend on a monthly basis starting with 37 percent September increased to 44 percent in October, 56 percent in November and 60 percent in December.

We are hoping that as interest rates stabilize that that persistency will continue to increase. The ten-year treasury rate, which most mortgages are referenced as you all know had a pretty wild ride itself last year, ranging from a low of 3.1 percent to a high of 4.6 percent. Currently it is hovering around a 4 percent level. And so for refi activity what that means is that there will continue to be some refinance activity right now, and there is probably estimates of the 2004 mortgage market, which range from 1.6 to $1.8 trillion, and that includes about a 35 to 38, 39 percent refinancing activity level.

We agree with those ranges, and obviously it is all highly dependent upon where treasuries and other rates go over the course of the year. Nonetheless, we are encouraged by other leading indicators that show good underlying growth in domestic production, good levels of capital spending in business development. And we hope and expect that those underlying developments will lead to positive trends in employment. And as you heard me say, a number of times before as unemployment goes down as employment goes up, that will lead to improvements in our delinquency rate and ultimately in our claims rates.

There is a typically a two quarter lag, and so as we see those positive trends in the employment and GDP areas hopefully continue, hopefully that will be reflected in changes and improvements in our underlying delinquency and claims rates. But there is that lag, and I do need to remind you of that.

Looking at the credit and mortgage interest business, we said last quarter we expected claims in the fourth-quarter to be above third-quarter levels. They were up, and as we look out to 2004 we expect that paid claims will continue to increase. When we look at the higher number of delinquencies, the mix of our loans in our portfolio that are currently in delinquent and default status, we feel comfortable with that as an estimate. We are hopeful that as the economy turns and as I said before with job creation coming that that delinquency rate will turn around.

As we look at our MI reserves, we have continued to strengthen our balance sheet by adding to our reserves, and we will continue in our present reserving methodology. We see no reason why that needs to be changed or altered in any way. Another subject that has been talked about actively over the last several quarters with us and in the industry has to do with captive reinsurers. As we said before, we evaluate each relationship that we have with our major mortgage lending partners on an ongoing and individual basis. That includes looking at all the costs and related business that we receive from each partner. We look at the cost of contract underwriting, the cost of sales support, the quality of the business that we have and how that business generation fits into the portfolio mix and the returns generated to us by that business and that respective business partner.

Nonetheless on a stand-alone basis, deep seed captives as most are currently structured are not long-term sustainable arrangements. They are currently in play in the market for market share. And as a competitor in this market, we have to evaluate where and when to use these tools for both the short-term and long-term. Having said that, we are satisfied with some of our captive arrangements. We are not satisfied with all of them. We recently terminated two deep seed captive relationships. We are actively addressing those that we are not satisfied with and that is likely to mean renegotiating captive terms (technical difficulty) of our business partners.

I would add that concern about captives is that it takes away from the revenue stream of the mortgage insurance business; captives do take out an element of risk in the portfolio and add capital support. Nonetheless, they do not take out enough risk out of the portfolio or add enough capital in their current structure to be sustainable over the long term.

One last comment on MI; we continue to build our presence in the international mortgage markets. We noted last quarter that we had closed our first UK mortgage transaction right after receiving our UK license, and during the fourth quarter we closed the second transaction. That was based on mortgage risk in the Netherlands. We currently have a very active pipeline of mortgage insurance opportunity in our UK subsidiary that we are pursuing.

Turning to the Financial Guaranty business, 2003 was a record year in the municipal business, the second record year in a row. And in California was among the major issuers in that marketplace. We have been aggressively marketing our Radian brand in that marketplace, and we believe the results have paid off. We wrote about $9 million worth of premium; that was written premium, in the fourth-quarter after receiving our Financial Guaranty license in California. That contributed to the success of the Financial Guaranty business in the fourth-quarter, but more importantly what we think is that we have clearly now established the value of a AA Financial Guaranty platform. That is validated, has been validated throughout the year. We believe that the market is accepting that and accepting the value that the AA brings. And clearly verifying that there is a long-term value to our platform and validates our business proposition.

The written premium from public finance direct business in the fourth-quarter as a result of this was more than twice what it had been in the preceding two years. This brought our public finance business to new levels of strength, and clearly as I say, strengthens our business franchise. In contrast with the muni (ph) market, the environment in our structured products group and in the structured product market in general is far more difficult. Spreads continue to be under pressure throughout the year, and at this point we have not seen any upturn or any widening of those spreads in that business.

Nonetheless, we've made great progress in consolidating and validating our franchise in this market, and we continue to build our capabilities in the international markets, as well. We believe that the growing need for global credit institutions to hedge their risk means that there are still many deals that are out in the market that will meet our hurdle rates, and therefore we see the year 2004 as one that will be satisfying to us and will offer us a number of opportunities in a very broad spectrum of structured financing products.

The structured market itself has grown between 40 and 60 percent each year for the last five years and currently projections for this year are that that market will grow between 25 and 35 percent. That may be conservative, the demand is greater. I think what puts pressure on that growth estimates is the constriction of the spreads in the market that they currently are.

When we look at reinsurance, '03 was a year for us to rationalize our strategy and our trading relationships. We took a number of actions in '03. We terminated one long-standing treaty relationship at midyear, and we renegotiated several others with customers that we have had long relationships with. And we continue to work with new customers in that business.

The Financial Guaranty reinsurance business has been a good business for us. The prospects are that it will continue to be a good business for us, and we are committed to remaining in that business and providing capacity to that business. Provided, of course, that that capacity meets our return objectives, as always. As a result, it is possible that in a Financial Guaranty business revenues may not grow on a steady stream. But we are very convinced that the profitability of the business will remain. In talking about the Financial Guaranty reinsurance business, we have disclosed to you over the last several quarters that the possibility of a callback of business from two primary companies could occur. At this point in time, we have received a waiver of all termination rights from one of our two primary seeding clients. That client, in fact, has always also ceded to us on a facultative basis the majority of a portfolio of business that had previously been ceded to another reinsurer, who has since exited the Financial Guaranty business.

We think that has established a good relationship basis with that one company. On the other hand, there is another company with whom we had a relationship with that still maintains callback rights and we believe they are likely to exercise that right very soon. We told you before we have had ongoing discussions with them for the better part of the 2003 year, and we believe those discussions are now coming to a close.

Let me tell you what we believe that will result if that occurs. Number one, it will remove a large amount of business from our portfolio that we believe is among the lowest returning ROE portfolios in our reinsurance book, profitable but a low ROE. Number two, it will free up significant capital for Radian to redeploy. Approximately $180 million of capital will be freed up in our Financial Guaranty business, and that capital will be redeployed in the areas that we have been having very good success, namely the direct writing of Financial Guaranty business and hopefully as spreads come back into the structured product market into that business, as well.

Number three, it will remove about 217 million of the $255 million of manufactured housing reinsurance exposure that we discussed with you last week. And number four, it will significantly strengthen our capital adequacy ratios. There are some negative aspects to this transaction, as well. The short-term impact on earnings will be about a $24 million reduction of earnings in 2004, and that will be on an after-tax basis about 26 cents per share. That is our current estimate. Again, it is not final. That is our current estimate to the best we can estimate it at this time. We believe about half of that will occur in the quarter in which the callback occurs so if that callback occurs in the first quarter as we believe is likely, that will mean about 13 percent, 13 cents per share in the first quarter.

According to our estimates the other 13 cents will be distributed over the remaining three quarters of '04. This will result mostly from lost premiums that would have been earned on the unearned premium reserve and installment premiums that will be forgone. This of course will all be net of loss provisions, policy acquisition expenses, etc. The key here is that we do believe that over the next two years we will fully redeploy the capital.

As we have discussed with you in the past, our business plan had called for Radian Group in some way to increase the capital in our Financial Guaranty businesses by about 100 to $125 million in 2004. Similar to what we had increased capital in the Financial Guaranty businesses by in the year 2003. With the release of the $180 million resulting from this transaction, that capital infusion obviously will not be necessary. So to the best of our ability, that is the way we view the results of that transaction. We will give you more as we learn more and as we are better able to determine the ultimate results and impact.

We are also pleased with the treaty relationships that we have to date. They have been ongoing and successfully renegotiated. We have been expanding our facultative business extensively with five primaries out there, and we are looking to in fact, conclude our first facultative reinsurance deal with a new 6th primary some time very, very shortly. So we believe our reinsurance franchise continues to be strong and vibrant, and there is clearly a demand for Financial Guaranty reinsurance in the marketplace.

As we have disclosed to you previously, we have begun taking steps toward the merger of Radian reinsurance and Radian asset assurance (ph). We believe that the combined company would be significantly stronger, obviously larger and with a more diversified book of risk, as well as a more diversified base of revenues. Reinsurance would then be one of several lines in our Financial Guaranty business, written under one company. That surviving company would be Radian Asset Assurance. Assurance.

Obviously the Financial Guaranty business as with the mortgage guaranty business our strategy is to participate in markets and products that are profitable and that generate returns on our allocated and delegated capital. And that will be a continuing discipline for Radian throughout 2004.

We believe that we have established a franchise that is diversified throughout the organization, including mortgage guaranty as well as Financial Guaranty. We think that is the proper outlook. We think that is the proper strategy to be employed over the coming years. We are committed to that strategy. We are committed to doing everything that we can and will need to do to be successful in both of those lines of business, and each of the product areas that we have decided to participate in. With that, let me turn it over to Bob.

Good morning. As usual, I'm going to provide some financial highlights and details for the quarter as well give a general outlook for certain items in 2004. Starting with MI business, premiums continue to be very, very strong despite the small drop in insurance in force in the fourth quarter that was caused by continued low persistence. There continues to be a shift in the source of that premium, more to nonprime and alternative mortgage products as compared to the traditional prime products.

Premiums earned from second and other nontraditional products in the fourth quarter was $31.9 million. That compares to $11 million in the fourth quarter of 2002 and its up from $28.6 million in the third quarter of 2003. As persistency increases, the rate of this shift will slow (ph). We have also seen a consistent increase in average premium rates as nonprime business with higher rates has become a bigger part of the in force book. Again, the rate of that increase should slow considerably for the same persistency reason as persistency increases and the prime product becomes a bigger part.

With regard to insurance in force, we feel we can grow insurance in force by high single to low double-digit in 2004 with more of that growth expected to come in the second half of the year. Captive premiums for the quarter were $19 million. That represents about 10 percent of premiums, exactly the same as it was for the whole year. New insurance written subject to captive is 37 percent of our total new insurance written compared to 32 percent for the year. That increase in the fourth quarter relates to the relatively low structured transaction component of new insurance written in the fourth quarter.

Many of you have asked about the risk that is contained at Radian Insurance and Amer (ph) Guaranty. That risk makes up approximately $1 billion other risk in force that we have reported on our mortgage insurance supplemental information page. The risk consists of the following. $735 million of that risk is second mortgage insurance; it has come primarily from about 7 to 8 originators. The business is extremely well dispersed geographically, other than about one-third being in California. But that's actually reflective of the whole second market actually less than the whole second market. The next highest state after California is only 5 percent.

The business is up to three-year seasoned, and so far although the business has not produced the returns that meet our expectations, we do expect that it will be profitable and certainly continue to improve in the future. There is $296 million of NIM risk, the largest individual exposure within the NIM risk, $30 million. NIMS have performed extraordinarily well. No losses to date, no losses currently anticipated. The balance of the other risk in force is made up of one international securitization wrap (ph) with investment-grade attachments and the exposure is $ (indiscernible). That is the exposure that is contained in other risk in force.

On to losses. Talk about losses and claims. As we said, the development was pretty much as expected in the fourth quarter, although delinquency rates were hurt a little bit by the lack of insurance in force growth. We do expect the continuation of increasing claims paid throughout 2004 of a magnitude that is very similar to what we saw in 2003. These are the loans that went delinquent in the second half of 2002 and throughout 2003. The economic situation and the movement in delinquencies in 2004 will impact claims paid in 2005.

Our reserve increase is strong this quarter and as always provisions for future losses in addition to our loss reserve will be dependent primarily on delinquency movement. As Frank mentioned we are encouraged by the leading economic information, which will hopefully lead to a moderation in losses. When the GEs and the IBMs of the world are posting solid results and big order increases that is very good for us as well but it is going to take several quarters for that to work into our financial results.

Expenses in the quarter were down sequentially from the third quarter, primarily due to a reduction in contract underwriting. Contract underwriting income for the quarter was 5.7 million; expenses were 12 million and were 29 million for the year of income, and 56 million of expenses. We feel like the fourth-quarter run rate for MI expenses are a pretty good run rate to assume for 2004.

With regard to Financial Guaranty, obviously premiums written were very, very strong, led by public finance direct business, which is greatly benefiting from our participation in California, as Frank mentioned. Keep in mind that the fourth quarter for public finance is seasonally high, so this number will not likely repeat in 2004. We do expect Financial Guaranty earned premium to continue to grow slowly and steadily throughout 2004.

One other comment regarding the potential impact of a callback if it happens, if it does happen return of unearned premium and the cancellation of some installment premium would take approximately 94 cents or 1.9 percent off of our adjusted book calculation. Mona and I will be happy to go through all the details of this and the potential earning impact of the callback with anyone who wants if and when the callback occurs.

Other than the big Conseco charge, the loss provision Financial Guaranty was relatively normal, although we did strengthen our non-specific reserves on trade credit by $4 million in the fourth quarter. We feel that was a prudent move to make. The majority of claim payments in the quarter related to trade credits, that is pretty typical, and in the future we will break out any claims payments on Conseco so you can see exactly how these claims will develop. Our current expectations are for the payments to begin soon in 2004 and extend for several years.

We also want to reiterate that our current projection from $140 million of exposure on the 2001 Greenpoint manufactured housing deal showed no loss payments for Radian. We expect pretty consistent loss provisions, along with moderate expense increases for the Financial Guaranty business in 2004. Clearly C-BASS and Sherman had fantastic fourth quarters culminating very, very strong years for these companies. We expect both businesses to produce similar strong results in 2004.

Gains and losses for the quarter were a big positive. We had realized investment gains of almost $9 million and a net change in derivatives was a plus, almost 11 million, and that was mostly due to a continuation of improving credit spreads. Finally, you'll notice that our tax rate for the quarter is very, very low. That is a result of investment income being a much larger component of net income than is typical. We would anticipate our effective tax rate to revert back to between 28, 29 percent in 2004 and in the future. We would now like to turn the call over to questions.

(OPERATOR INSTRUCTIONS) Robert Hottensen with Goldman Sachs.

Hi, Frank. On the facultative business that you are now writing in the financial guarantee area, can you compare and contrast the returns in that business versus the more traditional quota share and how that business has been restructured to ameliorate some of the concerns of the rating agencies have had before on the facultative business? The second question, and I do not want to hit you over the head with this, but I just wanted to follow-up from the conference call earlier on the Conseco situation, and just wanted to understand a little bit more the thinking in terms of the postmortem. How such a severe loss could have developed given the leverage and opportunities financial guarantee companies have to alter payment terms, trap cash, change servicers and so forth. Have you reviewed some of your other risks in the Financial Guaranty business with an eye towards strengthening your ability to intervene earlier and to reduce the severity of losses before they occur?

Bob, let me take your second question first and I'll ask Tino Kamarck to talk about the facultative market developments. With regard to the Conseco postmortem, first of all it is ongoing. But second, we have looked at extensively the structuring and processing and surveillance around this transaction. And what I think I can tell you right now is that when the transaction was structured, some of the structuring could have been stronger. This was a transaction that we participated in, and therefore did not have as much control rights as we probably either could have or should have, or certainly do now and that occurred -- let me back up. Anyway, some of those controls have already been put in place and were put in place probably a year, year and a half ago. One of the benefits, in fact, that one of the true business synergies that has occurred as a result of our acquisition of what was enhanced, was a view toward most structured transactions today from the financial guaranteed world perspective, which is different from the mortgage guarantee world.

That is, as we probably discussed with many of you in the past, the mortgage guarantee world has traditionally looked at underwriting assets and risk from an individual loan perspective basis. Literally looking at each individual borrower and then building and aggregating the risk. Financial guarantee world has always looked at risk slightly differently. They have always looked at it from the top down and said this is a pool of risk that we are looking at. How do we now best structure and protect ourselves? How do we gain the most rights? How do we gain the most ability to intervene? Remember in 2000 when we looked at this transaction, we looked at it as a mortgage insurance company. And as such, probably had some weaknesses in the transaction, structural weaknesses in the transaction, that unfortunately became all too evident in the last couple of months.

Just out of curiosity, though, when the bankruptcy event occurred and you had the change in servicing and you granted waivers and so forth, wasn't there an opportunity at that point to strengthen the structure?

There might have been. We looked at it at that time. We didn't think that interrupting -- the change in servicing related delinquencies, if you recall when we talked last week, escalated dramatically. Our concern was that if we change servicers that might further disrupt it. Number one. And number two, there was not a secondary servicer that was ready, willing and able to step up into that position quickly. Estimates that we received were that it would take three to six months for a secondary or backup servicer to take over that portfolio. Our estimate was that three to six-month interruption would have caused the portfolio to deteriorate very rapidly, and as such the decision was made not to do that.

Out of curiosity with C-BASS, is there any synergy there on future deals? Is there any way that you can ready them or have, create capacity there to service under certain circumstances or are they just out? They just don't -- are not involved in some of these markets like manufactured housing?

At the time of the Conseco bankruptcy, C-BASS and their servicing subsidiary Litton (ph) had not been in the servicing and manufactured housing loans. They actually reviewed the possible acquisition of those servicing rights, and did not decide to make that -- to go into that business. The question as to whether or not they could be geared up to be a backup servicer is one that we have had conversations with them about. It is possible, but you know this was the Conseco bankruptcy, I forget they were servicing something like $26 billion of manufactured housing loans. That would have been far too much for Litton to take on at that time, far too much for them to take on today. And so to build a secondary or a backup servicing capacity to take on that kind of a magnitude, it is just highly unlikely.

Let me go further. One of the reasons that Litton has been so successful in their servicing effort is that they service loans for which C-BASS has a real residual interest. And so they are not servicing purely for the contract servicing fees. That has really created, in our minds, a servicer with superior capabilities and superior motivation. Changing that motivation is something that we talk about, but we have not decided to do yet at this point in time.

The other point you made was could we have trapped more cash. Fortunately or unfortunately at the time of the renegotiation of the servicing rights, the cash that we had previously had contractually trapped in the servicing and having the servicing fees at the back end of the cash flow stream, were totally reversed in that the servicing fees went to the front end of that stream. And that was done to entice a new servicer into this transaction. Was their room to make a different decision there? Perhaps. But the servicing was a very, very tough area for us to look at. And we made the decision at that time we thought would produce the best ultimate result. It simply did not work out as well as we would have wanted it to. Let me turn it over to Tino to talk about the facultative questions.

With respect to the approach to reinsurance, financial guarantee reinsurance business, we see three areas of opportunity over time to develop the profitability of that business and improve it and manage that business more closely. If the simple paradigm of reinsurance, simplest paradigm of reinsurance is pure quota share were you take a vertical slice of business written over time, and then follow the fortunes of the direct writer. We have moved away from that paradigm in these three respects.

First of all, we looked very closely at the relationships with our primary partners. All of these companies obviously are excellent companies and write very good business and have been successful. But as we look at things like our loss experience over time with the particular seating Company, the relative or comparative profitability in terms of risk and capital required of the business ceded over time by a particular company, and the overall business strategy of that company, and, our ability to do business to partner with that company in areas away from financial guarantee reinsurance. To do business together in the direct writing market are all things we take into account in assessing our willingness to do business and flexibility on terms in doing business with a particular client.

The second thing is that there are any number of ways in which a reinsurance treaty relationship can be tweaked through negotiation and structuring. We can play with things like excluded lists of credit. We can take surplus share versus quota share. It is even true that in one set of treaty relationships we may take more or less of a particular risk, literally depending upon the ROE of the particular business being ceded, all under the umbrella of a treaty relationship. And as we make better and more creative and aggressive use of those sources of structuring elements, we can improve the profitability of flow business from those treaties over time.

Third thing is, as has already been mentioned, to emphasize the facultative flow of business by making ourselves the smartest and most responsive partners for our reinsurance customers so that we have a greater hope of seeing all the potential business that can be ceded on a facultative basis, and then it is simply a matter of assessing the pricing and the risk and negotiating the terms for that particular deal session to make sure that over time and with respect to both the treaty relationship if we have one, and the broader business relationship with that primary that on average we are improving the quality of the business and profitability of that business. We put all those three things together and we are seeing already that it makes a significant difference in the quality and the predictability of the profitability of our reinsurance flows.

Okay, thanks.

Geoffrey Dunn with K. B. W.

I want to clarify, Bob, on your paid loss guidance when you say same kind of growth rate in '04 versus '03, are you talking about the year-over-year roughly 65 percent increase? Or are you talking about the quarterly pace that we've seen recently which is more like 6 to 8 million per quarter?

I am talking about the dollars of increase.

Okay, and then on delinquencies, can you talk about the sequential development in the A- and Alt A business? Those would seem to be the areas where we saw more material jump versus some of the trends before. Was there anything unique happening there beyond just the growth of the book?

Not that we saw, Jeff. It is really just an aging of that and typically in the fourth quarter we've seen some seasonality to the loss trends that in the past has reversed a little bit in the first quarter. So we are hoping that it is that, as well. But some of it is just going to be, we wrote a lot of the A- over the last two years, and as we all know, that has higher delinquency rates. It's also the reason our premiums have been growing much faster, as well. So it is that balance, and we think it is profitable but it will produce higher delinquency.

Finally, trade credit continues to be an area of volatility. It runs a material loss ratio compared to financial guarantee, and it actually appears to take away some of that value of predictability and stability of Financial Guaranty. What is the value of having that in the Radian model?

We have been reviewing this for some time now. We have materially changed our participation in that business product. We went from being a major participant to being a considerably less active participant in that market. So we have already scaled back. The losses that are coming through now are coming through off portfolios that were put in place several years ago. It is a profitable line of business for us, but it is not one that we see as a great growth opportunity.

And I will just add, Jeff, the capital requirements of the business are pretty low so although it does produce pretty much a small profit, the returns on the small amount of capital that are needed to support it are still pretty decent.

Do you think it really has a place in that group dealing with Financial Guaranty, which has just very different characteristics of the business and probably more value given those characteristics? Why not just sell it? What's the point of having it?

It's not a separate company, so it is a portfolio that would have to be run off. Whether or not we could reinsure it somewhere or do something else, we always look at -- we just have not found an appropriate opportunity.

Okay, thanks.

Paul Miller with FBR.

Thank you. Bob, with the insurance in force growth, your mix -- I would expect your mix would go to more to the prime product and away from more the Alt A and lower FICO products. How should we look at premium yields? Should they rise, maybe another basis points and then start to go back to more normal level or lower level as you build as insurance in force grows?

Yes, I would say so. Certainly the big increase this year was from the alternative stuff with higher premium rates. So that's why average premium rates went up. As the prime stuff increases persistency and the growth comes from there, as well, obviously the premium rates are much lower on that. So I would say for next year you are going to see, you might see a little growth in average premium rate, but it is going to be much, much less than it has been because the prime component of that growth is going to be more substantial.

The other question is on the call back on the reinsurance side of the business you said it's going to be -- if it gets called back I want to emphasize if it is called back -- it's going to hit your numbers about 26 cents in '03. You said 13 cents in the first quarter, the rest distributed throughout '04. How and then you said you could replace that over the next two years. How quick in '04 should we be looking at you replacing that 26 cents in '04? So in '04 how much of a hit would it take netting out the redeploying the capital?

Again, keep in mind that it hasn't happened, and all the numbers we gave are really if and when it happened. And the expectation is that we could redeploy the capital over the next couple of years and put new business on. Remember that that business is going to earn slowly as is typical of Financial Guaranty. The business that is already on the book that is mature is producing more impact to the P&L than new business would. So it's a little bit tricky, but we will again, if and when it happens, we will be glad to walk through all the numbers and then think about scenarios of replacing the business and what that could mean to the results over the next couple of years.

One other quick question about the deep-cede you said that you terminated two deep seed negotiations. Has that impacted insurance in force? If you did not terminate that, would you have had higher insurance in force? Was that one of the things weighing on insurance in force at this point?

Not at this point because those kind of things take a while to filter through, and obviously as is always we have customers doing more business with less, so there are a lot of ins and outs and wouldn't have impacted insurance in force.

Thank you very much.

A.J. Grewal with Smith Barney.

A couple questions, the pace of growth in your default rates or delinquency rates seems to have picked over the last quarter. I realize you have not written as much insurance in this quarter. Magic (ph) has seen similar results but its pace has slowed down. Could you give us some color on that, and two, the cancellation rates in your insurance in force portfolios is a little higher than I expected, and its higher than your peer Magic. And also, could you give some color on why that is pacing at a higher rate? Thank you.

One thing I think on both of these, I think we can answer it the same way. I think you have to look at what it is is the quarter's worth of information. Look at a whole year's trend on delinquencies, look at a whole year's trend on persistency. We are subject to third party information that we are receiving, so we never -- I would never look at a quarter and just say that absolutely is what happened. Delinquency trend for us was pretty decent for the whole year. It did pick up for the whole year, no doubt about it. And persistency, again Frank talked about this, the trend is positive that is the important thing. And I don't know that one point here or there in persistency per quarter is going to -- you should read too much into that.

It would appear though, that your default rate -- it has increased quite a bit more over this past quarter than the past three quarters versus some of the color that we are getting from other lenders and consumer finance companies. So I'm just wondering if there is anything particular about your insurance portfolio versus maybe the market.

You know what is in our insurance in force; the components are there. We do not think there is anything in our portfolio that has really changed, and again, we sometimes see in fourth quarter seasonally high and that turn around. So yes, the fourth quarter was higher, a little bit higher than the rest of the year. Not dramatically higher, but a little bit higher. And those are the numbers that we were reported to us.

Thank you.

Brad Ball with Prudential.

Given the S&P move to a negative outlook for your guarantee business and the Radian Group overall, could you talk about what measures you are taking to try to shore up your ratings? And in a worst-case scenario what would be the implications if the S&P were to downgrade the Financial Guaranty Company to what extent would it inhibit your ability to write new business?

First let me say that from a financial perspective, from a capital perspective, from a risk to capital review we believe that our Financial Guaranty and parent company in their current form have enough capital to warrant the current ratings. I think what S&P said was something like they were questioning some internal controls in their release. And those are the areas that we will be addressing with them very specifically in a very focused and very disciplined way. And we are meeting with them, I think the next week or two to address those very issues. And it is our expectation that will address them in a sufficient and satisfactory manner and/or make any changes that would be necessary to give them the confidence that we have the controls, the processes, the surveillance, the due diligence, the underwriting capacity and the risk management capacity necessary to sustain and warrant a AA rating. It's not a question of financial capacity, as we understand. It is more a question of getting the controls that they may feel were not prevalent previously to a level that they feel comfortable with.

And just a follow up to that, the downstreaming of capital that you announced last week, was that inspired by the rating agencies, or was there another reason behind that decision?

That was inspired purely by the needs that we project for capital in the business to continue to grow the business and in accordance with the business plan that we have laid out, that we have told our various counterparties about. So no, it was not in any way inspired by any expectation of a negative outlook. It was purely our own internal decision to provide the capital necessary to grow the business. We still believe that there is a very strong demand for our credit insurance. And as such, we must provide the capital to the operating insurance companies that will enable those companies to write the business in their plans.

Finally, the capital that could be freed up if there were a callback in your reinsurance business the 180 million of capital, I know you mentioned this briefly, but could you highlight again how you would redeploy that capital? Specifically what businesses would you spend newly freed up capital going forward?

Yes, the two are the muni business and the structured credit structured finance business. It will not go into any trade credit.

Rob Ryan (ph) with Merrill Lynch.

On the issue of the policy persistency, on the basis of a 46.7 starting point year end 2003, what is your current expectation for year end 2004? And what assumptions are you making in that particular expectation? And has any of this changed in the last three months given where interest rates are, refinance activity is, etc.?

It hasn't changed, and as we (indiscernible) that Frank talked about that monthly trend, we expect that trend to continue. We expect to be in the '60s on an annualized basis in the first quarter. Obviously on a full year basis that is going to be lower and then by the end of the year getting to the low 70s. So that expectation hasn't changed.

That assumed interest rates were a little higher than they currently are. That was done when treasuries were, I believe the ten-year treasury was somewhere in the 435, 450 range. And so with treasuries back down to -- I don't know what they were this morning, but yesterday they were about 405, so that will put a little more refinance activity in place today. But it is not -- it hasn't gotten us to the point where we have changed any of those major assumptions yet. However, that said if you see treasuries going back down to 350, that would cause us to change our expectations.

Okay, great. On a different topic, in the past two years the percentage of your total mortgage insurance in force in the Alt A category has doubled and now stands at 20 percent. Can you go over some of the basic parameters of the return expectations? The above average type premium rates, the type of loss expectations in terms of frequency and severity that you have for that particular book of business compared to your general completely prime book of business? Just to give us an understanding of the parameters around what has become obviously an area of increased emphasis for the company.

Let me give you a little bit of history on the Alt A business and then talk about the more specific quantifiable measures you have asked about. We have been writing this business for a long time and we are very comfortable with it. And what happened over, I think the last two years is that the business changed with the rush of volume, a number of lenders migrated their credit down. Originally this business was and for a very long time had been a high FICO score business, 660 was the minimum FICO score in the business. Over the last two previous years, that migrated downward and a good slice of that business became 625 to 660. With that, you saw some of the losses develop that we have seen over in our portfolio in 2003 that came from that Alt A business.

What we've done recently -- and I think this is from my perspective as important as any of the numbers Bob will tell you about in a minute -- but we have recently gone back to all of our major Alt A mortgage originators with very strong caps or very strong limits on FICO scores. And so the amount of Alt A business that we will be taking that will be less than 660 on a go forward basis in '04 will be severely reduced. And that may have a business impact on our business. We acknowledge that. We accept it. And in fact we find it to be highly desirable if we are not going to get that business. That has not been good performing business. We will not look to get that business on a go forward basis.

Number two, we have raised the premium rates on the Alt A business productline across the board in order to reflect the experience that we have found in this product. Again, over the last two years some of that has weakened due to competitive pressures. In our perspective going forward we are raising the rates. We may in fact now be setting ourselves apart from the rest of the industry. From our perspective that's exactly where we want to be and that is how we have positioned this business going forward. Let me turn it to Bob to give you some of the other questions.

I think we could probably talk about more of the details off-line, but needless to say the Alt A expectations are for higher premium rates. It does have higher losses. The return expectations are greater than on the prime business, and most of the Alt A business has produced those kinds of returns over the years of writing that we've had. The poor performance by the lower FICO business is reflected in some of the delinquency and claim rates you've seen over the past year, and as Frank said, that's not going to be done in the future. So the future will reflect more of the higher FICO, so the higher premium rate is not subject to captive and you're going to have a little bit higher delinquency and claim rate, but when you put it into the ROE model the ROEs are mid to high teens. It is business we want to continue to write, at the higher credit levels, and we've seen it over a pretty good period produce good results.

Great. Thank you.

Bruce Harting with Lehman Brothers.

You probably said, but it's been a long call, so what is your outlook for delinquencies in each of your loan categories? And then you mentioned C-BASS and Sherman should have similarly strong years in '04. Is that just strong years or about exactly the same as '03? And I guess that's all I had. Thanks.

I think the numbers are, as we know, are very tough to predict on C-BASS and Sherman. Based on the projections that we have and the forecast we've gone through with them, we expect them to have strong years that are similar to what we saw in 2003. And I think we're comfortable saying that. With regards to delinquency expectations, that is really the one thing we have said I think over and over is dependent on the economy, dependent on jobs, dependent on a lot of things that we are not going to sit here and predict. But signs are demonstrating to us that we have reason for optimism with regard to that. But we are not saying (indiscernible) delinquencies to go down or moderate, but if these economic signs continue, and certainly jobs are something we look very closely at improve, then you can expect delinquencies to follow.

And then, Frank, you said the captive relationships -- I do not know if you used the word not acceptable or not a viable business model and you are rethinking a lot of those. How should we think of for modeling purposes the amount that you have in captive, 25 versus 40 percent for the '04 writings versus the '03 versus the year before, is there some kind of stair step function on what percent of writings will be at each level? And how do you see the competitive environment going forward? I guess that really just leaves one other company out there trying to defend that business at this point among the major five or six.

I think the phrase I used is that it is not deep-cedes as they are not currently structured are not long-term sustainable. I believe that, and we are taking every action in our power to make that happen here at Radian. In terms of the stair step of premium, we will have to get back to you on that one. I don't know that we.

The needle doesn't move on that because we got this in force book, so even if it changes over the next year, the 10 percent of premium is what is has been for several years and that's not going to change very much. Change is going to occur slowly regardless of how fast we reduce the amount of cedes.

Okay, thank you.

Jonathan Gray with Sanford Bernstein & Co.

I wonder if you could clarify something. I thought that Bob said the premiums earned in the most recent quarter on the nonprime book and I'm assuming you are excluding the rink (ph) portfolio from this that the premiums earned were 32 million roughly, 31.9, I believe. And if one looks at your press release claims paid for nonprime product excluding seconds, appear to be 42 million, 10 million north of the premiums earned. I wonder if you can clarify that.

The 32 million, Jonathan, is seconds and NIMS, the stuff in the other risk in force that I spoke about, it does clearly does not include premiums from Alt A and A- (ph) which are the claims you're talking about.

Can you since the company is breaking out claims paid by portfolio type, can you give us some indication of what the premiums earned is or what? How much premium earned income you have relative to the 31, relative to the 42 million in claims paid for A- and Alt A?

We do breakout on the slides, we do breakout the premiums from prime versus nonprimes. You can see that. I don't have the numbers at hand but we put the percentages there.

On the slides in the webcast?

Yes, the premiums are well north of --.

I am sure they are. Although again, I didn't notice in the slides. Perhaps we should do that off-line.

Okay, yes. We can.

Alex Orloff with Banc of America Securities.

Most of my questions have been answered; just have one left. What approximately do you expect S&P to act on their ratings, or if there is any action at all?

I'm hopeful they will not act on their ratings other than to reaffirm our current ratings. But I have no timetable on that whatsoever.

Okay, thank you.

Jordan (indiscernible) with Lovell (ph) Advisers.

Two questions. I got on the call late. Did you say the 25 cent potential charges are callbacks from the trade credit business?

No, it is from a long-standing treaty relationship in the Financial Guaranty business in a broad spectrum of business products.

And that callback would relate to what?

The reinsurance business at Financial Guaranty, reinsurance business that is on the books and has been on the books.

So that is performing worse than the reinsurer had expected and hence you may have a callback?

No, the business has nothing to do with performance. It had to do with their structuring or restructuring of their entire reinsurance relationship. And as such, they are looking to and have been looking to place this business in an alternate form.

So it comes back to you and then you have to put it on your books and don't get --.

No. Just the opposite, it goes back to them and comes off our books and goes back to them.

Okay. I follow what you're saying now.

We can talk off-line this morning on that if you like.

Second question is your reserves to pay claims is down to 1.6 times, and I remember speaking three or four months ago when it was 1 8 last quarter and you said I can't see getting below 1 8. What is your current thoughts on that basis?

We are continuing to strengthen our total reserves in mortgage insurance business, paid claims right now are going up. We are watching the relationship very carefully, and we will continue to strengthen the reserves as we think it is appropriate. But at this point in time, we think the current reserve adequacy for the mortgage insurance business is very clear and very sufficient.

So you are not going to say it is not going to go below 1 6 anymore?

That's just a measure. It is not something that is a relationship, it is not something -- we set reserves by the delinquencies.

Your delinquencies are going up, not down.

And so are our reserves. The reserves support the existing delinquencies. The claims are paid out of the existing reserves.

We still have about a little over $10,000 per delinquency in reserves in our mortgage insurance reserves.

Thank you very much.

David Hochstim with Bear Stearns.

I wonder, could you explain again what changed with deep-cede captives that has made them unattractive now? In the past they were part of overall relationships and that is how they looked at them. And then I wondered has there been any effect on pricing from the negative watch from S&P?

Nothing has changed with regard to the deep-cede captives. I've said pretty much the same thing that I said today for quite some time now. We look at each one on a relationship basis, but long-term a deep-cede captive independently as they are currently structured in the market is simply not a long-term sustainable venture. Where we -- in a relationship where considerably more business away from that was developed, where there are other profit potentials within a relationship for us to consider we would consider that, and we would consider a deep-cede captive as a part of that. But on its own relationship that was based exclusively on a deep-cede captive session is not long-term sustainable and will not be a part of our long-term business opportunity with that business partner.

Okay, so does that mean that there is going to be much of a change in the amount of deed-cede access to loss business you write or not necessarily?

It means there will be less next year than there was -- sorry, less in '04 than there was in '03 and hopefully less in '05 than there will be in '04.

Thank you. And with respect to the negative watch (ph) does that have any effect on (indiscernible).

The first point is one of a very important fact -- this is Tino -- we are not on CreditWatch negative (indiscernible) or otherwise. S&P has said that they changed the outlook on their ratings from stable to negative. That's a very different --.

I apologize.

And it is really too early to tell whether there's an impact in pricing in the marketplace. I think that how long that negative outlook may end up be hanging out there and how credible we are in addressing the concerns expressed by S&P, those factors I think will be taken into account in the market.

And would they typically move you from outlook to negative watch if they were going to consider a rating change or right now we are not even at the watch stage?

We are not at the watch stage, and in terms of what their history is with outlooks changes in -- changes in outlook is not a ratings action.

Okay.

They make that distinction, it's an important distinction.

All right.

And I wouldn't want to either address what the statistics are from S&P or how they would characterize the likelihood of change. From this point you should address those questions I think properly to S&P.

Okay, thank you.

Shawn (indiscernible) with Goldman Sachs.

Quickly can you just quickly address whether you guys talked to Moody's at all? I haven't seen anything from their front and after you address that I have got maybe (indiscernible) other quick question.

We are in very regular dialogue with all of the rating agencies. We will be in fact meeting with Moody sometime in the next two weeks as well to review our '04 plans. So we are very current with all of them. I think they are current with us, and our business expectations.

And they have not expressed any interest yet in terms of taking the same actions of S&P yet or can you provide us any color on that?

They wrote a commentary on last week after we announced our Conseco thing so it is out there.

You guys touched on growing the international mortgage business. Can you give us some color in terms of how far you are looking to grow that in terms of percentage revenues in terms of operating income and how much that is versus now?

Right now it is very, very tiny.

Very minimal, yes.

We have only done a couple of transactions. Over the long-term it could be 10 percent of our mortgage underwriting, but that's going to take several years to get there.

Okay. What are the potential outlays of capital to do that? Maybe you can address this for me now, but just kind of weighing what potentially could do there versus what you have to layout to get there.

In terms of capital, virtually no incremental capital. The operating expenses associated with the international mortgage development is probably a couple million dollars a year. That's all. Its a couple -- right now it's about three people in London.

Okay. All right, guys. I appreciate it.

How many more questions are in the cue?

We have three more questions in the cue. Jerry Brunie (ph) with JB Brunie (ph) & Co.

I noticed that the increase in book value for the prior year was approximately 80 cents per share more than your stated earnings which I take to mean that you simply provisioned for losses more than you paid claims. However, your increase in adjusted book value was something like $3.50 per share more than your increase in book value. Could you speak to what accounts for that?

First of all, the difference in the book value from the earnings is going to be other comprehensive income, so that's going to be the -- there was a substantial increase in the value of our investment portfolio, which increases our book value. So that's going to the difference there for the most part.

And then adjusted book, clearly we are adding unearned premiums which don't impact book value but do impact adjusted book and the future value of installments, which don't impact book value but do impact adjusted book. So it is a different calculation, and adjusted book includes essentially taking credit for business that is on our books that will produce future income, as well as offsetting that by some conservative loss on expense expectations.

I understand the (indiscernible) present value of installment premiums (ph), but it looks as if from your supplemental information that there was a real jump in the present value of mortgage insurance, MI business. What accounted for that?

We added to our insurance-in-force very substantially during the year, and you can see from the calculation insurance-in-force was really what is -- and the premiums that is earned from that insurance-in-force is really dictating the calculation of future premiums on MI.

Lastly, does some expectation for persistency on that business enter into the calculation?

Yes, absolutely.

All right. And did that change materially in the last year?

It hasn't. We really take a view there that it's going to be an average. We don't change it every year to reflect changes in our persistency expectations where we are really looking at a longer-term view when we're doing these calculations.

Makiko Coakley with Endeavor Capital.

Bob, I think you said that the increase in claims paid in '04 would be similar to the month in '03 in (indiscernible) is that correct?

That would be similar in magnitude than it was in '03, yes.

That's about 100 million in increase? I mean, yes, right?

Those are the numbers, yes.

Okay, and could you give me the proportionate increase between the prime versus nonprime in the second?

Don't have that off-hand, but we can talk about that off-line.

Okay, and on your second and NIMS product, if I calculate your premiums on this quarter over (indiscernible) in force that is about 12 percent, is that the right way to (indiscernible) ?

Well, the premium rate is based on the insurance in force, so -- but you can do that calculation if you'd like, and yes, those are the numbers.

What is the typical coverage ratio for second and NIMS?

Well, second mostly seconds are 10 percent aggregate loss limits, so the insurance in force would be 10 times the risk in force. And on NIMS, typically the insurance in force and risk in force are equivalent.

Equivalent, okay. Thank you very much.

Ed Groshans of Moors and Cabot.

Can you just recap? You talked about the manufactured housing and some change in reinsurance and callback?

In our reinsurance portfolio we have additional manufactured housing exposure of $255 million. If the callback occurs the amount of that $255 million of exposure will be reduced by about $217 million. So that is what will disappear immediately upon the callback.

And that was also associated with the 26 cents or am I confusing two things?

The 26 cents is the direct P&L EPS effect as a result of the total callback. So that is the P&L affect. The other was the risk in force effect. And Bob also mentioned about 94 cents in adjusted book value affect. So there are those three. There are others but those three are the financial highlights of the transaction.

Thank you very much, Frank. Have a good day.

At this time there are no further questions.

Thank you all. It's been a long call. We've had a lot to talk about. We think the year 2004 is setting up to be a good year for us. We've gotten some things behind us. We look forward to talking to you again in the near future. Thanks.

Thank you. This concludes the Radian Group fourth-quarter conference call. You may now disconnect.