Radian Group Inc (RDN) 2004 Q4 法說會逐字稿

Good morning. My name is Tracey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Radian Group Incorporated fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Mona Zeehandelaar, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, and thank you for joining us today. With me on the call are Frank Filipps, Bob Quint, Roy Kasmar, and Tino Kamarck. And as I 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 these 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. Thank you for joining us. As usual, I'm going to focus my comments today on our highlights of the quarter, and trends that we see, and then we'll turn it over to Bob for a more detailed presentation on our financial statements. And then, of course, we will turn it over to questions. For those of you who are logged onto our webcast, the slides that you see there are provided as background, and they should be used to compliment our remarks. But we will not necessarily speak to the slides, nor speak to that order of presentation.

When we look at the results, we see both the quarter and the full year net income numbers that are records for Radian. And as my last year here, I am extraordinarily proud of the last 10 years and the records that we have set, the income that we have produced, and the shareholder value that we have created. The fourth quarter was a very solid quarter, with net income of $156 million, 160 -- $1.62 per share. The net income for the year, a record $518.7 million, $5.33 per share. Book value per share at 12.31, another record, $39.98, up 16.5 percent over last year. These results continue to demonstrate how the strategy that we set out several years ago to diversify our sources of revenue and income using our core competencies and our focus on risk management and capital markets continue to produce both earnings and book value growth.

Speaking of book value, our adjusted book value at the end of December was $54.70, and that was up 11 percent over last year. And that takes into account the estimated impact of the Ambac callback that we expect will take place at the end of the first quarter of '05. This reduced book value -- adjusted book value by about $0.62 per share. And that's due to the reduction of the present value of installment premiums and unearned premium reserve associated with that clawback. As we have said in the past, we feel that the adjusted book value calculation is an important measure of the embedded value of the Company, and one that as investors, you should consider carefully. Although it is not a GAAP measure, it does take into account our existing book value, and our estimation, conservatively, of about future premiums, losses and expenses. And this is, as you know, a common measure within the financial guaranty industry. These additions and deductions net of tax represent approximately $1.4 billion of embedded value in earnings in the Company. And in this calculation, C-BASS and Sherman are carried at their GAAP book value of approximately $392 -- $392 million. We think that is an extremely conservative value. And I have got to tell you, in my next life, I'll buy those Companies for that value any day. There is a reconciliation of adjusted book value to actual GAAP book value posted on our website slides, for those of you who would like to review that methodology.

During 2004 we repurchased 2.8 million shares at an average price of $45.38, for a total cost of $128 million. Approximately -- that is approximately 45 percent of the 5 million-share repurchase authorization that we have received from our board. We will continue to repurchase shares in 2005, as we look at our capital sources and the opportunities for us to -- the opportunities for us to invest and reinvest that capital at the appropriate returns. If we look at our income distribution and percentages, this quarter our mortgage insurance business contributed 49 percent to net income, our financial guaranty business accounted for 31 percent of our net income, and our financial services business accounted for 20 percent of our net income. For those of you who have been following this, this is very consistent with the goal that we set out a couple of years ago, which was to achieve 50 percent of our net income from non-mortgage insurance sources.

In the mortgage insurance business, a couple of highlights. Our defaults were up slightly in the fourth quarter. We believe that reflects normal seasonal patterns. But they were down year-over-year. And the MI business environment continues to show positive signs in credit. We believe that while paid claims in the fourth quarter declined, the second quarter in a row, somewhat as we had projected, and we expect that claims paid in the next 2 quarters will be "flattish" compared to the fourth quarter of '04. We believe our mortgage insurance reserves of $560 million are strong by all the measures that we look at. Those include reserves as a percentage of our risk in force at 1.83 percent, reserves per default and that is $11,435. And the number -- one of the things we look at is the number of quarters of reserves compared to our claims payments, and that currently stands at about 6.2 quarters. All of those measures are very consistent, and consistent in the strong end of our own internal reserving methodology.

Persistency in the MI is up again. It was at 58.8 percent for 12 months of '04; 58.9 percent for the fourth quarter of '04. Given the interest rate forecasts that we are looking at, that we are seeing, we would expect persistency over the year 2005 to trend upward to about 70 percent by the end of 2005. In the mortgage insurance business, we also think we have grown our market share. In the flow business, based on 11 months actual and forecasts for the rest of the year, we think that our market share is probably up about 2 percent compared to where it was at the end of '03. We are not targeting market share actively. We think that is a result of just good prudent business practices, as we have always employed here. And we expect that -- we expect that our market penetration this year may go up again, given relationship developments with several of the major lenders that we have been working with throughout all of 2004.

On the risk management side, -- excuse me, on the risk management side, as you know, last quarter we developed and introduced an innovative reinsurance tool that we used to manage our risk, especially our non-prime mortgage insurance exposure. As you may recall, in the first transaction that we did last quarter, we ceded $86 million of non-prime mortgage insurance risk. And we were able to do that at a very profitable -- as a very profitable transaction to Radian. We were able to shed 92 percent of the associated risk at a cost of 37 percent of the premium. That deal is now is about 5 months old. It is performing well. And what we believe is that it is a model for us to use in looking at our risk management of non-prime mortgage risk. We expect it will be an active tool in our toolbox. The first transaction, as I said, ceded $86 million of risk. We have a current transaction in the works, which we hope to finalize shortly. That transaction, which has a nominal value, portfolio value of $1.68 billion on first-lien, non-prime mortgage risk, and has about $495 million of risk. It is likely to be consummated in the next weeks. Again, this is an active tool for us. For those of you who heard me speak before, when we talk about non-prime risk here, we think it is an area of growth. But we also think it is an area that has to be managed. Using this tool, we are able to cap our risk, while maintaining a profit level that is acceptable to us. And we think that this is, as I said, a tool that we will be using actively in the near future. We have spent a considerable amount of time, energy, resources to develop this. And so you should expect to see us using it actively.

Another development, LPMI, Lender Paid Mortgage Insurance. We believe this is an area that -- this is a product that can be very attractive in many interest rate environments to borrowers as an alternative, and as a competitive response, to piggyback loans, or 80-10-10s. For those of you who remember CMAC, CMAC and Amarin were both early innovators of this product. As a result, in the fourth quarter of '04, 22 percent of our flow business was through the LPMI channel. Through long-standing relationships and long-standing history of developing that product. We like that product, and we're going to continue to emphasize that product in '05 and beyond. Personally, I think it's a better delivery of mortgage insurance. And so, we're going to add a lot of emphasis to that in '05.

Turning to the financial guaranty world. Credit spreads here remain tight across the board throughout the fourth quarter. While the industry is experiencing a slowdown from record production over the last 3 years, we were able to write over $3.5 billion of gross par insured business, 1.5 billion direct, and 2 billion in the reinsurance markets. All of which was done with returns that met our hurdle rates in each of our product areas. On the risk management front, our quarterly watch and reserve committee, which reviews all of the transactions in our portfolio for risk developments, and pays special attention to those deals that are subject to intensified surveillance, has not surfaced any material case-specific problems or transactions that need any additional case-specific reserving at this time, of any special note.

Respect market conditions in 2005 is very similar to those of 2004. Our goal in the financial guaranty world is to continue to expand the franchise in a disciplined manner, while steadily improving our return on capital. On balance, we expect to see measured growth in par insured, with some fluctuation in premium writings, as we concentrate on finding opportunities that will generate appropriate returns for our risk. As in the mortgage insurance business, we will not be chasing deals that do not meet those hurdles. We will only insure products in markets where we're comfortable taking the risk and where we feel we're getting the appropriate return for that risk. We closely monitor all credit spreads in order to efficiently allocate our capital among our business segments, in the face of constantly changing capital market conditions. Whereas tight spreads in the mortgage and ABS markets challenge our mortgage insurance and financial guaranty businesses, these very same market conditions are those that allow us to get better pricing on our mortgage insurance non-prime reinsurance transactions as in the one I previously discussed. This very tight spread environment is also the same environment that allows C-BASS and Sherman to continue to outperform even our very high expectations of those operations. And allows especially C-BASS to issue securities into the marketplace at very favorable terms. I believe all of this illustrates how our diversified business strategy using our core competencies, managing credit risk, monitoring credit spread, and utilizing capital alternatives, can and has demonstrated our ability to produce strong financial results in a wide variety of economic and credit conditions.

Speaking of C-BASS and Sherman, they continue to be strong contributors to our net earnings, and offer great synergies with our other businesses. This quarter, net revenues for Sherman were $128 million, $0.65 higher than a year ago. And their total net income was $64 million for the quarter, and $201 million for 2004. Revenues at C-BASS were $125 million for the quarter, and that was up 25 percent over last year. Their servicing portfolio grew 63 percent year-over-year, and now stands at $33.7 billion. Net income for the quarter was $50 million, and 208 million for the year. In that, recurring services, recurring servicing revenues, and net interest income represented 71 percent of the total C-BASS revenues in the fourth quarter. Not only were these companies very profitable, but that profit was translated into real cash dividends, and we at Radian received $82 million in dividends from C-BASS and Sherman in 2004. And I am pleased to announce that we received another $52 million in dividends from Sherman yesterday. Again, highly profitable and high cash throw-off operations.

We're also expanding on the international front. We are carefully reviewing and assessing new markets to determine where we can apply our capital, where we can receive the appropriate returns. In the mortgage insurance business, we're in the process of finalizing terms of an agreement with a major international lender, to be their exclusive provider of first loss mortgage insurance. We think that is an extremely exciting opportunity for us, and will be profitable for years to come. Also internationally in the mortgage insurance business, we closed our second mortgage re-insurance deal in Australia in December. We look forward to doing more of those in 2005.

In the financial guaranty world, our Radian Asset Assurance Limited and Radian Financial Products Limited, which is our licensed broker/dealer in the U.K., both of them are making strong progress in their respective markets, namely structured products -- the structured products business throughout the U.K., and the E.U. In RFPL, we closed 2 deals in the fourth quarter of '04 - remember the Company was only licensed in the fourth quarter of '04 - and have 3 deals currently waiting in the pipeline, including our first PFI deal, which we expect to close very shortly. Total notional value of those deals, approximately $500 million. So, I think as you can tell, I think 2004 was a great year. I think it is a record year. And I think most importantly, it has set us up for 2005 and 2006 and 2007, to be even better. And with that, let me turn it over to Bob.

Good morning. As always, I'll be going over some of the financial highlights for the fourth quarter and for the year. With regard to our convertible debt, or our CoCo bonds, we have included the incremental shares that would result from conversion in our fully diluted share count, both in the fourth quarter, and in each quarter going back to January 2002, when the debt was issued. The impact of including the incremental 3.8 million shares and excluding the interest expense from net income on 2003, EPS was $0.13 a share, and on 2004, EPS was $0.18 per share, including $0.06 in the fourth quarter. That $0.06 impact in the fourth quarter looks very high and looks sort of strange, but it is the way the math works. It will be a bigger impact in the quarter, which we made the most money, and this quarter was a huge net income quarter. The outstanding amount is callable by Radian at any time, and is not putable by holders for another 2 years. As we have said previously, we still intend to call the security at some point, and we finance part or all of it. But in the meantime, we are still paying a 2.25 percent coupon, which is great economics. And we have a strong amount of control over the convertibility, due to the call feature. As long as the instrument stays outstanding in '05, the same incremental impact on share count will be present. And we have given you a reconciliation table in the earnings release to specifically demonstrate the impact of these bonds.

MI results in the fourth quarter, Frank mentioned an improving market share, in the flow market. And we did have relatively higher amount of structured business this quarter, consisting primarily of non-prime loans. We should note that on an apple to apples comparable basis, products have performed better if they have come from the structured channel, and that's due to our ability to carve out loans, and our better pricing power on the structured business. If you look at the variety of risk in force tables that we provide in the release regarding the MI portfolio, by LTV, by product type, et cetera, I think it pretty clearly demonstrates that the risk profile of the MI book is essentially unchanged from year-end 2003 to year-end 2004. This is very important to take note of, because it's something we carefully monitor in our risk management process. We don't expect the mix of business to change significantly in '05. But, as we've said many times, the growth part of the mortgage market is in the non-prime, for the mortgage insurance companies. And in order to potentially take on more non-prime risk, we've developed tools like the capital markets reinsurance, which caps our downside risk, and takes advantage of tight credit spreads.

MI premium was down sequentially from the third quarter, primarily because there was runoff in our NIM book. That's actually very good in a way, because it demonstrates the short-term nature of the NIM risk, but it also could create some volatility in premium streams, as it did this quarter. We do expect to continue to produce a reasonable amount of new NIM business in 2005. As Frank said, credit continues to behave very well. The reduction in claims paid this quarter is clearly of note, and we are projecting paid claims in the range of 360 million to 370 million for the year 2005. Obviously, we have a lot more visibility on the next couple of quarters. Delinquencies did pick up seasonably this quarter. But are down for the year by over 1,000, while our reserve for losses is up by $46 million. The primary reason for the reserve increase despite the decrease in delinquencies is the relative level of non-prime delinquencies versus prime, and the improved information we now have about the likelihood of frequency and severity on non-prime delinquencies.

You'll notice in the fourth quarter that the loss reserve increased by almost $16 million more than the differential between paid losses and our provision. This is the result of the cancellation of our excess of loss reinsurance policy, which is essentially catastrophic loss relief, and is no longer needed because of our strong capital position. MI expenses are relatively unchanged sequentially, but do contain a reduction in contract underwriting costs, offset by increases such as the placement of previously capitalized IT projects into service, the acceleration of the amortization of deferred acquisition costs. You saw that last quarter, and that continued this quarter. And that has to do with the substantial runoff in the recent books of business. As well as costs relating to the capital markets re-insurance transaction. Financial guaranty continues to be faced with a tough environment, which when coupled with the impending clawback that should happen in the first quarter, will lengthen the time necessary to get the business to achieve acceptable returns from our standpoint. We will need to be patient, remain disciplined by only adding quality, solid return business to grow our book.

There are 3 reasons why the earned premiums run rate in '05 will be lower than it was this quarter. First, the clawback will most likely kick in fully in the second quarter of '05. Second, we have had some cancellations on policies that had maturity dates longer than the current date. And due to the tight spread environment, these policies canceled, and that will cost us future premiums. And third, we have deliberately cut back on the trade credit premiums in an effort to focus more on only the highly profitable trade credit business. The combination of those items will reduce earned premiums by between 5 to 10 percent, compared to the fourth quarter run rate. And that's for '05. Needless to say, Sherman and C-BASS continue to be a positive highlight. C-BASS did benefit from some gains this quarter related to security calls. That was really consistent with the rest of the year. But their recurring income and revenue continues to grow as a percentage of the total. We do expect another strong year from C-BASS in 2005, in the range of the 2004 results. And Sherman, again, benefited from a sellers market and recognized some gains on portfolio sales during the quarter. And although we do expect another very strong year from Sherman, it will be difficult to duplicate 2004, which we can only describe as spectacular for Sherman.

Capital management, Frank mentioned, will be a very important theme for Radian in '05. Share repurchases are definitely a part of our plan, as our capital generation will likely exceed the business growth. While we have repurchased very little in the fourth quarter, expect that our repurchase activity will pick up in the first quarter. It already has. And we clearly expect this year to finish our current authorization, which would consist of about 2.5 million shares. And we're going to revisit the situation once that is completed.

And finally, I just want to talk a little bit about the gains recognized this quarter. It is unusually high amount. And it is largely a result of the positive change in the fair value of derivatives, both on the financial guaranty business and in our investment portfolio. These gains, an the financial guaranty side, are a result of continuing tightening of credit spreads. And on the investment side, are from the performance and equity markets. Please keep in mind, we don't really ask for credit for such gains. But, you shouldn't be surprised when these gains reverse, and become losses. On the financial guaranty side, if we hold the credit for the entire life, any gains must become losses. And on the investment side, it is going to be subject to the equity markets for the most part. But, these gains could turn around. So, just pointing out that this is FAS 133 accounting. We don't always believe that the volatile gains and losses truly reflect the business performance. But, don't be surprised when they can be very high or very low in a given quarter.

At this point, we'd like to turn the conference over to questions.

(OPERATOR INSTRUCTIONS) Robert Ryan, Merrill Lynch.

Could you provide an update on the potential for yet another commutation transaction by Ambac in 2005 or at some later date?

Yes, Rob. The situation is really unchanged. I think what we have said is that we're hopeful that it won't happen. But, there is nothing official that we can say at this point.

Do you have a rough estimate if that -- let's say it did occur in the first quarter of '05, what that would mean to 2005's earnings. And remind us what the known transaction expected in '05 is expected to do to earnings?

What did we say last quarter? I think we said last quarter that the impact on the full year was in the $0.12 range, something like that. Yes, in the low teens range. So, that really hasn't changed. You know, the -- I wanted to point that most of that is on unearned premiums. And that's sort of included in the expectation for earned premiums and financial guaranty. The size of the other piece of business is a little bit greater. The impact would be a little bit greater, if it happened. But again, we're hopeful that it will not happen. And we do expect to finalize fairly shortly.

Okay. Great. On a different topic. Just the update on the market conditions that you're finding within bulk, in terms of the availability of volume, as well as pricing.

Rob, there are still quite a good pipeline out there. Some restriction of the amount of deals available. But I would also remind you that, you know, we not only attack that marketplace in the pure, sort of bulk, loan by loan kind of insurance, but also in structured transactions. And what we're seeing plenty of opportunity there. So, I feel reasonably good about that marketplace.

Geoffrey Dunn, KBW.

Bob, I wanted to clarify on the CoCos. It seems like you definitely like the economics of the low coupon. And obviously, it doesn't affect the economics of the business with the accounting change. But when we look at our EPS estimates, what kind of guidance would you give us, in terms of including that or excluding that for the year?

Well, I guess, Geoff, all we can do is say, as long as it's there, the impact is going to be there. It's there today. So, but I think we're going to keep looking at the economics. We have a lot of control, because we can call the security and, we have to look at how the stock performs, and our capital needs. So, it's -- I can't give you specific guidance as to what's going to happen. But I think the general statement that we will still likely call the security at some point is, you know, is accurate. Whatever new instrument we refinance into, won't have the same impact.

Okay. And then just 2 number questions. On looking at the premium from the flow and pool business, it surged pretty nicely sequentially. Was there anything unusual coming into the quarter. Any kind of, 1-time hits?

Yes. It was the NIM business is high premium -- .

No. The other line. The seconds and the NIMs were broken out in 1 line. I'm referring to the 174.4 million, ex the NIMs and second.

Okay. I'm sorry.

You guys broke those out this quarter.

Yes. That's going to be -- the 134 sequentially was flat, right. The insurance in force was flat.

But sequentially, the earned premium was up about 4.5, 5 million?

Okay. So it was up, it was up sequentially from last quarter. That's going to be the newer business that we did. Structured business is going to have much higher premium rates, because it's non-prime.

Okay. And then lastly, can you give us a little expense guidance, given what you're seeing for volumes and amortization costs through '05?

The policy acquisition costs is very, very tough to project because, I guess as persistency increases, the acceleration of the amortization will slow down. That being said, we've also accelerated quite a bit over the last couple of quarters. So the run rate will come down, as well. Because there is just less to amortize. So if persistency increases like we think it will, that policy acquisition line should come down fairly meaningfully where it's been the last couple of quarters. The rest of the expenses, I think the general theme is the mean expenses and the business are not going to go up. But we do have these IT expenses that, from the previously capitalized projects, that are going to be coming into service. So that will sort of offset it. But we don't expect big increases in expenses, clearly. Financial guaranty, I think there will be some increases, moderate increases in expenses.

Paul Miller, FBR.

Bob, on your guidance with financial guaranty premiums. I just wanted to make sure I understood you correctly. You're saying that you're looking for a run rate of about 10 percent lower than the fourth quarter, for the entire year? Did I hear you correctly on that?

I said, yes, 5 to 10, and for 3 specific reasons. Being the clawback, the cancellation, and then the trade credit, which is a fairly meaningful part of the premium. But also of a low profit margin. So, yes, that's what we said.

And the other issue was, you said that you expect paid claims, correct me if I'm wrong, to be down, or be relatively flat, am I correct? I lost it in my notes, I apologize. You expect paid claims to be down, to be at a 360 to 370 level?

Yes. Relatively flat for the next couple of quarters, which is what Frank said. And then for a full year, which is obviously less, we have less certainty around that number, the range of 360 to 370

Now, what about reserves? Do you expect -- I mean, you've seen -- I know Frank has always talked about that when he starts seeing improvement in his delinquency ratio, you might see reserves start to decline on expectations of lower paid claims down the road. Are we at that point yet?

Well, you're always going to see reserves for us go up or down, based on delinquencies. And then, now it's not only delinquencies, but it's also about where the delinquencies are. Which product the delinquencies are. So, if you follow what happens -- and we never try to project what's going to happen with delinquencies, because it's a lot of macroeconomics. But, whatever happens with delinquencies will dictate to us where our reserve needs to be.

I don't mean to try to pin you down, but we could see reserves being flat or we could see reserves growing throughout the year?

Yes, it all depends on delinquencies, and where the delinquencies are.

And how much risk you put on the non-prime stuff?

Yes, but I think of note, if you look at the risk in force, it's not like the risk in force has changed from '03 to '04. It's really stayed pretty much the same, in terms of if you look at just the common risk measures.

Okay. And the other question is the insurance in force line. I know a lot of people in the industry, you are talking about your persistency ratio going to 70 percent. Is that going to be able to be translate -- are we going to be able to translate that into some solid insurance in force growth finally for the industry, or let alone just for Radian? I think that's what's more important here. Or just because the persistency ratio is going up. Are we still having trouble with the penetration rates, and we could see again another flat year for insurance in force?

I think the answer for Radian is low single-digit increase in insurance in force. But there is the issue of penetration. And, you know, we will have to work hard to get that.

And do you guys ever think you can get back in the double-digit range, especially with the new products coming on, like the lender paid insurance? Would that allow you maybe to get back to the double-digits? Or do you just think it is going to be a tough fight with the 80-10-10 loans out there?

I think it is a tough fight with the 80-10-10s. Things like LPMI will certainly help us, there. And shifts in the overall marketplace. Do I think I can get there over time? Yes. I think that's a possibility.

And then, 1 last question. The LPI, you said it was 22 percent of the quarter's flow. What was it a year ago? Do you guys have that data?

I would guess it's a little lower. Up a little bit since then.

Probably in the high teens, then.

High teens? Okay. Thank you very much, guys.

AJ Grewal, Smith Barney.

Just a clarification. The $0.12 earlier that you mentioned, impact from the clawbacks. Is that the $0.12 expected on the actions that happened in the first quarter, or additional business that could be clawed back by Ambac? Also, it looks like from, in your financial guaranty business, that it is becoming more and more expensive to underwrite your business. Given that you haven't really seen a major increase or -- in the premiums earned, but we're seeing underwriting expenses ratchet up. Could you give us an idea of what's happening there? And what to expect on that side? Thank you.

I think a couple of things. The underwriting expense has been increasing as we have continued to build the infrastructure throughout the organization, adding people, especially in our London operations, and starting the new Company in London. So all of that has the associated buildout costs and start-up costs. On the revenue side, remember the revenue was affected last year by the MBIA clawback. So, it does appear as if the business is more expensive to underwrite. But, it's actually been that shift in the those 2 things. The buildout, number one, and the reduction in premium, due to the reduction in business that occurred early in '04. So that -- you're right in looking at it that way. But, the way we look at it, is we are building the infrastructure for going forward.

So, is an appropriate run rate then what we saw in the fourth quarter, or should that still continue to rise in underwriting expenses? Also, Rob, -- Bob, could you talk about what exactly the $0.12 represents, that you mentioned earlier? I know that may not be the exact number that was mentioned in the past quarter. But, could you just refresh our memory on that one?

Yes, it's actually probably a little bit lower than that. It's more in the $0.10 range. And it's the prior clawback that was announced previously, that we still expect to happen in the first quarter. So that's what we're talking about. And then there was a previous question about, you know, there is another piece of business that we are hopeful will not be impacted. But if it is, it would have an impact that would be a little bit higher than that. Again, we're hopeful that it won't be.

And can you just talk to the run rate on underwriting expenses at (indiscernible) guaranty unit, please?

We're probably mostly done with the expansion. We do have in our budget for '05, the addition of a couple of new people in London. And so, I think while it's mostly done, I won't say that it is absolutely done.

Thank you.

I'm just going to clarify, the specific impact is $0.08.

Mike Grasher, Piper Jaffray.

My questions have been answered. Congratulations on a nice quarter.

Adam Weinrich, Sanford & Bernstein.

Assuming the mortgage market returns to something more resembling normal in '05, and say originations in the $2 trillion range or less, and a liquidation rate of kind of the mid-teens, as opposed to the high rates we've seen recently. What sort of -- and then, I guess the final factor being home prices moderating to something, in the I don't know, mid, single-digits or so, what sort of persistency rate do you think we might see? And, in addition to that, a longer term, more stabilized persistency rate? What sort of levels do you guys think about?

I think embedded in my comment that we thought persistency would trend to 70, is relatively modest home price appreciation probably somewhere in the neighborhood of 3, 3.5 percent. Interest rates going up gradually. I don't remember, what was the ending interest rate at '05, were we looking at? 5 percent, or something? 10-year at about 5 percent, at the end of '05. And so those were some of the macroeconomic assumptions that we had. That led us to looking at a mortgage origination market somewhere 2 trillion, 2 trillion plus. And that gets us to the persistency numbers increasing to, until you get to about 70. On a more -- on a longer-term basis, you know, in a static environment, I think the industry is likely to see persistency rates on a run rate in the mid-70s, as a run rate in, again, in a static environment. So I think that's, if we were going to model that, that's the kind of modeling we would look at.

Thank you. And then, just 1 other clarification. 16 million in change in fair value derivatives in the mortgage insurance segment. Is that FAS 133, also? Or what (indiscernible) does that relate to?

That's the investment portfolio.

And, what is -- equities in the investment portfolio?

Convertible bonds.

I see. Okay, thank you.

At this time, there are no further questions.

Well, thank you all. And we'll see you again.

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