Radian Group Inc (RDN) 2004 Q3 法說會逐字稿

Good morning. My name is Tamara and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Radian third 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) Thank you. Ms. Mona Zeehandelaar, 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 Kamarck. Before I turn the call over to Frank, I would like to make sure that you are aware of the investor day that we will be holding on November 11 in New York City at the American Management Association Conference Center. That's located at 1601 Broadway Street and 48th Street. Registration and continental breakfast will begin at 8:30 and the formal presentations will begin at 9:30. We will have presentations by Radian senior management as well as senior management from C-BASS and Sherman. We expect to wrap up by around two o'clock or so. If you haven't already done so, please confirm your attendance by either contacting me or emailing investorday@radian.biz.

As we do every quarter, 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 and good morning. Thank you all for joining us this morning, As usual, I am going to focus my comments today on some high level areas of interest, some forward-looking things and trends that we see, and then I will turn it over to Bob for more details on the financial statements. As usual, we will take questions. For those of you logged onto our webcast, the slides are provided as background and should complement our remarks of today, but they will not be discussed in any sequential order.

Overall, I would characterize the third quarter as a very sold quarter, one with record net income and one that continues to demonstrate how our strategy to diversify our sources of revenue and income around and based upon our core competencies continues to produce both earnings and book value growth.

Despite difficult environments in both the mortgage insurance and financial guarantee worlds, group net income grew by 7.2 percent over last year's third quarter and net income per share was up 9 percent.

During the third quarter, we repurchased 1.6m shares at an average price of $45.43 and a total cost of $72.8m. As you may recall, in September our board of directors authorized an additional 2m share repurchase ability, adding to the 3m existing share repurchase program that was approved in May.

Since the inception of that program, Radian has repurchased 2.1m shares for $97.6m at an average price of $45.76. That is approximately 42 percent of the 5m share authorization that is now complete.

Another highlight of the quarter was the increase in our book value per share, which at September 30 was $37.90, up 14 percent over the third quarter last year. And our adjusted book value is $53.42, up 11 percent over last year.

As we have said in the past, we feel that the adjusted book value is an important measure of the embedded value of the company and one that you should always consider. Although it is not a GAAP measure, it takes our existing book value and in our estimation conservatively makes assumptions about the future premiums in our book, future losses and expenses.

This is and has been a common measure calculated by the financial guarantee company, and is one that we have been discussing for some years now. These additions and deductions net of tax represent approximately $1.4b of embedded future earnings in the insurance companies alone and Radian group. In this calculation, C-BASS and Sherman are carried at their GAAP book value of approximately $340m. That does not represent what we feel to be the fair value or the market value of those companies, which is in our estimate, many multiples of that stated GAAP book value.

For those interested, there is a reconciliation of the adjusted book value to actual GAAP book value posted on our web site slides.

This quarter in our mortgage insurance business, the net income contributed 47 percent to total. Financial guarantee businesses contributed 30 percent to the total net income, and our financial services businesses, C-BASS and Sherman contributed 23 percent. This is in line with the goals that we set in 2001 to generate 50 percent of our net income from non-mortgage insurance sources.

Speaking about the mortgage insurance business, in that business as I said, the environment continues to be challenging, as evidenced by flat NIW, relatively low but improving persistency, and a small decline in our insurance in force. But there are also positive signs in that business as well, especially in credit. Paid claims declined in the third quarter for the first time in over two years. And, we believe, may have peaked, and that's a little sooner than we had previously anticipated.

We have also been helped in that area by continued strong loss mitigation results on both the first and second lien positions that we have in our portfolio. At this point, we are expecting claims paid to be flat to down in Q4 and "flattish" for Q1 of '05.

The default rate, while it is up a little, is reflecting both a lower insurance enforced denominator and a small increase in the total number of defaults in our portfolio. Persistency, as I said before, was up slightly at 57.4 percent for the 12 months, and for the third quarter was about 53.9 percent.

As we said in the past, as I have said in the past many times, I believe real persistency growth will occur when interest rates start to and continue at higher levels. The target I have set previously is around 4.75 for the 10 year treasury. I've been saying this for over a year, and of course a year ago we thought at this time the 10 year treasury would have been closer to 5.75 rather than closer to the 3.75 that it is today. We still see that as a meaningful point in the future of persistency trends.

As interest rates increase and as the credit cycle continues to improve, when we combine that with new tools that we have introduced like our Smart Home Reinsurance Tool that cap our risk on non-fi mortgages, and product we have developed like our Free After Five to compete with the 80-10-10 products, we think the outlook for the mortgage insurance business over the near term is positive and probably more positive than it has been in the last several years. And on our investor day, Roy Kasmar will provide a much more in-depth view of this business and its prospects.

Turning to the financial guarantee business, credit quality spreads there have remained tight across the board throughout the quarter. While the entire industry is experiencing a slowdown from record production over the last three years, we were still able to write pretty good business with very solid returns in each of our product areas.

Structured direct premiums written in the third quarter, while they were down sequentially from the second quarter, were still solid and they were down primarily because during the second quarter we included the business that was produced in the second quarter included significant amounts of business that were single premium, single upfront premium and that business did not get repeated in the third quarter.

While insured municipal bond issuance volume was relatively flat to last year, average premium rates in that market declined and we continue to exercise discipline in pricing for the risks that we underwrote, thus constraining our new business writings and other finance compared to the second quarter and a year ago.

We see signs of this picking up significantly in the fourth quarter and that is typical for this line of business. When we look at that business, we see return on equity that is meeting all of our hurdle rates, and on a risk adjusted basis is looking quite favorable. Our goal there is to continue to expand the franchise in a very disciplined manner while steadily improving upon our return on capital. On balance, we expect to see measured growth in par-insured, with some fluctuations in premium writings as we concentrate on finding new opportunities that will generate appropriate risks and appropriate returns.

On the credit side of that business, our quarterly watch and reserve committee, which reviews all of the deals that are subject to intensified surveillance, has not surfaced any case-specific problems, and therefore we have not taken any specific case reserves. But we have continued to prudently grow the non-specific reserves as a percentage of our earned premium.

On the reinsurance sector, I am pleased to report that one of the financial guarantee reinsurance customers of Radian has agreed to waive their rights to a claw back. You may recall that as a result of our double A3 rating assigned to Radian Asset Assurance, clauses in reinsurance treaties were triggered, allowing two of the primary seating customers the right to recapture previously-seated exposure.

We are currently seeking to expand the relationship in the business with the one seating company that has waived their claw back rights and we are actively negotiating with the remaining primary regarding their recapture rights. We hope that we will produce a positive outcome there and will be able to report on that during the fourth quarter.

Here again, Tino Kamarck will have a good deal more to say about the future of the financial guarantee business at our investor day. C-BASS and Sherman which we report in our financial services segment continue to benefit from many of the same factors that actually challenged the mortgage insurance and financial guarantee businesses. Those are mainly low interest rates, high prepayment fees or low persistency, and very tight credit spreads. And as a result, they continue to be strong contributors to our earnings and offer great synergies with our other businesses.

Last quarter we began to provide some basic portfolio data on C-BASS and Sherman in the supplemental sections of our press release. This quarter we will continue to do that, we will continue to increase and we will have both Bruce Williams and Ben [Duvall] at our investor day and they will be able to give you a much more in-depth and insightful view of their businesses.

This quarter, net revenues at Sherman were $130m, and that is up 60 percent over a year ago. And revenues at C-BASS were $105m. That is up 30 percent over a year ago. At C-BASS, their servicing portfolio grew year-over-year by 40 percent.

A couple of weeks ago, C-BASS announced that they entered into a definitive agreement to purchase several assets of PCSS Mortgage Resources, a division of [Provident] Bank. While the terms of that transaction are not yet public, this transaction will result in their servicing portfolio growing from approximately $22b to $32b when that transaction is complete.

On the international side, we continue to move forward and during the third quarter received approval from the financial services authority in London to launch a new company called Radian Financial Products. That company is a licensed broker/dealer in the U.K. and it will be able to engage in a broad range of financial and credit derivatives. The license means that Radian Financial Products will be treated as a bank for capital weighting purposes, so that our clients, our counterparties, will gain regulatory capital relief and can attract a lower capital allocation for managing their risk.

It is estimated that the value of transactions from the European credit derivatives market could reach $4.5-5 trillion dollars by the end of 2004. So we believe that this is a very attractive market for us to participate in and with Radian Financial Products now up and running, we believe we are well-positioned to execute in that market.

This is another step in the international development of Radian and will position us to build our financial products business throughout the U.K. and the European Union. Year to date internationally, we have done three international mortgage deals, one in the U.K., one in Italy and one in Australia. All of these have been investment grade transactions with high attachment points. And on the financial guarantee side of the business, we completed 10 structured finance transactions with approximately $1.5b of additional exposure.

Finally, before I turn it over to Bob for more specifics on the financials, as you are well aware, the New York Attorney General has recently questioned certain insurance and brokerage industry practices. Let me say that at Radian we do not use any insurance brokers to generate any of our business, and therefore we believe we have no exposure to any of these actions, and therefore we expect no implication in this whatsoever. And as a general matter at Radian, we believe that our focus and our attention on corporate governance at the highest levels is something that we have always been very alert and attune to, and are very confident that our governance is at the highest levels possible. Now let me turn it over to Bob.

Thank you and good morning. I am going to start with the MI segment where continued low persistency and relatively low levels of structured MI kept our primary insurance in force from growing this quarter. However, our premiums earned were helped by non-traditional premiums, that is primarily [Second and Nimms] where premiums earned rose to $35.6m this quarter, compared to $28.1m in the third quarter of 2003. Also, by [inaudible] insurance premiums, such as the large deal that we mentioned in the second quarter which to this point we have booked $4.1b of mostly prime insurance risk with loan characteristics and premium rates similar to primary insurance. In addition, we are helped by higher premium rates generated by the non-prime business.

You will notice this quarter and this year a large increase in the [inaudible] production. Almost all of this business has fixed periods of at least two years, two years or greater and much of it has fixed periods of three years, five years and seven years before any adjustment.

We do expect a flat to modest increase in insurance in force and in premiums earned over the next several quarters, however this assumption is based on a pick-up of persistency into the 60s very soon. Frank talked about the positive developments in paid claims, delinquencies also performed pretty well and we are seeing very much normal delinquency development as our book starts to age.

And look at the non-prime book, about 70 percent of the non-prime book was originated in 2003 and prior, which means it is either at or near its peak loss period, and we are not seeing any surprising delinquency numbers from these books. And this book includes all [inaudible]. While the prime book is earlier in its [inaudible] we are more certain about the ultimate losses in that business, so we are not expecting surprises when that book starts to age.

If you look at our loss reserve, it remains very, very strong. We look at various metrics to assess our loss reserves. Reserves as a percentage of risk in force has never been stronger, reserve per loan in default is also very strong. And very importantly, reserve as a multiple of annualized paid claims is up this quarter for the first time in several years, which is a very positive sign.

MI expenses this quarter were impacted by an acceleration of the amortization of policy acquisition costs from the 2001 prior books of business due to the substantial runoff in these books of business. If you recall, the amortized acquisition costs based on the gross profit method that is prescribed by the SEC during our 1999 merger, generally the majority of policy acquisition expenses are written off in the first three years. With these older books of business, because of the huge runoff, substantially all of the profits on these books have already been realized. Therefore, any remaining asset needs to be amortized.

Virtually offsetting this is a decline in other operating expenses this quarter, which was made up of a number of smaller items. The total MI expense run rate for the next several quarters should be about equal to the third quarter figures.

Financial guarantee business produced good results in a top operating environment. Premiums earned were down slightly, but they were up from last quarter if you exclude trade credits, while premiums earned numbers are a little more volatile.

As mentioned in the second quarter, structured direct premiums written that quarter were heavily impacted by upfront premium, and [given] the peak this quarter and that's the primary reason for that business [inaudible] declined premiums written in the quarter.

Importantly, we are continuing to build our unearned premium reserve and the future value of the [unearned] premiums which are locking in future premiums for the financial guarantee business.

Claims paid during the third quarter were down to a more normalized level, although we did have approximately $6m of financial guarantee reinsurance claims from a few older deals that were fully reserved and therefore were paid this quarter. So a negligible addition to the case reserves and that means that our mix of non-specific reserves to total reserves keeps growing. If you look at the non-specific reserve, it is up from year end by about $33m. Development on the loss side of trade credit were also very positive this quarter. We can expect to see overall paid claims and financial guarantee to be reduced further in subsequent quarters.

Moving to C-BASS and Sherman, Frank mentioned that great results are a continuation of the great results that they have been producing. C-BASS has helped this quarter by a continuation of security calls which produced gains. These gains are very hard to forecast, but they are a reflection of the same interest rate environment that has produced very low persistency in the MI business.

Sherman specifically benefited this quarter from a seller's market of the charge out business, by selling some portfolios at substantial gains. About a third of their income this quarter was generated from these gains, which are not recurring items. Because of the competitive environment in the business that they are in, the amount of purchases could decline a little bit, and purchase prices from new portfolios will likely be a little bit higher.

As Frank mentioned, we are happy with C-BASS' recently announced transaction which will take their servicing portfolio to a much higher level and will increase the amount of recurring servicing. It will also provide them with a residual on which they can realize substantial value over the next few years of losses develop favorably. Much of that future benefit of this deal will likely be loaded into the 2006 and 2007 years financial results.

With regard to Primus and their recent IPO, Radian sold 178,000 shares and recognized a gain of just under $1m in the third quarter. We currently own 4.7m shares, or about 11 percent of that company and the market value of their shares were $64.2m as of September 30, compared to a GAAP carrying value of about $34m, prior to our change in accounting methods for this investment.

The accounting for this investment as of September 30th has been moved from the equity and affiliates category to an equity investment which is available for sale and from this point on carries a fair value which is the $64.2m and any changes up or down will be run through the equity line in the future. This is a change and future earnings of Primus will not be run through our equity facility. It is the value of the investment and the change in that [inaudible]. The change is appropriate because of the lack of control or influence we have on the company and access to information and that is the result of there being a publicly traded company.

Last quarter we mentioned the likelihood that our convertible debt outstanding will be refinanced in the near term. That outcome is still likely, but not set, as we are still reviewing our refinancing options and the timing involved. If we keep the security outstanding, it will likely be subject to a change in accounting in the fourth quarter that we have estimated would dilute earnings by between 3-4 percent. We understand the potential impact, however our decision about the security will be the best economic decision we can make for the company. We would now like to turn the call over for questions.

(Operator instructions) Your first question comes from Rob Ryan with Merrill Lynch.

Good morning.

Good morning.

Considering what I guess is new news on the outlook for claim payments, what would you see as the likely future need for reserve building or keeping the reserves relatively flat, or the change in the balance sheet for the mortgage insurance business? Given the outlook not only for the [paid] claims but also new default inventory?

That's going to be dependent on delinquencies, as it always is. So you can look at the change in delinquencies and that is going to dictate the change in reserves and then the other component of that which you don't see is the ageing of the delinquencies or the delinquencies in a closer stage to foreclosure or in an earlier stage of delinquency.

This quarter, delinquencies went up by about 1,000 however, the ageing of the delinquencies got younger, so more of the delinquencies were earlier, so that dictated our need to increase reserves to support the delinquencies but maybe not the $11,000 per default.

The provision and the change in the reserve is always going to be dictated by the move in delinquencies.

Can you quantify the extent to which loss mitigation techniques were helpful during the quarter, and looking forward, giving some price appreciation potential, whether you remain as optimistic for future quarters?

The measurement of those actual results are difficult. It's hard to put a specific number on it, but suffice it to say it is several million dollars for the quarter, so it is meaningful and right now we expect those results to continue. It is not only our prices, it is on the second, it is selling the [inaudible] that we have and there are other techniques that are being used. So we do expect those results to continue to be pretty strong.

Okay. Switching over to Primus, is it reasonable to expect that the income statement effect on Radian will be smoother going forward as a result of the change in accounting?

It will be really, it will be nothing unless we sell something, because their income will not be running through our equity affiliate fund to the extent their income is driven by derivatives gains and losses [inaudible] to the answer, although it really wasn't a substantial number in any given quarter.

Just for clarity, this starts in the fourth quarter?

Yes. The third quarter had the [inaudible] financial guarantees in the equity affiliate fund, the results on Primus. Yes.

On the old equity method basis?

Yes.

Okay, thank you.

Sure.

Your next question comes from Paul Miller with Friedman Billings Ramsey.

Yes, I was wondering if you could make any comment about your - I always forget these agency ratings, but I think the S&P has you on a negative watch or negative outlook on financial guarantee from the issues that happened in the first quarter. I was wondering, can you give us any updates or have they given any updates on when they are going to have some type of - if they are going to take that off, or whatever. Add some color to that?

And secondly, can you talk about if you do refinance the bonds, how much would it cost on those contingencies bonds?

We are continuing to work with the agencies, all of them, in very regular meeting schedules, continual dialogs, addressing all of their issues. We believe we are well on our way to satisfying all of their requirements, but I don't have any timetable that I can give you with regard to the removal of the negative outlook at this point in time. We are still hopeful that it will happen shortly, but I can't give you any definitive timetable.

On the refinancing, it really depends on what instrument we would re-fi into. The coupon on the current convert is 2.25, so depending on what the coupon on any new instrument could be, it could be a little higher. Not meaningful. It is definitely going to depend on what type of instrument.

Okay. And you haven't decided which way to go at this point? You're not leading one way towards or the other?

We're still reviewing the options there. You know, there are a lot of good options that we have.

Okay, thank you very much.

Your next question comes from AJ Grewal with Citigroup Smith Barney.

Yes, can you tell me if you had to make any concessions for the reinsurer for your financial guarantee client to waive its claw back right?

No, no concessions at all. It was what we would call a normal, regular business practice.

Okay.

There were no financial concessions.

That's great. And what was the balance of your investment portfolio excluding cash?

It is a substantial part of our $5.3b. Cash is, you know, it is typically around $100m or so? $30m of cash. So substantially all of it.

Okay. Could you just go over again where you expect sort of seasoning on the non-prime and the prime book again, please? As I recall you were saying that the non-prime booked is pretty much at peak delinquencies?

Well a lot of it is. You know, obviously we were at 30 percent this year, so that's not there, but 70 percent was written 2003 and prior. The non-prime is peaking year two or so. So the point was that a lot of this is in peak losses, and based on the current delinquency figures that we're seeing, they are not different from our expectation.

Thank you.

Sure.

Your next question comes from Jim Shanahan with Wachovia Securities.

Hi, good morning everyone. Congratulations on a good quarter. I had a question for you, please, about the MI business. The average loss severity in your MI business declined, it looks like for the second consecutive quarter, with the biggest improvement in the alt A segment. Can you just discuss in greater detail there what is driving that improvement?

Jim, part of it is going to be the loss mitigation, so obviously that sort of spray out, and part of it is that. The other thing is it really depends on the loan balances of the loans that are going to claim. We think more that last year was sort of an anomaly in that there were a lot of larger loan balances going to claim, driving that higher number up. So you know, I don't think anything has changed dramatically. When you look at the loans that are going to claim, in alt A specifically, they are just smaller loan balances this year. And it's the loss mitigation as well.

Thank you.

Your next question comes from Geoff Dunn with KBW.

Good morning, this is actually Nader, as Geoff had to take a quick call. Just one question. Do you have an actual dollar amount for contract underwriting this quarter, and also any dollar amount on the remedy provision for contract underwriting?

The remedy provision was the normal - the million dollar range, so there was nothing unusual there. And contract underwriting, we'll have to get you the delta, but they were essentially flattish from last quarter.

Okay, thank you.

(Operator instructions) Your next question comes from Mike Grasher; Piper Jaffrey.

Good morning. I just wanted to follow up I think on Paul Miller's question with regard to the agency ratings. How much of an impact has this had in terms of your aggressiveness on the share buyback program? And then, just in addition, if you could run over the share repurchase as it currently stands, again. I was away from the call at that moment when you did that.

Well I don't think there is any direct link between the share repurchase program and the rating. Our rating at the double A level has allowed us to enter all of the markets, offer all of the products and develop counterparty lines with all of our targeted lines and counterparties. So we don't feel that the double A 3 was in any way constraining in our business, and therefore not employing our capital in the financial guarantee business. That, this quarter and for the last two quarters, has really been a function of the market. The credit spreads available in the market and just in the public finance market the fact that the financing themselves have been down.

In terms of putting a constraint on you in terms of risk to capital ratios to hold in place, the agencies are not concerned from that standpoint?

No. The agencies have never expressed a concern about our capital levels in any of our businesses, whether it was the financial guarantee or the mortgage guarantee business. They have always stated that our capital is more than adequate to meet the ratings that we have. And so there has never been a capital issue associated with the ratings.

The share repurchase has really resulted from the operating companies not having a greater demand for capital other than what - in the mortgage insurance business, for example, they have been able to generate internally. And in the financial guarantee business, what has been released from the prior NBIA claw back which resulted in the financial guarantee business being over capitalized.

The share repurchase has been fully executed with cash at the parent company that has resulted from other operations, not from any special dividends extracted from the mortgage guarantee or the financial guarantee business.

Okay, thanks. That's helpful.

Sorry, did you want the numbers again?

Yes, if you could real quickly.

Or I could give them offline as well.

During the third quarter we repurchased 1.6m shares. Average price, $45.43; and a total cost of $72.8m. We have a total of 5m program in place due to the increase we had in September. And so since the inception of the program, out of that 5m we have repurchased 2.1m shares for $97.6m at an average price of $45.76.

So about 2.9m remaining?

That's right.

Okay. And then on the MI side, did the portion of the cancellations that are coming up - any way to break that out in terms of whether they are mostly alt A or prime or A minus? Any sense of that?

They are really all of the above. I mean, you know -

Is there more of one particular category?

If you look at the loans in force you can sort of figure it out. They are pretty close. I mean, they are all - they all have low persistency, but you can kind of figure it out. There's not huge differences.

Okay, thank you.

Your next question come from Jonathan Grey with Sanford Bernstein.

Yes, good morning. First of all, could you tell us the premiums earned on the prime book, separate and apart from the rest of your mortgage insurance outstanding?

We haven't done that in the past, Jonathan. I think it is something that we are looking at, but we haven't done that in the past.

Okay. Then I guess a more general sort of question. The strength in house prices around the country and particularly on the cost has been certainly strong and up cumulatively over the last several years so that it would be, I think, naïve not to anticipate a correction of some magnitude at some point. Nothing goes - no markets advance indefinitely without any kind of retracement.

In light of that, is it not reasonable - is there anything that the company can do to prepare itself for the next credit cycle? I know the reserving policy of the industry is such that you have to wait until you see the whites of the eyes of the delinquencies before you can do anything, or so we're told. What might the company and the industry do to prepare itself for the cyclical nature of the risk you underwrite?

Jonathan, I think you put it very aptly. Our accounting requirements do not allow us to establish loss reserves in advance of actual delinquencies. So we are unable to go through an IDNR cycle when we expect something like housing price declines to affect claims in '07, or something.

You can't reserve at the holding company level, outside of the - you can't modulate your reserve policy somewhere else in the company so as to -

I think Elliot Spencer would have a tough time with that one.

That would be a departure from the way that the industry reserves.

Well again, it seems - I mean, this is obviously not the place to talk about it, but the notion that there are no losses on - no losses in your industry until they show up is… In other words the accounting profession pretended there will be no loss until they see it, is preposterous. There is no - has there ever been a book of business that never produced a loss?

You are right, but the other part of that is that there is a lot of premium on that same business that haven't been recorded yet. The thought is that we are always measuring the expected premiums in the future versus the expected losses, and that number should always come up positive. So you know, it is in a sense - it does make sense because we are going to get premiums in the future that haven't been recorded, or if they didn't record it upfront they haven't been earned yet.

Thank you.

You have a follow-up question from AJ Grewal with Smith Barney.

Yes, could you give us an idea of where you think your premium rate is going? I understand this is being driven primarily by the [Seconds and Nimms] but relative to the one period that is reported so far, you seem to be doing better on the premiums. It seems to be driven by the premium yield.

Yes. I think, I think that this number is - it is hard to imagine it getting too much higher, however we have documented before, we've raised premium rates on some of the non-prime business. To the extent that that continues, you know, to be a meaningful part of our [stock] that is going to impact the premium rate. So this range is probably the right number for the next while.

Okay. And it appears your cancellation rate is, again, this is the only data point I have is Magic, is slightly ahead of Magic. I just wanted to get your thoughts on why that is the case or why that could be the case, or what is the difference between your portfolio and theirs that is driving a higher cancellation rate? Thank you.

Maybe this quarter our persistency was lower, but I think if you look sort of longer term, you know, it is going to be very close to all the rest of the companies in the industry. So I wouldn't necessarily look at, you know, this exact quarter and make a determination like that. I would go back a long time. I don't think there is anything meaningful there.

Thank you.

You have a follow-up question from Jim Shanahan with Wachovia Securities.

Good morning, thank you. The new rate cards, it looked like became effective earlier this week and I think Bob just commented about the raising premium rates and non-premium. Can you be more specific about what rates changed versus your prior rate cards and if your increases were matched by your competitors? Thanks.

Yes, predominantly on the non-prime business alt A, and some of the cash on refinances and those kinds of things. And in certain cases, yes, we have seen some of our competitors match our premium increases.

Are there any business segments where you see that you really stick out relative to your competitors?

No, not particularly. We've priced it out, we feel it is appropriate so I think we are comfortable where we are.

Thank you.

You have a follow-up question from Paul Miller with Friedman Billings Ramsey.

Thank you very much. I was wondering if you could make a comment about the 80-10-10. That seemed to be the hot topic here and some of your competitors are making comments that the FICO scores over 700, that 80-10-10 is siphoning off over 80 percent. I know when you look at the industry penetration rates, from the mid-90's there was like 20 percent penetration rates on new insurance written on your product as low as, I think, 10 percent. Do you think that is going to bounce back and do you think the 80-10-10's lose their flavor a little bit going forward?

When we look at our portfolio and slice it by FICO's, we haven't seen a decline in the percentage of high FICO scores in our portfolio, so we can't give you any statistical statement that would support the fact that high FICOs are going to 80-10-10's, at least not as it is in our portfolio.

There's no question though that the 80-10-10 product has, over the last couple of years, continued to eat into the mortgage insurance penetration in the marketplace. You know, I think recently we and a couple of the other MI companies have been introducing new products to counter that. We will continue to introduce new products to counter that and we will try to push back on it.

I don't think 80-10-10's will ever go away, so it is up to us to develop products that will be efficient and will give the borrower an effective alternative. We are working to do that in order to recapture our market share and penetration.

So I think we're not sitting around and not attempting to recapture it, we are very aggressively looking at it and have a couple of new products in our laboratory right now that may get introduced in the fourth quarter or the first quarter of next year.

Do you blame the 80-10-10 for the decline in penetration rates, or is it a combination of low rates, high own-price appreciation, a lot of other macro factors. I mean, some of these factors hopefully go away with a higher penetration rate.

The majority of the loss has been to the 80-10-10 product and banks very aggressive pricing on second loans, you know, which is the 10 and the 80-10-10 you know, I personally when I open my mailbox I get offers for home equity lines or combinations where the interest rate on the second, today, is actually lower than the interest rate on the primary mortgage. And when that happens, it is just impossible for any product to compete with it.

We think - we think - that when that occurs, the second mortgage that is being created is severely under pricing for the risk being assumed by the lender. And you know, we are not going to be able to compete, nor would we want to be able to compete if we think a competitor is under pricing the risk. So if they want to buy market share on that basis, they can and they have. But we don't think that they've all been appropriately priced.

Thank you very much, Frank.

You have a follow-up question from Jonathan Grey with Sanford Bernstein.

The loss development - excuse me, the loss rate on the prime book appears to be behaving well in the quarter and it looks as though it has declined from the second quarter level. Certainly its not rising. I wonder, can you tell us what the loss - what kind of - well the loss rate on the non-prime book appears to have crept up just a very little. Can you tell us, do you think the loss rate on the non-prime book reflects a fully seasoned portfolio? How do you expect to see it behave going forward, and if you prefer to answer that by addressing the two separate main segments of the non-prime book, please feel free. In other words, the alt A versus A minus or if you wanted to address them in aggregate. But it is very - it seems like it is a market with which management and investors have less experience, certainly, than the traditional book.

We define loss rate by claims paid divided by the in force.

Yes, sir.

Yes, I mean, you know, I think - I think a couple of things. One, all of the segments have been hurt. The loss rates have been hurt by the substantial run off. So to the extent that run off has been much faster than we expect, the loss rates are higher in that regard.

The losses, which are the numerator, are for the most part right within our expectations, including on the non-prime. So if we get sort of a normalized persistency, then the loss rates will improve and the loss rates will be sort of normal and expected.

Thank you.

You have a follow-up question from Geoff Dunn with KBW.

Just one quick follow-up. You talked earlier about your financial guarantee relationships with some of the primary companies. Do you have any color on when some of your treaty contracts might be coming up due for resigning?

It varies. The most important aspect is the claw back rights which remain available to one of the primary seating companies, and that will be resolved within the fourth quarter. In terms of specific dates, Tino, do you have more color on that?

Well, we've got one contract that is on a calendar year basis, one treaty is on a calendar year basis and another significant, very significant one in terms of proportional reinsurance is up at the end of the first quarter.

Great. Thank you.

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

No. Nothing further. We want to thank you all for participating and we will talk to you again in about three months. Thanks.

Three weeks. Investor day.

Three weeks at investor day.

This concludes today's conference call. You may now disconnect.