Radian Group Inc (RDN) 2004 Q1 法說會逐字稿

Good morning. My name is Deshanta (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Radian Group first-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Ms. Mona Zeehandelaar, Vice President of Investor Relations, you may begin your conference.

Thank you for joining us today. With me on the call are Frank Filipps, Bob Quint, Roy Kasmar and Tino Kamark. You will note that we included a table of key financial highlights at the beginning of our press release this quarter, and I want to clarify that only two lines, premiums written and premiums earned, exclude the impact of one of the primary insurer's recapture of business with Radian Reinsurance. All other lines in the table include the impact.

Before I turn the call over to Frank, let me remind you that today's conference call will contain statements that are forward-looking. As you know, these statements are based on current expectations that are subject to risk and uncertainty. Radian's actual results may differ materially from those expressed or indicated by forward-looking statements. Factors that can affect Radian's performance are described in our 10-K and in our other filings with the SEC. Let me now turn the call over to Frank Filipps, Chairman and CEO of Radian.

Thank you, Mona. Good morning all. As is our custom, I will try to focus on some highlights and areas of specific interest in the quarter and then turn it over to Bob for a more complete review of our financials. And then, obviously, we will take some questions. For those of you who are on our webcast, the slides that you see there are meant to be used as background. They will complement our presentation today, but our presentation will not follow those slides.

Overall, as I look at the quarter, I think we had a good quarter. Given everything that occurred at the beginning of the quarter, I would say a pretty solid quarter for us. Premiums written excluded the clawback reversal was up 10 percent. Premium earned excluding the clawback effect was up 19 percent. Book value per share was up 17 percent and our adjusted book value at March 31 was up to $50 and 13 percent, up from year-end and up about 15 percent from 3/31 last year. Last but not least, net income per share was up 14 percent. As I have said, I think all in all, a pretty good quarter for us.

We point out adjusted book value, and I point to that because as we have discussed in the past, we think that adjusted book value is a very valuable measure of the value of the company, and clearly represents the embedded future value of the company as well. Although this is a non-GAAP measure, it takes into account all of the measurements that we at management feel are important for us, and clearly that reflects how we manage the business. There is a reconciliation of the adjusted book value calculation to actual GAAP book value posted on our website for all of you who wish to go back and do the reconciliation of that.

During the quarter, we completed our 2.5 million share repurchase program that was authorized about a year ago. In the quarter, we purchased back 585,000 shares at an average cost of about $44.13. For the total repurchase of the 2.5 million shares, the average cost was 34.77, $34.77. As we have said in the past and as we have discussed in the past, we believe that repurchasing of shares is something that should be considered when it is an effective and efficient use of capital. It is not something that we do in order to take advantage of particularly low stock price, but it is something that we entertain when we believe that the capital use and the returns on that capital from repurchasing shares will offer us a positive return. If buying back shares is most efficient, we will continue to do it. We will continue to look at that in the near term as we look at possible incremental share repurchase programs.

On the rating agency front, I know many of you have talked to us about where we stand on that. Let me just recap that for you. In early March, Fitch reaffirmed our ratings with a stable outlook. We were pleased with that. We have had an extended, extensive and quite interesting dialogue with Standard & Poor's. As you know, they had put us on a negative outlook back in January. We have been working with them. We are committed to continue to work with them. They had some questions about controls in Radian. I honestly believe we have addressed all of their issues. I am committed to addressing anything else that they need. We have put controls in place that eliminate the possibility of transferring risk around Radian intragroup. That was one of the key concerns that they had. And as a result, I am optimistic that in the near term, and near term could be 6 to 12 months, but somewhere in the near term that we will satisfy all of their requirements, and I am optimistic that the negative outlook will be removed. We continue to talk with Moody's, and there again we have addressed many, if not all, of their issues, and we have supplied them with all of the information that they have been looking for with regard to business models, product models, etc. Again, I am optimistic that our ratings will be affirmed there as well.

One additional piece of good news. Recently, Radian won the RESPA case that has been pending against us for several years. It has gone through the court system in a couple jurisdictions. As you may recall, the case that was brought against us alleged that kickbacks to lenders were in violation of RESPA, and a suit was brought against Radian and I think just about all of the other mortgage insurers as well. The case was dismissed. It was dismissed in our favor, and we believe that the opinion in that dismissal was very strong. Therefore, the conclusion is that we don't believe there will be any further significant legal action around this. This is a win for us. As you may recall, Radian chose to fight this case. Other companies decided to settle this case and paid huge sums to make it go away. We never believed we did anything that was in violation of any RESPA or other regulation, and as such took a very hard stand and fought it, and at this point in time I am very pleased by the fact that we have won this case.

Turning now to our business units, the MI business, while in a challenging environment, has clearly shown some encouraging signs in both credit improvement and persistency improvement. In addition, our market share in the mortgage insurance business has remained strong. We believe it may have increased a bit in this quarter, probably somewhere maybe north of 17 percent. As we look at the mortgage market, a couple months ago we had made predictions probably back at year-end that the market would probably be about 1.6 to $1.7 trillion in mortgage originations for the year. In mid-March the MBIA (ph) and others raised their '04 forecast to about 2.5 trillion. That's when interest rates were going down. Today with the ten-year treasury in excess of 4.4 percent, my guess is that you will start to see that origination forecast reduced soon. I would expect that you'll see forecasts reducing the 2.5 trillion to closer to 2 trillion as we go through the year. And after Fed Chairman Greenspan's comments yesterday, we will see where interest rates go. But I am making a forecast that that 2.5 trillion will come down.

What that means for us is that persistency should pick up. Persistency for us in the quarter was 51.5 percent -- that was annualized -- and 61.5 percent for the quarter itself. If rates were to stay where they were today, our guess is persistency will stay in the low 60s. If they go up a little, persistency will inch up into the high 60s probably in the third and fourth quarters of this year.

On the credit side, the number of defaults and our default rate declined in the quarter in just about all sectors, with the exception of our Alt-A book. As we have discussed in the past, this is an area where we think we made some assumptions in the past that are proving to be a little bit too optimistic, so we are cautious on the Alt-A book. What I can tell you is that the claims rate that we had assumed in that Alt-A book are pretty much on track. When we modeled that book, we had expected about 5 to 6 claims per 100 loans originated at the time of origination, and right now that is running in that range, although at the high end of the range. The real problem is that that Alt-A book has refinanced away much more rapidly than we had expected. That is true for all of our books, but in the Alt-A book, that refinancing was even more accelerated. I think Bob is going to give some more details on that presentation in his report.

In terms of job growth, we are encouraged by the recent growth in jobs. As we have said for a long time, that is a direct correlation to ultimate losses and delinquencies, although there is probably a three to six-month lag. On the captive front, we have not changed our direction or our course in any way, nor have changed any of our policy statements. We believe that it is appropriate for Radian to look at each of its captive relationships and each of its lender relationships on an individual basis and, as such, we have continued to do that. We have made strides in turning back deep-cede captives. We have eliminated several of them. We have modified several others, and we are continuing to march down this path.

We have not changed our policy. We have not changed our outlook that many of the deep-cede captives in place today are not long-term sustainable, and our goal is to either reduce them, eliminate them, or modify them to the point where we believe they will be sustainable over the long-term.

In the international mortgage insurance world, we continue to make strides. We have closed a couple of other transactions in the UK, as well as in the Netherlands. We believe that the opportunities there will continue for us, and we are working diligently to pursue them.

On the financial guaranty side of the business, financial guaranty had a good quarter. We went through a difficult period in the reinsurance clawback. Any time you do that, it is not good. You lose a large chunk of business. You don't feel good about it, and unfortunately it is also reflected in our financial statements. We are recovering from that. We are recovering quite well. We are reemploying the capital. We are reemploying it at rates that are higher than had been employed in that reinsurance agreement, and so there are good things that can actually come out of this, and there are 3. Number one, it freed up tremendous amount of capital, about $170 million at Radian Reinsurance, which will continue to be redeployed at higher rates of return. It reduced a good deal amount of $17 billion of low reinsurance use on our reinsurance book. And number three, it greatly reduced the number of names on our reinsurance watchlist. So I guess I have often been accused of being someone who sees the glass as half full, and I think this one is half full and filling rapidly.

First-quarter production excluding the clawback historically was good. Historically, the first quarter is slow in terms of new production, especially when you follow a fourth quarter that was very strong, and deals try to get completed in the fourth quarter. When you look at the market, credit quality spreads were very tight, so the number of opportunities that we had were diminished, diminished by choice. We chose not to write business where we would not achieve our desired returns.

Talking about spreads, we can't eliminate the Conseco effect on our business in this sector. After Conseco, our spreads widened and we traded off probably as much as 15 to 20 basis points off the AAAs. That widened out by about 7 to 10 basis points. What I can tell you is that that widened spread has now all but compressed away. It has not been totally eliminated. There is still some overhang, but we are working diligently on this and it is almost gone. We are almost back to where we were prior to the Conseco announcement.

This has been difficult for us. We have been working it diligently, but we are working it and we are seeing the results of that. We still anticipate strong results from our direct financial guaranty business in the public finance sector, and we are moving into new sectors in this business, primarily transportation sector, looking at toll roads, airport revenue bonds, tunnels, bridges, etc. This is a new area for us and one that we think is pretty fertile territory, and one that we're going to be pursuing pretty aggressively as we go forward.

In our secondary marketing activity, we've continued to use capital there and to provide capital and capacity to the market, in what previously had been constrained names by our own single name limits. We continue to write business in California. For the first quarter we insured about $38 million worth of bonds, primarily California GOs, a very good business for us, and we were able to take advantage of our newly obtained license in California to do this. We are optimistic that California offers us another market for expansion.

In the structured products market, again credit spreads very tight for the whole quarter. We are optimistic that those spreads may widen and that this will give us another opportunity to fully engage in this business as we go forward. During the first quarter, our structured products team completed about 14 transactions totaling about $1.2 billion of par insured. That was a good quarter for us. The reinsurance market, we are continuing to offer reinsurance capacity. We have relationships and treaties with I think it's six or seven of the primary financial guaranty companies in place now. We are finding good demand for our reinsurance capacity, and as the returns are currently satisfactory to us, we will continue to offer this capacity and hope to grow our participation in this business. We believe that the business we're writing now is of high quality and of attractive return.

As we look at our financial services sector, we're very pleased with the progress we have made there. Both C-BASS and Sherman had excellent quarters. Sorry, I lost my note on that. They both had excellent quarters, as you can see. They continue to grow, and they continue to grow recurring revenue, which is good, core quality recurring business. C-BASS had an extraordinary quarter in their gains for the quarter. That may not be recurring, but nonetheless the business continues to grow very soundly and in a very well- structured and managed way. With that, let me turn it over to Bob.

Thank you, Frank, and good morning. This morning I'm going to focus on several items within our financial results that warrant special attention or clarification, and I hope I could do that this morning for you. First, regarding the clawback which was between $16 and $17 billion of insured par from our financial guaranty business, that has obviously caused a distortion in several line items of our financial guaranty P&L. To make things as clear as possible, what we have done is provided a supplemental schedule that is a three-column statement showing you the results of both the financial guaranty segment and the consolidated financials and the results excluding the clawback. A second column with the specific impact of the clawback, and then the third column which is a full P&L, which obviously ties to our GAAP P&L for the quarter.

Essentially, what we had to do to record that transaction was to reverse out the business that was taken back as if it were never written. The direct onetime impact to earnings for the quarter ended up being 11 cents per share. Primarily that represented the difference between statutory unearned premium and GAAP unearned premium, although there were several other line items that were impacted to a lesser extent. Also, as we previously disclosed, there was another 13-cent impact that will be spread over the entire year, primarily made up of premium that would have been earned during the year. As we redeploy the additional $170 million of capital that the clawback freed up, and that will be done on schedule over the next two to three years, that 13-cent impact will be mitigated. As Frank mentioned, we have already begun to do that on favorable terms.

If you look forward to future quarterly results in the financial guaranty segment, the figures in the column that exclude the clawback is what we will be building on to produce our future results. In addition, what we've tried to do is any supplemental financial guaranty information that was impacted by the clawback we have highlighted, clarified it, to allow more appropriate comparability.

Turning to MI premium, MI premium earned was very strong this quarter, despite the small decline in the in-force. This was due to continued increase in average premium rates, resulting from the nonprime business mix and also from the continued strong premiums in our alternative products, which includes seconds, pool insurance, and bond reps. We believe we can grow earned premium for the balance of the year. However, the growth will be modest as the average earned premium rate has likely peaked, and most of our in-force growth will come in the second half of the year, as persistency increases.

In the first quarter, you will clearly notice that MI operating expenses were up compared to last quarter after we said that the run rate was likely to remain at fourth-quarter levels. The entire increase in MI operating expenses is attributable to a strengthening of the accrual for contract underwriting remedies. That is where we pay for errors that the contract underwriters have made. With the huge volume of contract underwriting we have done over the past few years and the huge increase in the amounts of that volume, we feel it is prudent to have a solid reserve to absorb such expenses when they do occur. Generally, this is a small steady ongoing expense, so it is unlikely to repeat in future quarters.

As a result of Radian's significant position in the Alt-A MI product and due also to the strong demand for additional information about our Alt-A book, we have presented a variety of things that hopefully provide more clarity around our Alt-A. First and foremost, we would like to explain what we call Alt-A. What does Radian call Alt-A? Anything that isn't a fully documented loan, we include in Alt-A. That includes many loans that have stated income, which would be unverified, but verified employment and verified assets. It also includes many loans that go through the normal Fannie Mae and Freddie Mac underwriting engine and get routine approved ratings. Very few of our Alt-A loans have no verification of income, employment, or assets. We believe that our definition of Alt-A is the most inclusive definition compared to anyone else in the marketplace.

To be clear and to reiterate what we have been saying publicly, we are generally happy with the credit performance of our Alt-A book. We expect to continue to write the business. We have adjusted pricing upward. We have adjusted the FICO mix upwards, and that is based on our experience. Among other things, we gave given you a breakdown of our Alt-A business by FICO score. Most of this business is high credit score, and therefore it is people that have a demonstrated history of paying their mortgage. In addition, the average LTVs (ph) on the Alt-A book are a little bit lower than the rest of us our book, and that helps.

Importantly, the only business in our Alt-A that is currently performing any worse than expected from a credit standpoint is the lower FICO Alt-A book, and that would be the 620 to 660. And to narrow that down further, only such lower FICO business from the flow channel. And that is about half of the business in that bucket. So to break that down and to show you what that means to our risk in force, Alt-A is about 20 percent of MI risk in force. The 620 to 660 bucket is about 25 percent of that, and the flow business is about half of that. So it ends up being about 2.5 percent of our risk that is in that bucket that it performed a little bit worse than expected. (indiscernible) that business, that 2.5 percent, will still be profitable; it will just have a little bit lower return than anticipated.

As Frank mentioned, our effective claim rates for Alt-A are in the five to six range. Our expected claim rate for higher FICO Alt-A is about five claims per 100, and our expected claim rates for lower FICO Alt-A is about 7.5 claims per hundred. Our pricing projects to at least mid-teens returns on this business, assuming those claim rates. We believe that all the business in the Alt-A bucket will produce claim rates right in those ranges. The problem with this business for the 2001 to 2003 vintages has much more been the prepaid cycle has been faster than modeled. Keep in mind that all of our business, every single piece of our business -- prime, Alt-A, A-, and second -- that was written 2001 to 2003 is producing subexpected returns due mainly to prepays being much faster than average during the cycle. When we price our business, we price to an average loss and an average prepay. There will always be deviations from that average. That is why we expect the mid-teen returns for this business over a cycle, which includes a credit cycle and an interest rate cycle.

The good news is that the low rates in our current book will ultimately give us a book of business, and hopefully, it's this current book of business that is on our books now that lives longer than the average and is therefore more profitable, ideally offsetting the high or fast prepay in the 2001 to 2003 (indiscernible). And that includes the Alt-A business.

We did write a high percentage of Alt-A business this quarter. By our definitions, the entire mortgage market is moving more towards Alt-A. What we can promise is for the FICO mix on Alt-A business we write from here on in will be higher than it was in 2003, and that is due to significant underwriting changes we made and we spoke about last quarter. We have already started to see that happen in the first quarter 2004 writing.

In the first quarter, in which the number of our delinquencies declined significantly -- and obviously that's a great positive -- we still increased our MI loss reserve by about $8 million. This does need an explanation because we have spoken in the past about our provision having more to do with delinquencies than anything else. That is true, but remember, our balance sheet loss reserve is the best estimate if future claims that will have to be paid out on existing delinquencies. Over the past few years, we have seen the roll rate from delinquencies to claims increase, and we have no evidence yet that our claims paid have peaked and will come down. If and when we do have such evidence, we would be able to reduce our reserve line; but until then, expect our reserves to continue to decrease. There is also likely some seasonality to the decline in delinquencies. We would like to see several quarters before we consider it a trend. We are still comfortable with up claim guidance we gave last quarter. That guidance translates to paid claims in the $380 million range for 2004.

You will notice that claims on seconds went up this quarter from where they had been running. After going through some growing pains in 2001 with our initial seconds book, we pulled back in 2002 and didn't do very much of the business. And we reconstituted it in 2003 and wrote a decent amount of it in 2003. The claims you see in the first quarter are the 2003 book beginning to generate some paid losses. We expect those paid losses to be consistent for the next several quarters. This business also has been hurt by very fast prepays. However, based on the current results, we feel the business will be profitable, but not profitable enough that will be any more than a very small part of our future writings for the MI segment.

This quarter we booked a substantial gain on sale from investments, $26.7 million. The number has been consistently positive, but nowhere near this level. This quarter, the number was affected primarily by the sale of equity securities at a gain for portfolio balancing and portfolio mix purposes.

Frank mentioned C-BASS and Sherman and their wonderful quarters. Clearly market conditions have been good for them. They continue to execute sensible, disciplined business plans. We believe the second quarter can be equally as strong for C-BASS and Sherman, and for the second half of the year, we would expect C-BASS would fall off from that; however, their year interims (ph) yield will clearly be very strong. We continue to focus internally on book value growth and adjusted book value growth. I would note that our book value growth of 4 percent for the quarter and 17 percent for the year ended March 31, '04, a very, very solid number.

Finally, I want to point out that Radian in April swapped about $250 million of our outstanding debt from fixed-rate to floating-rate. Including our floating-rate soft capital facility, our current mix of debt is now 54 percent fixed and 46 percent floating. That is a proportion that we feel very comfortable with. This move will provide a small short-term earnings benefit, but it is clearly not an interest rate debt (ph). We did this because it makes sense from a business standpoint, that the interest on the floating-rate debt will likely be negatively correlated with MI cancellations. We would now like to turn the call over to questions.

(OPERATOR INSTRUCTIONS) Robert Hottensen of Goldman Sachs.

A few questions. The first is on the reinsurance side, you mentioned that the remaining business following the MBIA clawback is high-quality, providing attractive returns. On the AMBAC conference call yesterday, they indicated that with AXA and with Munich exiting the business, there might be some opportunities, at least in their case, to rethink their insurance relationships and recede business to other reinsurers that had been previously carried by AXA and Munich. Do you think that you would be in a position to compete with other reinsurance companies to capture some of this business back?

The second question really relates to the trade credit business. I note that Assured Guaranty, which was another AA company, split-rated company that has basically, I think, discontinued the trade credit. Would that imply that your prospects could improve in that market? Are they much of competitor in terms of moving the needle? And then the final point about the trade credit, do you see some trends that would suggest that the loss trends there are going to moderate?

Okay. First, in terms of the reinsurance opportunity, we think that the opportunities are good. Our relationship with AMBAC has always been very solid; it still is very solid. They are a valuable counterparty for us, and we would love to offer them and have offered them capacity to pick up where others have given up or have left the marketplace. So that is clearly an opportunity for us and we are exploring it actively.

Frank, it is worth noting, if I can interrupt for a second, that we actually have already done one of these bulk -- I guess you would call it re-cessions with another of the primaries on negotiated terms.

On the trade credit, we have been pulling back in terms of our trade credit exposure for the last two years. What I think you see in terms of the premium growth is actually -- the result that you were referring to, Bob, is that the terms of the agreements have improved so substantially that we have actually grown our premium while reducing a lot of our exposure. That is our continued plan in that business. We will only be in it in a rather focused way, and not in a broad way. It is not a business that is long-term core to us. We like the returns and the opportunities right now, but as those premium rates may fall in the future, my guess is that if premium rates fall, we will offer even less capacity to that marketplace.

And in terms of Assured Guaranty, I really can't speak to them, but we have clearly benefited from the market in general.

Geoff Dunn of KBW.

A couple weeks ago on MGIC's (ph) call, they were talking about a differential on the cure rates they have seen in the last three quarters on new business versus on the older business. Are you seeing any kind of similar developments and is that factored into your loss guidance?

I think it's a little too early to make a judgment there, Geoff, on the newer business. But as I mentioned, we have seen an upward tick in the roll rates over the past couple years, and a lot of that is because of the mix of business as well. But I don't think we are going to make -- we have made a judgment on the newer business yet.

Okay. And on the seconds business, I just want clarify. It sounded like you may be indicating you're going to back away from this market given how its' developing. How quickly will that tail disappear and how long should we be looking for both the premium component and the paid loss component at these levels?

It is clearly faster than the rest of our business. It prepays faster. The losses show up quicker. So I would say after a couple years, you would see it pretty much gone. But we did write a decent amount of it in 2003.

But it is your intention to almost pull entirely away from this?

To reduce significantly, certainly.

Last question. With the excess capital you now have in the Financial Guaranty side, you definitely have the capital on the MI side to potentially seek some sort of redeployment of that. kind of dividend could you pull up from the MI sub this year?

We have been looking at that -- probably in excess of $100 million. Maybe much more than that.

There's the free dividend capacity, which is unassigned surplus; and that, as Frank mentioned, is over $100 million. There are other ways to get dividends if you choose by going through the insurance departments. That's a little more difficult. But if that was the desire, it could be a route we would go if we want.

Have you considered going to the DOIs to try to get some of the contingency reserves that are beginning to roll off?

We really have not. Right now, we've got, as Bob said, a sufficient amount of excess capital that we can dividend out. So we're going to go down that path and then we will take a look later in the year at any special dividend requests that we may wish to put in place. So we're starting to be a little optimistic that in force may grow, and if it does, then we will need the capital to support the growth in that in force. So we're going to watch it very carefully. We are not opposed to taking the dividend out. We have said any number of times that what we want to do is manage the capital in this Company very carefully, and allocate it to profitable products. So if we have the opportunity to take capital out, we will, and we will do it very prudently. We don't want to do it in any dramatic or rash way.

Okay, thank you.

Paul Miller of FBR.

I had two quick questions. One is -- if my calculations are incorrect, please tell me, but the average premium yield jumped from a 67 basis point to 70 basis points. Can you just add some color why that jumped so much between the fourth and first quarter?

Yes, Paul. Primarily it's the mix of business, so you have the nonprime business with significantly higher premium rates than that. You also have the nontraditional products, the stuff like seconds, pool insurance, etc., that really is in the numerator because it included in premiums earned, but it is not in the denominator. So that is something that has always been true, but the more you have of that as a component of your premiums earned, the higher the average earned premium rate. Now, I did say and will reiterate, I think 70 is about as high as it goes.

Okay. Because as you start to grow insurance in force and that numerator starts to increase, that will come in?

Yes, especially if it is the A business and the lower premium rate business that grows, and that is clearly expected.

And you mentioned last quarter that you started to raise some of your prices in the Alt-A. Is that being felt yet in the premium yields or that's going to take awhile?

Just a very little bit, Paul. I would say over time we will get that, and just a little bit in the fourth quarter.

Making the comment that you want to attempt to back out of some of these deep-cede premiums, wouldn't that put some upward pressure on the premium yield, also? That's just going to take a lot of time to work itself through the system.

Yes.

The other question I have for you is more of a housekeeping issue. On your Financial Guaranty business premiums earned, it dropped -- and it dropped from like $63 million to $36 million, and I expect a lot of that was due to the statutory and GAAP catch-up coming through that line item. Am I correct?

Yes. And if you look in our supplemental information, we showed you exactly what that was. So if you look at the premiums earned column that excludes the impact of the clawback, I think it is the low 60s, right? It is in the low 60s. Now, the reason that is down from last quarter is because of the secondary impact of the clawback, the fact that there was business that would have earned in the first quarter that didn't. So that is a small impact. That's a couple million dollars.

I'm just trying to model going forward. Should that jump up into the 48, 50 range going forward?

No, start from the 61 or the number that is excluding the clawback -- and that is clearly marked. Start from that, and as we grow the book, it should grow slowly, steadily from there, as it has for the past several years.

So really quick -- I'm being thick here. Start at the low 30s or the low 60s?

If you look at the number, it's on Schedule 2 in segment information, supplemental schedule. Premiums earned as adjusted, quarter ended March 31, excluding clawback was 61,196. That is the number that we're going to grow from starting now.

Thanks a lot, Bob.

Rob Ryan of Merrill Lynch.

Good morning. Just a little bit of that nitpick. I was getting confused. You were mixing up the 12-month calculation versus the 3-month calculation for persistency. And when you switched to the issue of an outlook or a sensitivity analysis given interest rates, what were you talking about in terms of one of those calculations versus the other, and by what timeframe were you discussing? Is it year end 2004, that's what you are projecting? Or just exactly what was that?

Obviously, the quarterly annualized number for this quarter was in the low 60s. The annual number, the number from 12 months ago, was the low 50s. What we were referring to was really more an annualized number. So next quarter, obviously, we are going to see some of the impact of the reduced rates that happened. So next quarter probably won't move very much on a quarterly annualized basis. However, if interest rates stay where they are now and even move up a little bit more, the high 60s that Frank referred to was again more a quarterly annualized rate; it's not speaking to what the 12-month minimum would be.

Okay, great. Just a question also, it's one thing that jumped out at me in the release. I think it was new information that maybe wasn't provided before. The average claim amounts in the Alt-A is extremely high compared to the overall average. Could you explain the characteristics of the loans or how the claims work or whatever that would contribute to that pretty substantial differential?

Most of the difference is explained by the average loan size. If you look at average loan size in our book, I believe the prime book and A- book is about $130,000 loans, and the Alt-A book is about 170 something. So a lot of the explanation is just the loan size. In addition to that, there is a higher average claim on the Alt-A book, which tells us that obviously the 170 is an average. Those loans that are going to claim in the Alt-A happen to be the higher balance loans. You've got loans, obviously, all around that average, and it happens to be that a lot of the loans in the 2, $300,000 range are the ones going to claim, and in the claim payments on those is very high.

Are you seeing a delta that is any different in this area compared to the book as a whole? The issue of how frequently loss mitigation techniques can be used to reduce some of the severity. Is this increasing faster than the book as a whole or just sort of in lockstep, but obviously starting from a much higher starting point?

We will probably have to take that one off line. I'm not sure that we -- we have to walk through that very carefully.

Fair enough, thank you.

Jonathan Gray of Sanford Bernstein.

First of all, can you -- it appears that the losses on seconds, which I assume are in the Rink (ph) portfolio, were quite large in the most recent quarter -- over 13 million. I am wondering what is going on there. It is a very small portfolio.

Jonathan, the increase in the amount of claims in the seconds is predominantly a result of that 2003 book that we wrote. We wrote a significant amount of seconds in 2003 that has produced also a good amount of premiums, both in 2003 continuing into 2004. So a lot of the reason why premiums increased for Radian in '03 and continue to increase is that seconds book.

Now the seconds, the way those roll into claims is they roll much, much faster into claims. After 180 days we actually pay the claims, so the claims show up much quicker. So that is the reason. Clearly that business is performing okay at best. It is not a business that has performed very, very well. But the premiums still are well in excess of the claims, and we do ultimately expect the business will be profitable. So the increase is directly related to that 2003 book that we wrote, and we did say we expect claims to be pretty consistent in this range for seconds, but we're not going to be writing very much more of that (indiscernible).

Bob, is that the Rink portfolio?

Yes it is -- it is part of the rating chart portfolio.

I thought you had stopped writing to that portfolio some time ago.

There are seconds in both rating insurance and Amerin Guaranty. Amerin Guaranty is also the place where seconds are written. So it is really a combination of those two companies that house all the seconds.

Okay, do you anticipate losses -- that that was some sort of lump and that we're going to see a return to -- I mean, last year, the full year losses on that portfolio were something like $23 million. You're running at a $52 million rate currently.

We also added significant amounts of premium in '03 and significant amounts of business in '03 that were not losses in '03. So incrementally, this is the '03 book starting to roll into its relatively normal loss patterns.

We must be confused. I will try and take this up with you at another time, if I may. If I could ask, did you say that the full year paid claims in MI -- am I not mistaken, did you say they your anticipation was in line with your earlier indications of $380 million?

Yes.

Last question, credit underwriting mistake reserve. Can you tell us what that was over and above a normal expense in the quarter during the first quarter?

The total reserve take was about $10 million. Typically, that has been running $1 million or so a quarter.

Thank you very much.

AJ Grewal all of Smith Barney.

If we take into account the $8 million of reserves built in the MI business, and also excluding the Conseco claims paid, it looks like your net reserves were up only $3 million. So by deduction, it would suggest that your -- (indiscernible) your guaranty reserves have been down about $5 million. And if that's correct, could you let me know? And what are your plans as far as reserve building in the Financial Guaranty business?

Again -- unfortunately, this clawback comes back to haunt us in a lot of ways. We actually paid -- and this is also specifically disclosed -- we paid $11 million that was in the loss reserve -- as part of settling the clawback, we paid $11 million out. So that is going to come out of the reserve. Excluding that, we did build reserves in Financial Guaranty.

Okay. And your tax rate has jumped around the last couple of quarters. Could you give us an idea of where that's heading?

The tax rate, to large extent, is related to the net income and the percentage of our net income that is in investment income, which is heavily tax advantaged. Obviously, the fourth quarter net income was lower and the tax rate was lower because of that. Investment income was a bigger percentage. This quarter, we were impacted a little bit by that 11 cents from the clawback, which was operating earnings. So our tax rate in the first quarter is a little bit lower than it will be, but not significantly.

Thank you.

Bruce Harting of Lehman Brothers.

Hi, Frank. Hi, Bob. Can you talk a little bit about the impediments to continuing to grow on the Financial Guaranty side? Are there, between the combination of the ongoing negative watch -- and it sounds like you said the Conseco effect is all but gone. And then separate issue, can you remind us about that RESPA case? Was that the one where they said the MIs were, in effect, dealing too closely with --? I don't recall exactly the specifics, but I remember other companies paid a pretty good penalty on that thing.

Let me take that one. The RESPA, it was a case that stated that we, as a mortgage insurance company, were providing kickbacks to lenders improperly in the origination of loans and mortgage insurance. And that -- you have the case right, Bruce. That's the one that others settled and we decided to fight. So that's the basic thing. Howard, do you want to --?

I just wanted to underscore -- Frank had said that, in fact, every single other mortgage insurer was, in fact, sued along with us. They attacked all of our practices in virtually identical actions. And again, as Frank pointed out, we were the only ones to fight the case and had a complete victory in the courts.

With the regard to the impediment to the Financial Guaranty business, the biggest impediment to our business plan at this point in time is the rating agency overhang. And right now, the credit enhancement products that we are offering in various markets is being very well-received. We think that validates the business plan that we have had in place for a couple of years, that is based on the assumption that a AA credit enhancement, AA Financial Guaranty, AA wraps, depending upon the products that are being utilized, has a viable, long-term sustainable marketplace. It is not, by far, the largest sector of the market, but what we are finding is that as we continue to provide the product, the product is gaining more and more acceptance in all of the lines that we offer it.

And so, as often happens, the product acceptance, the AA product acceptance in and of itself feeds the continued growth of that product. As it is accepted as it is shown to add value in and of itself, it then creates its own market. That has been our strategy. It has been working. The impediment to its further growth right now is that rating agency overhang. And as I said, we are pretty optimistic that we are going to get through that. When we do, we believe that our penetration of the market, the AA market penetration, will continue to grow. So we are pretty optimistic about that.

Thanks. And it seems like Alt-A five, ten years ago, was something that was the domain of one or two lenders like Greenpoint and a few others. And beyond that, it was always viewed as a pretty small segment of the market. As it grows as a percentage of your underwriting, is this just a sign that the prime business is going more to the captives and it's lower margin, or why the continuing emphasis, by not only yourselves, but the industry toward Alt-A and A? And should we read into that that's the plain vanilla product is going more toward 80/10/10 or the captives and the pricing is just not attractive? And then finally -- I know you don't like to talk about your competitors, but how do you see the deep-cede playing out in the industry? It sounds like more and more companies are deciding it's not the way to go. I guess in the prospectus of the Company coming out, they originally -- Genworth said they were not doing it anymore, and then put an amendment saying they may it do it on selective cases.

When you look the Alt-A market, you have to look the way it has developed. And when you look at the expanded approvals that are available in the automated underwriting systems of each of the GSEs (ph), we think that that sector of the market will, in a very natural way, continue to expand. Clearly, the underwriters, as well as we, have found that by and large, FICO score is the biggest single predictor of mortgage performance. And as such, more and more of the underwriting engines are being more heavily weighted toward that. Documentation and verification of documentation is still important. And in the lower FICO score sector of that marketplace, it is even of greater importance still. So as Bob mentioned, we've made some changes in our underwriting guidelines to reflect all of that.

But I believe that what existed five years ago as a low-doc mortgage is today almost the norm. When you look the amount of documentation that underwriters look at and verify today, by and large and across the board, it is substantially less than it was five years ago. It is less than it was three years ago.

So the Alt-A marketplace will continue to grow. Most of the major lenders have very focused, dedicated resources. In fact, some of them have subsidiaries that target this market. So it will grow. It will continue to be an active sector of the market, and as such, we have to get our underwriting guidelines as well as our pricing right to reflect that this is going to be an ongoing sector of our market and a growing sector of the market. We are not in any way pulling out of this marketplace, but we are addressing the underwriting criteria as well as the pricing parameters that we need to make it successful.

With regard to other people's participation in deep-cede captives, I think you summed it up pretty well with the amendment you cited.

Thanks.

Brad Ball of Prudential.

Actually, just a follow-up on the Alt-A question. Just to clarify, Bob, did you say the you were no longer doing Alt-A with FICOs below 660? Also, you mentioned there are very few Alt-As in your portfolio that have no verification. Could you quantify that very few?

I'll try the first question. We will continue to do some business in this lower than 660 Alt-A, but significantly reduced. And the prices have been raised a lot in that, so we are pretty comfortable with that. You'll start seeing those numbers -- as we disclose them, you will start seeing those numbers hold true. What was the second one?

The question about no verifications.

I think we made this statement very confidently, that there are very few loans that are no everything. Some people refer to them as Nena (ph). It is very difficult to specifically capture that information in the loan field, so we can't say exactly what it is. But from the programs that we insure and the lenders that we know and our reviews and QC, we know that it's a very small number.

Fair enough. And another follow-up on the contract underwriting reserve. I think you mentioned a more normalized of around one million per quarter. Are we going to get back to that level? Is that what you said, after the 10 million you did this quarter?

Pretty much. The reason we did this is because we looked at a couple of years where contract underwriting was dramatically increased, and we thought it was a prudent thing to do was to put that reserve up. But we don't expect -- we haven't seen anything coming down the road that would lead us to believe that the old run rate would change very much.

Finally, in Financial Guaranty. Frank, could you tell us in particular where are you reinvesting that freed up capital? You mentioned a few new areas, like the transportation industry. Is that where we're seeing the freed up capital go?

That is one of the market opportunities where we see new requests and new demand for our product. So yes, that is one of the areas. We also think that credit spreads in the structured product market over the remainder of this year will widen back out a little bit, so we are going to be participating more actively in that market. Last quarter and the quarter before -- the fourth quarter last year, first quarter this year -- credit spreads and structured product were at historically the tightest levels they've been at. We have started to see that back up a little bit. We are optimistic that is one of the areas that will offer us opportunities as well.

If I may, I could jump in and supplement that a little bit. As capital is freed up, so is also capacity, in what the industry calls capacity constrained names -- the big frequent issuers in the public finance market, where insured capacity is a scarce commodity. We now have more of that scarce commodity available, which we can ration out at very desirable prices as market opportunities arise.

In terms of the timing of the reallocation of the capital, I think you mentioned three years. Will it take that long or could we expect you to reallocate it more quickly than that?

It will probably take two years. We are expecting that some time in '05 the capital that was freed up should be fully redeployed.

Great, thanks.

Chris Buonafede of Fox-Pitt, Kelton.

Two questions. First you mentioned about the rating agencies having some issues with control. And I think, Frank, you mentioned putting controls in place to avoid transferring risk within the entities of the group. How does that affect the potential merger of Radian Reinsurance and Radian Asset, if at all?

It doesn't affect the merger at all. In fact, the merger is on pace to be completed, we are hopeful second quarter of this year, maybe early third quarter. We think we have almost all of the approvals that we need. We just received the approval of the State of California, which was a big one for us. So we are ticking them down as quickly as possible. So the merger will occur. In the merger, we will actually strengthen the Financial Guaranty business and strengthen each of the lines of the business.

The transfer of risk that we talked about -- or the elimination of the transfer of risk -- is somewhat reduced as a result of the merger, since there will be one company which will write both the direct business as well as the reinsurance business. The significant transfer control risk that we have talked about with the rating agencies has really focused more about moving risk from the mortgage guaranty side to the Financial Guaranty side, and that was, in fact, the event that was around the Conseco loss.

As you recall, Conseco was originally originated in the mortgage side of the business and reinsured across the business lines to the Financial Guaranty side of our business. That has been through various governance changes internally. That has been virtually eliminated as a possible practice in the future. And so that is the key risk that we addressed, and I think certainly one of the major concerns that S&P has had in the past. And so in addressing that, we think that we have gone a long way in terms of just better governing our risk and controls internally, and in so doing, addressing one of the key concerns that they had had as well.

Okay. And secondly, I noticed that in the first quarter, the ratio of new risk written -- primary new risk written to primary new insurance written was very high. I think it was about 26.7 percent, and that is the highest we've seen in a very long time. And it came despite not much new bulk business written, which could push that ratio up anyway. Anything happening there that is unusual or why that would be so high this quarter?

I think that is going to be also LTV-driven, Chris. If you write higher LTVs, you're going to typically be putting higher coverage on those loans, so that's going to drive them.

Okay. And one other thing. What is the premium earned from the Radian insurance side of the business?

It's a little over $30 million this quarter.

Thank you.

A follow-up from Geoff Dunn of KBW.

I just had a follow-up related to this Assured Guaranty Company being spun out of ACE. Tino, I think you have said before, talking about the Double A market, that if there was more than one competitor there, the returns and growth could quickly be competed down. If Assured Guaranty ends up operating as a split-rated director Company for the next year, does that alter your business plan, or are they not necessarily in the spot that you're in?

Well, it's a compound question. And let me answer the easy one, because it is factual, first, and the other one being somewhat more speculative. We have been watching what Assured Guaranty has been doing in anticipation of -- in the marketplace in anticipation of the pending IPO, expecting that that will reflect what their strategy will be going forward. So the easy answer to your question is that they have not been in our space. We have not seen them as a direct competitor. They are clearly -- their goal, to my eyes looking from the outside, appears purely to Be a Triple A writer of direct substantial guaranty. Now, if that is not their strategy, it turns out, or if that strategy doesn't work for them and we see them trying to do some kind of a hybrid strategy or looking to compete with us more directly, it is very difficult to speculate what the consequences would be. We have not seen it so far.

Okay, thanks.

A follow-up from AJ Grewal of Smith Barney.

You had mentioned the run rate for the Financial Guaranty unit earned premiums around 61 million. How is that going to be affected by the additional three to four cents per quarter that you're not going to be earning? Should that be lower over the next couple of quarters or how does that work?

No, because the first quarter didn't have that either. So this was the first quarter that we did not have that in there. So the 61 is essentially the starting point, and represents all the business that we currently have. And then as (indiscernible) said, we build on that, we will increase from that.

Thank you.

Robert Hottensen of Goldman Sachs.

Frank or Bob, on the Alt-A business, you indicated that the run rate or the loss factor is around 5 to 7 per 100 loans. When you -- and that is performing within expectations. Was it also within expectations that the larger loans would show greater frequency and higher severity? And is the -- are you seeing higher and higher loans default with greater frequency in that book, and when might that trend reverse itself?

I think the trend, we would expect that to reverse at probably the last part of '05. The growth in that book has been relatively recent, occurring primarily in '03 -- '02, late '02 and '03. And that is also when we saw the development -- the extension and development of that low FICO score Alt-A book -- the book we have referred to do as the Alt-A minus book, which Bob tried to quantify for you. That really developed late '02, '03.

You are seeing the delinquency rate in that book that did not come down this quarter as the others have, and so our projection is that the claims will work its way through the end of this year into next year. And hopefully, the business that we put on more recently after we changed the underwriting and after we changed the pricing will perform much better on a go-forward basis. With regard to the severity, we didn't fully project the severity increase in that that has resulted, so the severity is a little bit higher, but not dramatically higher. And there was a third part of your question, which I didn't remember.

Third part was did you anticipate that you would have a higher actual frequency rate among a higher (indiscernible) dollar loans?

Well.

In other words, what you have said is that the losses, when you look at it on a unit basis, are running within expectations. It would seem to me that the total dollar of losses is running much higher based upon the adverse selection and the higher severity. I think the MI industry has been known to talk about loss rates by numbers of unit per units, but it is somewhat -- I don't want to say misleading, but it's not entirely accurate to say that the portfolio would be performing in line with expectations if you didn't expect the frequency and severity to be adversely selected.

I think a couple of things happened there. Number one, the percentage of the loans in the Alt-A low FICO score, 620 to 660, in and of itself was higher than we were expecting, and that has caused a higher percentage of the actual delinquencies and claims. And as such, when we were originally looking at the total Alt-A business, the total Alt-A business has origination claims at probably the 5 to 6 percent range. And what has happened is because of the higher composition, including the lower FICO scores, that extended that high end of the range from 5 to 6 to include some 7.5s. We didn't expect as many of those 7.5s to be in the book. And that is what is happening, so I am not sure (multiple speakers).

Are the larger loans the ones with the lower FICO scores?

Not in general, no. But there are more low FICO scores in the Alt-A book than we had originally modeled.

There's no reason why ultimately the higher loan balances would not have the same general rates as the lower ones or the middle ones. We've just seen -- sometimes it could be an area that -- California for example, which has a lot of the Alt-A business -- actually California's performed well, but they do have some of the higher balance loans, and it could be a specific area within California that has some high balance loans that have gone to claims. So over time, that should even out.

Okay, thanks.

Jim Shanahan from Wachovia Securities.

Clarification on the forecast of paids, up 380 million. When do you see paid losses peaking this year, or at all. And if I'm right, do you intend to reserve until you see evidence of improving credit quality in the portfolio? In other words, could reserves be in excess of paid losses for the entire year?

They certainly could be. Obviously, we're going to look at delinquencies. We're going to look at (indiscernible) rates. And we have pretty good visibility on claims out a year or a little bit less than a year. So if we see signs that claims paid could likely come down, that would signal to us that the reserve could potentially come down. But clearly, the reserve could be -- or the provision could be higher than the paid for the rest of the year. That would not be surprising.

Do you anticipate that your paid losses will peak in the third quarter, fourth quarter, or possibly sometime next year?

We don't have great visibility out past the end of the year. And based on our forecasts for the rest of the year, I would say they will rise modestly or moderately for the rest of the year. So if they peak, it won't be until the end of the year, but we are not sure if that will be the peak or not.

Okay, thank you.

We have two more questions. Matiko Cokli (ph) of Endeavor Capital.

Good morning. The security (ph) prices -- am I understanding correctly that you don't have any authorization in (indiscernible) right now?

That is correct. We have utilized the entire amount that had been authorized previously.

So how quickly can you get a new program in place?

Our next regularly scheduled Board meeting is, I think, May 11.

May 11, okay. And in your comment on your debt that you moved from fixed-rate to floating-rate, your interest expense this quarter didn't change from the fourth quarter. It is going to go down in future quarters?

We closed that a transaction in April, so it wouldn't have impacted the first quarter at all. And I did say depending on interest rates, if interest rates stay the same as they are now, the interest expense will go down a little bit.

Can you tell us how much?

It's a couple million dollars a quarter.

Is there guidance for the Financial Guaranty side on the expenses? You said that the Mortgage Insurance expenses would be flat throughout the fourth quarter (indiscernible) run rates. (indiscernible) your guidance for the Financial Guaranty side.

Financial Guaranty, I think we said the expenses are likely to rise moderately, and I think that is still our forecast.

Okay, thank you very much.

Sure.

Tim Buckley (ph) of Schroeder Investments.

Just a question on the Alt-A loans that went into default this quarter. Would you have an idea of when those were originated or is there a certain bucket that were originated in a certain time period? Thanks.

50 percent of our Alt-A business is '03, so there's a good chance that a lot of it is '03. The rest is either going to be '02, a little bit of '01. And then the new stuff in '04, which wouldn't be delinquent yet. So the majority has to be 02/'03 and some '01.

Thanks.

At this time, there are no further questions. Are there any closing remarks?

We want to thank everyone and we will talk to you again next quarter.

This concludes today's Radian Group first quarter conference call. You may now disconnect.