Radian Group Inc (RDN) 2005 Q2 法說會逐字稿

Good morning. My name is Jodie, and I will be your conference facilitator for today. At this time, I would like to welcome everyone to Radian Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time, simply press "star" then the number "one" on your telephone keypad. If you would like to withdraw your question, press the "pound" key.

Thank you. Ms. Zeehandelaar, you may begin your conference.

Good morning. Thank you for joining us today and for your interest in Radian. With me on the call are SA Ibraham, CEO of Radian, Bob Quint, CFO, Roy Kasmar, President of our Mortgage Insurance Business, and Steve Cooke, recently appointed President of our Financial Guaranty business.

Today we will follow our usual format. SA will begin, followed by Bob, who will review key quarterly financial metric, and then we will take your questions.

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 risks and uncertainties. Radian's actual results may differ materially from those expressed or indicated by forward-looking statements. Factors that can affect Radian's performance are described in our 10-K and in our other filings with the SEC.

Also for those who logged on to the web cast, the slides are provided as background and should complement our remarks today. A reconciliation of certain non-GAAP measures that may be discussed on today's call is provided on our webcast slides.

Now, it is my pleasure to introduce you to SA for his first call as CEO of Radian. As you may know, SA comes to Radian as a 27-year veteran of the banking and mortgage industries, most recently serving as President and Chief Executive Officer of GreenPoint Mortgage, where he led the company through a period of dramatic growth, innovative product development and technology leadership. SA?

Thank you, Mona, and good morning to all of you. I have now been at Radian for nearly three months, and this is my first earnings call. I'm happy to report $1.56 earnings per share, 140 million in net income, the second highest earnings quarter in Radian's history. This is particularly impressive given that we are in a challenging environment and that the previous high of $1.52 earnings per share, 156.8 million in net income was driven in part by $44.6 million in favorable change in the fair value of derivatives.

I characterize our quarter as a very solid quarter that we can be proud of, with excellent operating income and cash flow, with a continuing strong balance sheet and positive credit trends, and another outstanding performance by Sherman and C-BASS.

Since many of you do not know me, let me describe what attracted me to Radian. Most recently, as Mona said, I was the CEO of GreenPoint Mortgage, a major customer of Radian. At GreenPoint I had the opportunity to work with Radian on several occasions. I saw firsthand Radian's ability to construct customer-focused solutions and to be an innovator. I was drawn to the opportunity to lead Radian, which is a company that has enjoyed an excellent track record of growth in earnings and book value, and one I saw as ahead of the curve in anticipating and addressing the convergence of the market in financial guaranty markets.

During my first three months here, I have been able to validate my initial impressions. I have found them to be correct. Radian is an innovative, creative company with bulk capabilities, acquisition as well as to successfully address evolving market opportunities. While we clearly face cyclical and structural industry challenges in both our mortgage insurance and financial guaranty businesses, I hope that we have seen the worst of that combination now. I came to Radian because of the inherent secular attractiveness of the financial market segments that Radian serves.

As most of you may know, the US residential mortgage market is huge. With $8 trillion in outstanding, it represents the single largest form of debt in the world. And even more impressive is the fact that this market doubled in the '90s from $3 trillion to $6 trillion, and is projected to double again in the 2000's from $12 trillion to $13 trillion roughly by 2010. And potentially some say it could reach $16 trillion to $20 trillion in outstanding by the year 2015. Our financial guaranty business participates in the US public market debt, which has $2 trillion in outstanding, and is growing at 5% annually. The global derivatives -- credit derivatives market in which our financial guaranty business also participates has now exceeded $5 trillion, and is projected to grow at 27% per year.

During my first couple of months, my main focus has been to develop my own way of looking at the company; its strengths, its weaknesses, challenges, and opportunities, by gathering information from all key stakeholders; Wall Street, our customers, rating agencies, investors, and, of course, our employees. I have been evaluating every component of our business with a fresh and objective perspective, and I have been making the specimens of what is working and what is not and starting to formulate a vision that will enable us to capture a greater share of these highly attractive markets. And of course, I have been working to build a focused and cohesive team that is driven and obsessed with success; success defined as value creation, with the right balance between profitability, expense management, developing and pursuing growth opportunities, and foremost, given the nature of our business, prudent risk management.

I am focusing my attention on four key drivers of value. First, opportunities for topline and earnings growth domestically and internationally; second, credit risk management; third, critically evaluating and supplementing our inventory; and fourth, innovation, which is, how do we do business, how we develop products, how do we develop technology and how we develop mutually profitable partnerships across the industry? And I have already taken some actions, which include two significant organizational changes. I appointed Suzanne Hammett as Executive Vice President and Chief Risk Officer and Stephen Cooke as President of Radian Active Insurance, both reporting to me.

Suzanne is highly respected in the field of credit risk management with nearly 30 years of experience in the industry. Until recently, Suzanne was EVP and Chief Credit Policy Officer at JP Morgan Chase. As you know, Radian has built a strong legacy of innovative risk management strategies and properties over the years. With Suzanne's deep understanding of credit management and her exceptional strategic capabilities plus her commitment to operational excellence, Suzanne will take our credit culture to the next level.

It's also very interesting to know that Suzanne's background and experience complements mine so perfectly. Both of us spend our early careers at Chemical Bank's in various risk and line management roles; Suzanne on the corporate global markets and institutional side, and I on the consumer and mortgage side. Suzanne also run through out the field set that up of the Radian team. Roy, Bob and I have extensive mortgage ribbed experience. Steve and Dave have extensive public finance experience. Suzanne brings up fields to bridge both and set policies that address the increasing complexity of the structure and international markets in which we now participate.

We continue to believe that our financial guaranty business has opportunities to achieve attractive financial returns, and we're committed to finding ways to do that. To realize these opportunities, I announced this week the appointment of Steve Cooke, as President of Radian Asset Assurance. Steve is well versed in this highly specialized industry and served as executive vice president and chief legal officer for Radian Asset Assurance in September 2004. And Prior to Radian, he spent 17 years at Ambac. Steve is - and I know this I'm talking to various people. Steve is highly respected in the financial guaranty industry and has excellent credit skills and business skills.

At Radian, Steve chaired the credit committee for structured products. And with his extensive background, Steve has seen a wide variety of fields across the financial guaranty spectrum in many companies. Steve has strong leadership skills, too. And in the last couple of days, I have observed and I have been impressed by his ability to rally and inspire the Radian financial guaranty team. Steve will lead a task force of senior executives drawn from across Radian to a comprehensive review of all our opportunities in the financial guaranty business and develop a strategy to achieve better returns.

We are also privileged to have David Beidler continue in his senior role of deputy chief of the financial guaranty business. Dave is a seasoned financial guaranty professional with experience at many leading companies and Dave has a keen sense of credit and business success factors.

Earlier this week, we announced that Tino Kamarck left the company. I am grateful to Tino for his contribution. And my Radian colleagues and I joined in acknowledging in thanking him for the critical role he played in the evolution of our company as a global credit enhancement player.

Now turning to our other business segments. Our core market insurance business continues to be a strong contributor to Radian's earnings. Over many years, I built a strong relationship with Roy Kasmar. And I'm now working with Roy and his team to examine every aspect of the MI business, expenses, products, and customer profitability, and opportunities to expand the value we bring to our customers to produce even stronger results.

As you have seen, C-BASS and Sherman are well-managed successful companies which have been strong contributors for our earnings. Our investors have benefited from participating in C-BASS and Sherman's earning and their success by point up staff. I believe that there are opportunities for Radian and these companies to leverage each other's core competencies in manners that will benefit both of us.

In my view, the company has a good strategy in place. My priorities to fine tune the strategy realign short-term and long-term objectives to correspond the changing market dynamic and then to relentlessly focused on the entire Radian organization in execution. We need to execute our strategy to deliver stronger results in our core businesses and in bolstering the respect and confidence of the rating agencies.

My property priorities are to lay a clear set up short and long-term internal metrics and focus the organization to successfully execute them. Openly and objectively examine shareholder value and maximize the additional opportunities. And to enhance our credit capabilities and culture to prepares us to prudently pursue new products and markets.

Before I turn over to Bob, let me share my impressions of my first quarterly financial review process here at Radian. Prior to coming to Radian, I conducted due diligence on the strength and integrity of the financial control and corporate governance process at Radian. Obviously, I took the job because I was satisfied with the process.

Having been here, I continue to be satisfied and I'm impressed by the strength of the entire company in this regard. I have now been through a very disciplined process that included a rigorous review of reserves and keep financial statement items as well as internal control drivers. Now, as he normally does, Bob will provide you with details on the numbers. Bob?

Thank you, Frank. Good morning everyone. Starting on the MI side, MI premium income was up sequentially from last quarter and that reflects the significant amount of structured business renewed during the quarter at fairly high premium rates. And that was offset by the continued high runoff.

While our persistency was low, the annualized persistency for the quarter was 46.8%. We did have the significant cancellation of a large structured transaction that we thoroughly in 2003. Instead of the more typical loan by long cancellation process, this deal had a provision to unable cancellation of the whole deal on the bulk basis. Without that cancellation that was approximately $3.6 billion of primary insurance, the persistency for the year ended June 30th it would have been about 60%.

There is an additional related piece of the transaction that can be canceled in the fourth quarter, and that's another 1.1 billion of primary insurance in force. Nothing else from the portfolio resembles this structure. The premium rate on this canceled business was extremely low. So the impact of the cancellation was much greater on insurance in force than it was on premium income. The large increase in structured business written this quarter was due partially to an increase in opportunities we saw based on some spread widening in lower rate of APS trenches.

The fact that we wrote more structured in flow business this quarter did have an influence on many of our new insurance written breakdown such as a percentage of non-prime business written and the ARMs written. We closely monitor the components of our in-force talk and if you look you can see the breakdown by product, by FICO, hasn't really changed very much since year-end or last year.

Premiums from second at NIMs continue to be challenged, as a runoff on that business has been very, very high. However, we have written a good deal of structured poll insurance and financial guarantee structures in the mortgage space along with international mortgage insurance, mostly in Hong Kong.

And that supplements very well on our primary MI business. The pool insurance Radian demonstrates our ability to structure transactions with deductibles or other features in a way that enables us to run profitable business and more basic loan level MI execution wasn't possible. We expect premium income to keep rising modestly throughout the rest of the year.

Overall for the rest of the year, we expect premium income to keep rising modestly throughout the rest of the year. Clearly, highlights for the quarter was losses and the provision. MI losses came in very favorably as claims fell again and delinquencies remained in check.

As we told you last quarter, we could have a revision in pay claim guidance. We're now are revising the pay claims guidance to $335 million for the year, in that range certainly. By keeping our loss reserve essentially flat from the first quarter, we have increased the reserve level to a stronger point in the range calculated by our loss reserve model. We believe that this time revision within the range is valid based on our judgment about potential overheating in certain housing markets in the US, and thus our cautiousness about potential development of these current delinquencies.

We will continue to use our loss reserving model, which is based on history, and then overlay and forward-looking view on having the credit markets to help us determine where in the range we will be. We are especially pleased with the delinquency and claim development in our all day book, where we have deliberately focused on high type of business for last few years. And we've talked about that a lot. And now this seems to be reflected in the delinquencies and claims data and that's support early position on this product. Please remember, that while we are cautious about potential overheating in the housing market.

Our Risk in Force in California, which is a heightened area of concerned for many of these folks, is down to 10% of our risk, which is very, very low comparatively. And our percentage of insured loans greater than 500,000, which is another area of particular concern, is only 1.7% of our Risk in Force. MI expenses were very much as expected, all of a continuing low persistency compare to original expectation and that's kind of like a broken record, has influenced us to accelerate approximately $3 million of policy acquisition, amortization into the second quarter. That was unusual and wouldn't have been done absentee continued low persistency.

Turning to financial guaranty, the results for the quarter were influenced by our trade credit business, which came down significantly and that's consistent with our strategic decision to cut back on some of the lower probability business in trade credit. This impacted revenues, clearly but written on premium, and also impact of losses as they create a loss ratio typically, in the 50% range. New business and our other financial guaranty product lines came in at or close to our expectations as credit spreads widened a little bit, which presented us with more opportunities to write good business. The expectation for written premium in the second half of the year is positive based on the business already written or in the pipeline for the third quarter. While earned premium, excluding the trade credits differences, is a little less than expected this quarter. We do expect a reasonable pick-up in financial guaranty earned premium, the second half of the year.

In addition to a reduction losses in trade credit due to production cutbacks and also due to the reserve reduction in some over trade credit books of business that are performing better than anticipated, credit performance in the base financial guaranty portfolio was extremely strong with negligible claims paid other than in FICO. And there was positive overall movement in the watch less credit. Our loss reserve in financial guaranty remains exceptionally strong by any measure.

C-BASS and Sherman continue to show great results. For C-BASS, some of this was a result increases in servicing income driven primarily, by last year's provident transaction Although C-BASS has succeeded and generated -- generating more of their income from recurring sources, there will likely be a reduction in C-BASS income in the second half of the year, as there is typically less transaction driven income during that time. Sherman second quarter which helped our large gain on portfolio sales, which likely won't be repeated in the second half. But we also expect their income to be reduced in the second half of the year.

Our current expectation is that 55to 60% of our affiliate income for the year was booked in the first half of the year. We remain extremely bullish about the prospects for these companies to continue to produce strong results into the future. And while they were always been on the inconsistency and their earnings they have built a very, very good component that has become dependable, consistent earnings.

As you all saw, previously we refinanced our convertible debt in June. The full impact of this transaction will be recognized on August 1, when the convertible call will actually be completed. The impact is as follow, on a fully diluted share, the second quarter still contains the entire share count of 3.8 million shares. The third quarter will reflect one month of the 3.8 million share count and two months without it. There will be an average for that quarter. And then subsequent quarters, will not have a share count in that.

With regard to interest expense, the second quarter reflects one month of the additional interest -- expense on the new debt offset by interest income on the cash proceeds from the new debt with a net impact been negligible. The third quarter will have the full quarter of additional interest expense offset by one month of additional interest income. And subsequent quarters will just have the incremental interest expense, which is approximately $10 million after-tax for EPS competition purposes and is about $7 million after-tax from a cash standpoint. There will also be a $3.5 million charge in the third quarter to write-off, previously capitalized cost of issuance on our convertible. You'll also see on June 30th our balance sheet has both the old and new debts. And that is temporary and will be reduced on August 1st when the call is completed.

And finally, we're very happy that our book value has grown to just about $42 per share at June 30. And in addition, are adjusted book value, which is a non-GAAP measure and a reconciliation of that is presented on our website, but we believe considerably values that exist in business on our books is up to $50.70 at June 30, 2005, which is an increased of about 15% over last year's figure.

Now, I would like to turn the call back over to SA.

Thanks, Bob. As you've heard, Bob reinforced our strong quarter with the numbers in his commentary and we will continue to work on the priorities that I discussed earlier. We will keep taking actions and we'll report our progress to you.

Now, we'll be happy to take your questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press "star" then the number "one" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes form Paul Miller from FBR.

Thank you very much. Bob, can you go back and talk about your premium rates again? I think you made a comment that even though insurance in force could be flat to down, I'm not sure exactly what you said, but you still expect very strong premiums earned. We saw your premium rates go from 68 basis points to 72 basis points. You said that, that was mainly due to the bulk business. Are you taking on more risk in the sense that you're doing more Alt A, you are doing more subprime? I mean where is that strength coming from to keep those premiums right high?

Okay. Two things on the premium rates: One, we did write a lot of structured business this quarter and that has higher premium rate. The second thing that impacted the average premium rate is, the big cancellation fee was extremely low. So that came out and what went in was higher premium business, so clearly that impacted the premium rates.

Now, we did because we were so much structure this quarter, there was a lot of Alt A and A minus business in that, obviously, that has higher risk associated with it. But we feel like we've priced it appropriately to get the right return. And if you look at the insurance in force and the components of the insurance in force that really hasn't changed very much and we monitored that pretty closely. But one thing that you said is very important and that is, primary insurance in force is no longer clearly mapping to premium income. We're doing a lot of this other business structured full insurance, international MI and other business which we breakout and we show you how much we're doing. And the premiums associated with that, that's going to have more of an impact overtime on our premium, on our topline than just the primary insurance in force.

And going back to the structured business, there has been a lot of discussion out there about the pay option on ARM products or the old cuffing ARM products out of California, that's been a very strong secondary market over the last couple of months. Are you guys been riding any of that business?

Paul, this is Roy Kasmar. No, it's very small, less than 1% of our portfolio. One of the good things about doing structured is, we have good vision of what the loans in the transactions that we can carve out pieces that we don't particularly like. So I think it's a good way for us to be able to play in that market with better vision.

Would you -- the market seem to be building very quickly, I don't know if it's going to be sustainable or not. But would you take more risks in the pay option ARM, what's your opinion on these things?

Well, there are consumers where interest-only loans make some sense and you can underwrite them appropriately. But it depends on each consumer and that particular consumer's credit perspective. So, certainly, the ones where people think they are qualifying at the interest-only rate and those types of the things, I wouldn't be too constructive on. But there are ways to do those loans that make sense.

Thank you very much, gentlemen.

Your next question comes from the line of Geoffrey Dunn from KBW.

Thanks. Good morning. I was wondering if you could talk a little bit more about credit. Obviously, favorable vision in your guidance. Can you equate what you're seeing on the paid loss environment with the seasoning of the '03 and '04 books? One of your competitors has indicated that they think the '03 book has peaked. What are you seeing in those two specific books?

Yes. We're agreeing. I think we think that the '03 book has peaked. Now, a part of the results on the claim side are related to the great results on the loss mitigation that we have had. And, you know, as long as that keeps up, that would be very positive. You can assume that that's going to be as good as it has been, because that's just been very, very strong. So clearly, the revision reflects the great experience to-date and our, sort of, revised outlook for the rest of the year. But we really haven't built in that same kind of results on the loss mitigation side that -- you know, if that repeated -- that could be upside

Okay. And then you've remained active in buying back your stock. I think you completed your new authorization. When is your new board -- when is your next board meeting? And what is your ongoing appetite for share repurchase?

We have completed the authorization. You're right about that. We do not currently have one out there. As we review all our opportunities and look at the excess capital, which currently we feel we will be generating excess capital in our businesses, share repurchase is always something we will consider. The next time the board formally meets is August, but if we see an opportunity to do repurchase, that would -- you know, that could be something we get done before that. We'll certainly report on that, if it happens.

Okay. And last question actually for SA. I had a chance to look at your financial guarantee business for a couple of months, and you said you are focused on improving the returns there. Can you separate the two businesses between reinsurance and structured? And do you see equal value in being in both of those businesses or could some structural changes be part of your ongoing plans?

The -- let me answer the second part of your question, first. We are very open to making any structural changes that we believe are wanted. We have this task force that I described, which includes Bob and a couple of people from here, by the way in addition to Steve and Dave, and they're going to go through every aspect of our business. There is couple of important things to remember though, when you talk about that reinsurance business, for us that I will ask Steve to comment on, because we do it differently from the way you think.

Well, one of the things that we've been doing over a period of time is we've been de-emphasizing reinsurance and moving more into the direct market. And we've also been offering the mix of business, more fabricated (ph) business, less treated business, which gives us better control over pricing and profitability as well as credit dynamics and also helps us to assure better diversification of our book of business. And it is clearly a part of our continuing strategy. But as we've said for some time, we've been moving it and enhancing our direct business much more overtime.

Okay. Thank you.

Your next question comes from line of Rob Rydon from Merrill Lynch.

Good morning.

Good morning.

Outside of the issue of your refined participation in trade credit, within financial guaranty. Could you discuss some of the lumpiness on the earned premium especially in the reinsurance businesses? Whether this has anything to do with carryovers from previous commutation transactions or data integrity that you received maybe integrity of the data that you received from primaries? Or what's going on there?

Well, there are a couple of things, and I think you have hit it; there is lumpiness in reinsurance result concerned. One, we did have the end back -- call back in the first quarter. And that had sort of a one-time impact depending that also impact our future quarters because we have installment business that one away. So there was an impact as well, and with getting information from the primaries often -- unfortunately things can get revised or changed and we're subject to the information that we receive from them. So sometimes there is adjustments that are necessary based on revision of information, so that doesn't happen. We still have the least visibility on that business. From a written standpoint we have the decent visibility and from a earnings standpoint sometimes a little less visibility and that unfortunately manifest itself and result sometimes.

Okay. And then on the trade credit, is this a new level based on the market opportunities and where you see the attractiveness of returns? You know, fairly with the higher loss ratio it doesn't have a lot effect on the bottom-line. But just trying to model without based on what you see as your opportunities in that not really traditional financial guaranty lines that in our segment?

I think it's, you know, what are we doing with trade credit facility is just one of the strategic is downplaying kind of business more but with respect to the adjustments in the current business that there is more of a strategic focus on business, which is more profitable, but also more risk amount. So you'll see it doing more excess of loss business in that area or treaty business and therefore it becomes sort of more particular, I think the results of that is that premiums are down but also the loss ratios go down is as well. And we will continue to see and refer that did market and market position doesn't make the appropriate treaty with us.

Okay. So is it based on your attachment point? Or how does the difference in the risk profile work?

Yes. It is based on a passive point in terms of certain dollars amounts in excess of the certain point level.

Okay. Great. Thank you.

Your next question comes from the line of Mike Grasher from Piper Jaffray.

Good morning and congratulation on a nice quarter. We need to follow-up with regard to Bob you comment around the last mitigation efforts. Could you walk us through some of those efforts, and what maybe driving those -- maybe results and are they are same -- are they the same across products?

This is Roy Kasmar. I think the local point will be that we are the way we select loans for loss litigation, the aggressiveness of that loss litigation where we have made inroads. Now, don't underestimate the housing market depreciation, also I think Bob mentioned that. So I think its two things that we're doing a better job and selecting aggressiveness around that is good, but also the housing market is helping.

Okay.

On just a product, I don't think so. I think it's more about where we think there is equity in the property and where we can mitigate the loss, less about, is that Alt A or whatever.

All right. Okay. And then, Bob, could you provide an update just in terms of insurance in force remainder of the year overall?

No, we didn't -- we have always said, but I think it -- we don't expect it to go down. You now I would say, up slightly, flat to up slightly, obviously depending on persistently, which have gotten wrong so long. But not down and could be up a little bit. And again supplemented by some of this other stuff that produces good revenue stream. That's why we have a good confidence about premium income keep rising.

Okay. Fair enough. And then, I think didn't hear any mention of the lender paid product. Could you give us an update on that?

Yes. We are continuing to get good traction there. 24% of our flow business this quarter was LPMI. That's up from the high teens. So we are clearly making an impact with their in the market.

Thank you.

Your next question comes from the line of Bruce Harting from Lehman Brothers.

Is it too early to say based on your part of businesses how you'll be reallocating capital? I mean where it is -- can you sort of prioritize right now, or is it too early to say where you will be spending your marginal dollar of capital? And maybe you could address that near-term and then longer-term. In addition to what you said so far, on the financial guarantee business, can you give us kind of a state of the market as you see it? And what conditions in the fixed- income market would we need to see more topline growth there? Thanks.

It is too early to comment on how we would be reallocating capital. Clearly, the whole purpose of strategic planning is to effectively allocate capital towards those areas that represent the best future opportunities and fairly that would be part of the exercise as we go through. In answering your question on giving more details on the financial guarantee side, again let me turn to Steve and have him comment.

Just with I think with respect to kind of our overall business and like with respect to the public finance business, I'll say this is pretty simple on an industry-wide basis and certainly companies there, we are doing more aggressive marketing, which I think is paying off particularly for us. And we continue to do the potential things that we need to expand our public finance (inaudible) versus faster than the growth of the overall market. In the target finance of market there are clearly challenging times with respect growth in the funding capital market. But we have been seeing a (inaudible) recently (inaudible) business opportunity in the number of product of factors. I like to attributes with respect to our international offices, in one that we got infrastructure in place where (inaudible).

Did that answer your question, Bruce.

Yes. But I mean I would look forward to as your strategic planning goes along. And then, can you comment on something -- it's clearly in your expertise the Alt A business? And how you see -- you know, do you think the 23% origination volume last year in subprime is in any way sustainable? And how much longer do think those kinds of numbers will continue? And then secondly, maybe you could just comment on the Alt A market as well? Thanks.

Well, it is interesting. Last week I was in State California Mortgage Bankers Association conference and shared the panel with Mike Carrie (ph) and Doug Duncan, Chief Economist of the NBA. The general view, at least my view, is that all of these traditional descriptions are now morphing, and the Alt A market descriptor in the path was very narrow. It's becoming broader, and if I go to back my previous experience, the challenge was the fact that more loans -- more and more loans outside the traditional Alt A space or Alt A characteristics.

So it's becoming increasing difficult to define what it Alt A loan what is that. What I think is it reflects the maturing of Alt A market to the point where certain Alt A characteristics are creeping into the rest of the product line and becoming mainstream, and therefore you see the GFPs, you see everybody else participating in it.

If you accept that definition, and certainly I see the Alt A market continue to broaden and become more mainstream. At the same time, you'll see the -- particularly the larger and more responsible players in of the subprime sector becoming more disciplined as the market matures. And -- but having said that, it is tough out there. It is highly competitive, a lot pressure on margins.

The traditional Alt A players are no longer alone. Many of the players are coming in. Huge pressure on margins. Huge pressure on credit. On the credit side though I feel positive that the secondary markets that finally -- maybe wrong way but have now got the data and the concerns to start focusing on credit factors, we can advance toward -- create a more level playing field that can PMI players and the secondary market player, and PMI actually did some work on the -- from equity side that kind of -- committed on that. So as the market becomes more mature, more mainstream, more players will jump in. It was widen. But I think at the same time, as it becomes more mainstream, the extreme credit factors will get back within certain boundaries. That's my view.

Okay. Thank you.

Your next question comes from the line of Paul Miller from FBR.

Yes. Let me take you step back to the C-BASS and Sherman part of the businesses really being contributing more and more to your bottom-line as these companies just continue to beat our expectations. I know that the other company you have a joint venture with is said they will give more clarity down the road on how these earnings flow through and how to come up with some type of model.

I was wondering are you guys planning to do the same thing to give us more clarity instead of just saying that we expects revenues to be down next quarter relative to this quarter? It is difficult for us to try to model this out.

Okay. No, that's certainly fair. And I believe we have begun to give a lot more disclosure than in the past. So we have given out more information about these companies. I think for you guys, it's important to know that a lot of their income is recurring and can be essentially modeled. The part of non-recurring is very difficult. And you know, it can be hard to predict the non-recurring stuff.

And so you know we'll keep doing that. I believe we've done, we've made some progress and we want to keep making more progress, although at some point there these are private companies and we also have to understand that and there's probably certain stuff that wont be able to be disclosed.

So I think directionally, we'll keep giving more, understanding there's a limit to what we can give and the scene here is that they have a lot of recurring income and that part is pretty predictable.

Can you give us a breakdown of what's recurring, what's not recurring like I think of your close to $61 million of earnings in this quarter, I don't know if that's 100% both C-BASS and Sherman. But what is recurring and what is not recurring? Could you give us those type of -- that type of data point?

If we do it on, we do it. If you look at our disclosure; we do it on C-BASS. We give you servicing income, which is obviously we consider recurring, and net interest income from the portfolio which we consider a recurring. So we give you that. And so that's a step in the right direction certainly.

What about Sherman?

Sherman is tougher. We give you net revenue. We'll have to work to try to figure out something that's mutually acceptable that gives you a little bit more visibility on Sherman.

Essentially, almost all of their income is typically recurring because its -- it's portfolios as that they have purchased and are collecting on now, we have noted very specifically that this year, because there's a lot of demand in the marketplace, they have sold portfolios and it's been the right thing to do. And that I would consider non-recurring or not predictable. But other than the sale of the portfolios, much of their income is recurring, in portfolio driven income.

And is the drivers, I mean, I would look at (inaudible) are long Bob. The drivers of this stuff, is it the credit curbs, is what drives these earnings that the credit curbs one account? So we expect earnings to decline and what if the credit curb continue to taking out the revenues to increase?

Only with regard to C-BASS issuance of securities, that specifically of credit spreads widened out, then there are not going to be the profits taking when they issue securities. The last couple of years, when they buy loans they don't depend on gains or on account on the fact they're going to have gained when they securitize these loans. That's sort of crazy and that's been driven by tight credit spreads. So to the extent credit spread widen, just that part of their business will change a little bit. But that's -- it's not a huge part of their income.

In Sherman is it just default rates in the credit-card industry? As that goes up, Sherman will have better opportunities to grow their portfolios and vice versa if credit improves in the credit-card industry?

Yes, during generally put, its supply and demand. So, yes, if credit trends come down, there is more portfolios out there, there'll be more supply of product. You know, right now there is a very high demand and there's a lot of capital that has come into this business. And there is just more competition for portfolio driving prices up, and you know, the prices are so low, the prices just have to go up a teeny bit to change the profitability characteristics.

So, you know I would say, its supply and demand of product and Sherman -- both Sherman and C-BASS are sort of broadening their scope of business and broadening the ways that they make money, which makes a lot of sense.

The less specific ways you have to make money, cyclical trends in your business can present cyclical kinds of earnings, you know dynamic. So both of them like we said, so when it paddles with our business for finding other ways to make money using their great teams and core competency.

Hey Bob, thank you very much.

Sure.

Your next question comes from the line of Mark Patterson from NWQ Investment Management.

Hi. And official welcome to SA. If this is what Radian can put out after two months of your leadership, I can't wait to see what a full quarter looks like.

Mark, you are upsetting up Frank.

All right, Frank's going to hear it.

A question on that -- on the structured business, New Insurance Written this quarter and then that cancellation fees. Bob, I think that you mentioned that obviously it skewed the premium, then the persistency but just a question on may be appetite on the Alt A and A minus. You said it was an opportunistic time to do some extra structured deal in the second quarter. Is that still around today? Is the risk/reward still there?

And then secondarily, with regard to, you know, kind of risk/reward premium versus potential losses down the road, I noticed that we skewed to a lower FICO and lower LTV. I look at the all paced up and saw that the 90% and above that get on insured on LTV were actually lower. So, just wondering how all that stuff skewed and then what you're seeing risk/reward wise and opportunity wise for Q3 and Q4?

This is Roy Kasmar. First, yes, it looks like into the third quarter I think you should expect a reasonably strong structured transaction quarter. My vision for the fourth quarter is not quite that good as it's like -- you know relative to pricing and risk, we had opportunities there, and I think we were satisfied with the opportunities we had relative to the price. Any individual quarter you are going to see those mix into business moves around a little bit.

But, I think we're happy generally where our portfolio mix is. We've also expanded a lot of synergies segmenting our efforts in the company relative to channels and those channels are broken down between the traditional lines of business in our capital markets area. I think we're getting better traction there.

So, many sorts of improvements, perhaps, in our internal execution have also weighed in on that. And then, you know, I was channeled international, I think you saw some nice growth in that business relative to Hong Kong. And you know I remained very constructive last long, very constructive on the growth of that business going forward as well.

Thank you.

Your next question comes from Stephen Poppel from Financial Security Assurance.

Good morning. You spoke about the large cancellation of a block of business. I wondered what more you could say about the circumstances surrounding that?

Well, we wrote it in early 2003. So it was season some alike. And it was obviously was the portfolio kind of situation were the insured had the ability to cancel. And you know the - I guess the results were better, good and the - we made -- we made it a lot of money on it, very low losses. And we insured you that as well and exercise the option to stop paying premium and take the business back. So it was -- what kind of unusual. And if you look back on the business, it was extremely profitable for us. We were -- we are happy with it.

Where the conditions that allowed to be exercise of the option, present from the start? What were they just recently satisfied?

They were present from the start. And, any of our business has-- anyone can cancel it? No. Essentially, then time by not paying the premium, certainly on the monthly business. This is just a much more unusual situation because it was a block of business that was canceled all that once.

I think it was priced expecting that. And there in fact the losses were zero. So it was a very profitable transaction

Good. Thank you.

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

Well, I would like to thank you all for participating in this call. And I know some of you have to get up early in the morning. Very early - it was pretty early in L.A. for this one of you. Thank you. And thank you for your comments and congratulations and your questions. We will be back again next quarter. Thanks.

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