Radian Group Inc (RDN) 2005 Q3 法說會逐字稿

My name is Nikki and I will be your conference facilitator today. At this time I would like to welcome everyone to the Radian Group 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 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.

Thank you and good morning. With me on the call are S.A. Ibrahim, CEO of Radian, Bob Quint, Chief Financial Officer, Roy Kasmar, President of our Mortgage Insurance Business, and Steve Cooke, President of Our Financial Guaranty Business. Today we will follow our normal format. S.A. will begin followed by Bob who will review key quarterly financial metrics and then we'll take your questions.

For those logged on to the webcast, 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 those slides. 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. And Radian's actual results may differ materially from those expressed or projected in these forward-looking statements. Factors that could cause Radian's actual results to be materially different than those in the forward-looking statements are described in the Safe Harbor Statement that is included with our webcast and in our annual report on Form 10K for the 2004 fiscal year. Now, it is my pleasure to introduce you to S.A.

Thank you, Mona. Good morning. I am pleased to report net income of $162.6 million and value to DPS of $1.88 for the third quarter. Another solid quarter for Radian. Please note that the net income includes $38 million or $0.44 per share of after-tax gains on dispositions of investments and for the change in fair value of derivative instruments. Bob will comment further on the change in fair value of derivative instruments.

Production was strong in the quarter with net premiums up 11% over last year. We grew book value year over year, 13.7% to $43.08 at September 30th, and adjusted book value 13.8% to $60.78. We feel that the adjusted book value is an important measure of the embedded value of the Company that you should consider. Although it is a non-GAAP measure, it takes our existing book value and, in our estimation, makes conservative assumptions about future premiums, losses and expenses. This is a common measure calculated by the Financial Guaranty Companies. These additions and deductions, net of tax, represent approximately $1.5 billion in embedded earnings in the Company. In this calculation, C-BASS and Sherman are carried at their GAAP book value of approximately $400 million. Please note that there is a reconciliation of the adjusted book value to actual GAAP book value posted on our webcast slides.

ROE was 18.2% for the quarter, benefiting from significant investment gains and changes in fair value of derivative instruments as I mentioned earlier. Excluding these, R0E is within our target range. Our balance sheet is very strong. While we face challenges in the businesses we are in, we continue to produce solid earnings and after book value, and are optimistic about our prospects to keep doing so. In the mortgage insurance segment, net premiums written grew 13% this quarter. Persistency inched up modestly from second quarter to 57.1%. Primary insurance in force grew slightly to $109.3 billion. While defaults were up this quarter, base claims were very favorable at $71.1 million. Again, Bob will provide additional color on this.

In the traditional mortgage insurance business, we are writing new business at acceptable premium rates and returns. Importantly, we continue to augment traditional mortgage insurance with structured transactions, which you can see reported in both the structured line and other risk written disclosures. Other risk written, which includes full, second and international, represented over 20% of our total mortgage insurance risk written this quarter. Remember that these products are disclosed separately from primary insurance and risk in force, and this is in the area where you need to be mindful when comparing ours with industry peers. In fact comparisons of many financial metrics between industry peers are often difficult due to differences in definitions used. Something I realized personally when I began comparing our statistics to others. As we have been saying, we believe that these products are the primary growth area of the mortgage insurance business where we see opportunities to leverage our superior structuring capabilities.

We also continue to be successful in developing the international mortgage business, which includes financial guaranty type transactions as well as loan level mortgage insurance in Hong Kong. Turning to financial guaranty, net premiums written were solid, growing 6% overall compared to the third quarter last year, with very strong growth from our public finance direct business which more than doubled compared to last year. We are pleased with the progress we have made in shifting the balance from reinsurance to direct business and within the reinsurance business from treaty to facultative business.

In financial services, while down from record levels, C-BASS and Sherman continue to be strong contributors to Radian's results. As I mentioned in our second quarter call, we are taking a fresh and objective look at every aspect of the Financial Guaranty business to address its challenges with respect to profitability, strategic focus and credit agency negative outlooks. I also noted that we formed an executive task force to work with Steve Cooke and the financial guaranty leadership team to identify ways to maximize profitability and to refocus the business in a more strategic and efficient manner. The task force initially focused on our London operations and overall expenses.

The first recommendations, which we will implement immediately, is to put our trade credit business into runoff. The trade credit business will take a few years to run off. So the bulk of the remaining premiums will be earned and capital claims paid during the next 24 months. While the short-term effect of this would be slightly negative to earnings, the removal of this non-core line of business will allow us to focus on the longer-term financial guaranty products, for example international, private finance initiatives.

The task force has also identified several opportunities for expense reductions that are not material in the short term, but are aimed at producing a leaner, more focused business of financial guaranty in the long term. While tax rates continue to challenge the financial guaranty business, it remains an attractive part of the Radian group in terms of its contribution to earnings. And growth in this business will be focused on a targeted basis and at a disciplined pace. We believe that the financial guaranty business is currently over capitalized. And this week we declared a $100 million dividend from the financial guaranty segment to Radian Group payable during the fourth quarter. We will continue to ensure that the business is well capitalized to support its existing business and plans.

While Bob will go into more detail about the numbers for the quarter, I wanted to touch on some frequently expressed concerns by investors and analysts. Every day a potential housing bubble is discussed in the press and recent stock price behavior in the mortgage insurance industry leads me to believe that investors may be overreacting. Opinions vary on whether there is in fact a housing bubble and which areas are vulnerable. The conventional wisdom is that there are hot spots on both the East and West Coasts, which is not surprising given the rate of appreciation in these locations over the last few years. Recently, some have expressed near-term concerns in the West Coast states . We are closely monitoring 24 MSAs representing 22% of our first lien in force as of September 30th. We have identified these MSAs where affordability and the presence of other indicators leads us to conclude that housing prices may be inflated.

Historically it is important to remember that indicators for home pricing stability have included several simultaneous events. A local recession, caused by regional downturn or structural changes, a sudden imbalance in demand supply equilibrium for housing driven by house prices or rising interest rates, and concentrated job losses or credit events driven most significantly by increases in unemployment. In our current list of MSAs it should be noticed that unemployment figures have actually improved year over year. Additionally, in all markets other than in the (indiscernible) states the general consensus is for flat to improving unemployment rates. Based on our express (ph) models which simulate the impact of house price and interest rate trends on our book's future performance, we believe that it would take a very dramatic and unprecedented national economic event to cause our MI business to have net losses.

Another hot topic of concern to investors is the growth in exotic loans. This is the term being used for products such as interest only and pay option ARMs. Many have expressed concern about how much of this risk we are taking. While we are writing credit protection on these products, we take a very disciplined approach and have portfolio risk management tools in place to limit our exposure to these risks. At September 30th, interest only loans represented 1.9% of our primary risk in force. Of our interest only risk in force, over 75% have reset terms of five years or more. Negative amortization ARMs represented 1.6% of our primary risk in force at September 30th. And we are particularly cautious when it comes to loans with multiple risk attributes. We refer to this as risk layering. What this means is the one loan attribute, such as an interest only feature, might by itself be an acceptable risk, it may become less desirable when accompanied by or layered with other loan characteristics such as investor attributes, lower FICOs or higher LTDs.

Prior to Radian I ran Greenpoint Mortgage, a leading national mortgage lender, which was very successful in creating new products including the ones mentioned above. We were very successful at laying off credit risk to investors and insurance. Being now at the receiving end of credit risk, I am very sensitive to what risks we take and how we manage them. Our recently hired Chief Risk Officer, Suzanne Hammett, our entire team, and a new committee of the Board of Directors, which is responsible for overseeing credit risk, share my risk discipline. I am comfortable that we have the appropriate portfolio risk-management tools in place to limit our exposure to these types of risks, and that risk management discipline is at the center of all our decisions. We have also used and will continue to use our Smart Home vehicle as a risk distribution tool.

Before I turn over to Bob, I would like to reflect on my first six months at Radian. As I become more familiar with the Company I get more excited about Radian's future strategy, building upon what makes Radian unique. For those of you who have missed the recent investor conferences I will briefly summarize our future vision.

Our goal is to create a global credit risk management company that delivers value to our customers in the acquisition, management ,and distribution of credit risk. We have unique expertise in understanding mortgage credit risk at the loan level while also having the ability to deliver solutions that can be drawn from both mortgage insurance and financial guaranty technologies. Being able to leverage the combination of these two capabilities makes us more than a mortgage insurance company and more than a financial guaranty company. This unique expertise, still in the early stages, presents us with opportunities to counter the challenges in the traditional mortgage insurance business. While we will benefit like others from any reversal in the decline in domestic mortgage insurance penetration, we are not just counting on this reversal to happen and are creating a future that is less dependent on getting back to the glory days of mortgage insurance.

Finally, we remain committed to managing capital efficiently, finding the right balance between having a capital cushion to cover the risk we take as part of our business, but being disciplined in achieving capital efficiency, and we have demonstrated that we are not averse to returning capital to our shareholders when appropriate. On August 9, our Board authorized the repurchase of three million shares of common stock. To date we have purchased 2.6 million shares at a cost of $135.2 million and 86% of the authorization is complete. With that, let me now turn you over to Bob for more details.

Thank you, S.A., and good morning. As always I'm going to be providing detail around our third quarter financial results. On the MI side, earned premium benefited this quarter from an acceleration of about $15 million resulting from loan cancellations reported within a large single premium pool policy. That resulted in our taking all of the interim premiums associated with the canceled loans into earned premium this quarter. Because the customer has paid us all the premium up front, the cancellation notices can and did come in on a lumpy basis. Note that this did not impact persistency because it is a pool insurance transaction. Despite this acceleration, mortgage insurance and earned premiums still grew substantially this quarter and has grown by almost $90 million since a year ago to $216.6 million. Much of the increase comes from this deal. In light of this acceleration, it will be very difficult to match this level of earned premium next quarter. Of note in our mortgage insurance business written, included in other risk written this quarter was a substantial amount of second lien risk written, most of which puts us in a second loss position where we are much more comfortable taking that risk.

The provision for losses on the MI side was impacted by both favorable claims paid and an increase in delinquencies. The increase in delinquencies reflects some seasonality and some seasoning particularly in the non-prime book. In reviewing our claims inventory, we do expect claims next quarter to bounce back to something similar to the second quarter level and we expect that the next few quarter claims to increase modestly after that. Our consistent loss reserving, based primarily on our loss reserve model, has produced a strong loss reserve level that is above the mid point of our range because of our continued concern about affordability in the MSAs that S.A. referred to. We not only strive to keep building book value but we also strive to preserve our existing book value under stress economic scenarios. That is the impetus behind Smart Home and other risk-management techniques that cap our downside and are intended to avoid substantial losses. We are willing to give up premiums in order to accomplish that.

In looking at our MI business by vintage year, our examination of loss ratios by vintage year show us that the 2002 to 2004 years which make up a lot of our book of business are performing with an expectation better than the 2000 and 2001 years which were hurt by both prepays and losses. Expenses on the MI side were a little bit high this quarter. They were impacted primarily by the $3.5 million write-off of the debt issuance costs associated with the contingent convertible debt that we refinanced in the second quarter. We told you about that last quarter.

The third quarter shares include one month of extra shares relating to the convertible debt and there will be nothing go forward in our share count. Financial guaranty had a strong quarter of written and earned premium. Earned premium was helped this quarter by refundings booked. Our move to exit trade credit will have the impact of reducing both premiums and losses over the next few years, but it should not impact our overall profitability in the business in a material way, especially when you combine it with some of the cost-saving initiatives that will be going into play. As mentioned last quarter, financial guaranty losses this quarter were back to a more normal level after the second quarter reserve releases in the trade credit business took that number down quite a bit. Expenses of financial guaranty were up slightly, partially due to a disproportionate amount of credit default swap business, for which expenses are charged immediately rather than deferred over the life of the deal like financial guarantees and also due to some severance accrual. Obviously removing some of the excess capital in that business via dividend will increase the returns which is a primary focus of the task force. We do not intend to revisit another potential dividend from financial guaranty during the next year, but will strive to manage our capital more efficiently in the Financial Guaranty business in a way that is consistent with our plan for that business to grow in a controlled way.

Financial services again performed well, although as previously mentioned not like in the first half of the year. We do believe C-BASS and Sherman are able to produce relatively consistent earnings over a variety of economic circumstances, although quarter to quarter earnings will produce some lumpiness and we are continuing to be very excited about the opportunity that both of these companies have to post strong earnings go forward.

You have probably observed that there is a particularly large gain relating to the fair value of derivatives this quarter. You have probably ignored this and we agree with you. This is predominantly the result of spread tightening on the tranches of corporate CDOs and AVS (ph) that Radian insured. In fact we closed our first credit default swap transaction in the MI segment this quarter that requires derivatives accounting and you will already see a gain on that transaction due to spread types. This is a prime example of applying financial guaranty technology to the MI business which is clearly a focus of ours. However, these non-cash gains do not necessarily reflect credit improvement. In fact, there can potentially be credit deterioration embedded in these net gains because our fair value model takes into account both spread and credit rating. We almost exclusively buy and hold the credit risk and do not trade our position. The net positive mark on our balance sheet is currently about $60 million, and consists of both positive and negative marks. For example, an individual credit might have a positive mark of $2 million due to market spread type. Over the rest of the life of this deal, however, we could and likely will have additional gains, losses and volatility in the P&L we book for this transaction. As long as we don't pay a claim these gains and losses will ultimately zero out over the life of the deal.

Therefore, the $60 million net positive mark on our balance sheet will reverse over time by requiring losses of an equal amount to be booked over the remaining lives of the deal. Please remember that. Of course, if there is any substantial credit deterioration and/or claim payments with regard to these derivatives, these items will always be included in our quarterly disclosures.

Our tax rate for the quarter is unusually high, due primarily to a lower portion of our income coming from tax advantage investment income. This rate is likely to revert to a more normal level over the next few quarters. S.A. gave you an update on our share repurchase program. We will likely complete the program in the fourth quarter and will review our capital position and business opportunities during our upcoming planning process to determine next year's capital plan. It is likely that share repurchase activity will go down in 2006 as the excess capital in the MI business is not expected to be as substantial as it has been in the recent past. We are now ready to turn the call over to questions.

[ OPERATOR INSTRUCTIONS ] First question comes from Geoffrey Dunn.

Thank you, good morning, guys. Bob, first, can you give us a number of the amount of accelerated premium that affected the MI line this quarter?

Yes. I did, Geoff. $15 million was the acceleration due to that taking the unearned premium into earned because of that cancellation.

Okay. Thanks. Sorry about that. And then, can you talk a little bit about the delinquency patterns that you expect in your book of business. I think after one of your competitors reported last week there was a lot of negative sentiment surrounding what we thought was just normal seasonal and seasoning patterns, as you mentioned. What kind of levels do you expect are going to be normal for delinquencies on your A - and lower book, your ALT-A book and prime book? Any kind of rough ranges you can provide us in terms of what you expect in your pricing would be helpful.

That is a tough one, and we typically don't try to project out delinquency rates. I think we've said and I think we can continue to say that the levels of delinquencies overall within all of the different products are within our expected ranges. Clearly seasoning is going to increase the number of delinquencies. The other thing that we do expect to happen pretty soon is for our book to start growing a little bit and that is going to increase the denominator, which will help the delinquency rate. None of the rates are outside our expected levels. Seasoning does increase the level of delinquencies. Clearly, our book is very young. Most of our book is '03, '04, '05. It wouldn't be unusual to see increases in the level of delinquencies, although if our book keeps growing, then the delinquency rates will be similar or within the range that they are now.

You mentioned that the book is young but haven't you said that you think the 2003 book has peaked in terms of delinquencies?

Yes.

That is what, about one third of your book of business?

It is a little less than that. Yes, it's less than that, but it is still a fairly substantial part.

Thank you.

Sure.

Your next question comes from Rob Ryan.

Good morning.

Good morning.

On an item that usually has pretty good management visibility, the claim payment number looked especially low and you have given us guidance about going forward, but was there some kind of out of pattern effect or something in the third quarter claim payment number?

There really isn't anything specific. There are a couple of things that caused the claim state number to be low and one of them we've been talking about for a long time which is our strong loss mitigation results. That is clearly a part of it, but it is really just more that claims sort of hitting a bottom this quarter. Delinquencies have, over the past year have been behaving very well and claims just hit a low. We do expect them to bounce back as mentioned.

Anything about the future regarding the extent of reserve building? The amount by which your loss provision might outpace the claims?

We are really subject to what our (indiscernible) model tells us is going to happen. So one clear indicator is the number of delinquencies. That is probably the first thing you should look at. If delinquencies increase, then we have to increase the reserves to support that. And underneath that is the aging of the delinquency, the size, where it is, all of those things. I think we have been pretty consistent and we need to be consistent. The model gives us a range, and absent a change in our view of the economy and the challenges within certain MSAs, we will likely stay at higher than the mid point of our range.

From what you can see at this point, we wouldn't expect anything out of pattern in 2006 based on current information?

No, we don't expect that.

Okay. Great. Thank you.

Your next question comes from Bruce Harting.

Bob, good job going through the credit default swap explanation, not easy stuff. Can you talk a little bit about that from a strategic perspective what you're doing with your Primus investment over time and I'm not clear on whether this is a new core business for you at the Radian level and obviously -- are you going to break this line item out a little more or will it be shown like this in future quarters in terms of the volatility you were talking about? Thanks.

Hi, Bruce. This is S.A. You asked two questions, one was Primus and the other is the growth in our new financial guaranty technology application to mortgage insurance business. On the Primus side, basically, as we have said, we look at investments from time to time and we determine what is the appropriate level of investments we need to have and we have basically -- with every investment, and that is how we look at Primus. I don't think there is anything to tell there other than for it it is an investment. It is not a strategic investment. It is an investment.

In terms of the other question you asked, we have said now in the investor presentations as well as on this call, that we view our unique capabilities as the application of Financial Guaranty technology to Mortgage Insurance transactions. And we have -- we have had -- the first transaction that Bob talked about as we get deeper into that business, we will consider whether it makes sense to break that out and give more information or not, and we keep thinking about that constantly. Bob, it's probably early in the game right now, but going forward as it becomes a bigger part of our business from a metrics point of view it may make sense to shed more light on it.

Bruce, keep in mind this business that we are talking about is portfolios of corporate credits, or ABS. It's not single names. It is not the business that promises names. It is very different. Keep that in mind. Nonetheless, the accounting is the same. We have to mark this to market because it is a derivative, and FAS 133 accounting is required on this business. That is the similarity. The business is different. The CDOs we do are portfolios, generally of investment corporate names, and/or high interest grade ABS and even on the MI side, it is a pool of mortgages that is very similar to the pool of mortgages that we provide loan level mortgage insurance on. This is just providing credit protection in a different form than we have historically.

You warned or you mentioned don't be surprised to see if spreads widen. Of course, you would have a mark going the other way, a negative mark. Would that make you more likely to be opportunistic and build that portfolio when spreads widen, S.A. or Bob?

Well, if credit spreads widen and pricing is good, surely that is a great opportunity for us, because we are pricing based on historical default and claims and not based on spread. Clearly, spread widening would give us an opportunity to get better pricing and would be good really for all of the business now. Credit spread widening is not the only thing that will produce losses on the fair value of derivatives. It is just over time if a deal has a gain, over time, by definition, there is going to be a loss because it has got to zero out by the end of the deal. Credit spreads widening would potentially produce losses on the fair value and just time on the deals that have positive marks currently.

My last question, what was the third quarter persistency, and also -- rather than the 12 month trailing? Then also if you can comment a little more, it sounded like, Bob, you had a little glimmer of optimism about growing the book again for the first time in maybe a couple years and it sounds like we're hearing that from one or two of your competitors that have reported already as well. Can you talk about the catalyst for that?

The third quarter annualized is 56.4, so it certainly doesn't look terrific but we did grow the book this quarter. I think that is one sign for sure and I think recently rates have come up to the point where we do have some optimism.

Bruce, did we answer your question?

Well, a little bit light there on the catalyst for seeing -- some companies are saying they think the industry has bottomed out in terms of its penetration and should start going up again. Are you seeing that from your channels as well relative to the competition from the likely suspects, captive and 80-10-10s?

We are hopeful that may happen because as interest rates go up, second mortgages -- the payment on second mortgages becomes less competitive, but MI on the first – than having MI on the first and larger first. So we are hopeful there will be that 80-10-10s have bottomed out, and as I said in my remarks if that happens we will benefit from it like out other peers in the industry, but we are also prepared with other areas in our quiver if that doesn't happen. You are right, there are hopeful indications but nothing that we would want to forecast at this point.

Thank you.

Next question comes from Mike Thrasher.

Good morning. Bob, could you go over the change in the expense level, the financial guaranty one more time? I think you mentioned specific to a line of business.

More of the business in financial guaranty these days is being written as credit default swap as opposed to financial guaranty contracts. Financial guaranty contracts have the standard insurance accounting where you defer the costs over the life of the deal. As part of FAS 133, derivative accounting, we expense right away the expenses relating to derivatives. As the business moved more towards derivatives, there is acceleration of expenses, you write them off right away. There was -- the mix of business is moving that way. The other thing is there were – and none of these are huge numbers, but they add up. Then the other part was severance accrual, that was a couple million. That also impacted the number a little bit.

Last quarter, I think there was a book of business that had canceled I think $3.6 billion on the primary side. There was potential for another $1.1 billion. Is that still intact? What is the outlook for that?

Yes, that is still going to happen and likely going to happen in the fourth quarter.

Okay, thank you.

Sure.

Your next question comes from Steve Stelmach.

Good morning. If you could -- could you just explain the return differences between the trade credit business that is rolling off versus where you expect to allocate that capital? If you would just explain it to delta and returns that you expect.

Yes. The trade credit business, first of all, didn't use very much capital. It is not like we're getting a huge pot of capital to redeploy. It did use some capital. It is a very low margin business, and the return is lower than the returns on the business that we are currently writing in financial guaranty. I don't think it dramatically changes the returns in the business because there isn't that much capital allocated to it. It is more that this is really non-core, it doesn't really fit the Financial Guaranty business. It throws the ratios off and it was never a growth part of the business.

Okay. And on the credit default swap product, the media is making a lot of noise about a very competitive environment and spreads are extremely tight. Can you give us a feel for the pace of how you're adding that business on to your book now, versus an environment where it is a little more attractive? Are you guys being selective now, holding off for later or is it pretty much all full steam ahead?

That is a good question and we are doing something differently. And to address that question with the right color, I would like to ask Steve Cooke to answer it.

Absolutely. Particularly in the structured finance business we, I think along with all other financial guarantors who play in that market have seen the effect of narrow spreads what our particular strategy has been and I think will continue to be until such time as we see spreads widen is that we have been playing up higher up in the capital structure, so that we have been doing more super senior transactions with higher attachment points, and with higher quality underlying portfolios of corporate obligation and which are at the -- when you look at them more risk removed.

Okay. So as spreads widen you go a little bit lower in credit, do you expect, assuming higher premiums for that business, correct? Not only volume has been improved but premium should as well?

That is right.

Thank you.

Your next question comes from Laura Heins.

Hi, I was hoping you could talk about a little bit of CDO exposure with some of the recent defaults with Revco and Delphi, and some of the airlines.

Certainly we have Delphi in some names in some of our CD0s that generally that won't have any kind of material impact. And I don't know about Revco. I don't know. We can get back to you with that.

Okay.

Next question comes from John Boich.

Hi, Bob, how are you doing? This is John at Avera. I am just trying for model purposes kind of gather up all the items that we may not want to include going forward. I want to be sure I have the list straight. You mentioned the $15 million of the accelerated revenue recognition and bringing loss provisioning back to a normal level would be about 10, and then there was the change in the value of the derivative which I thought I saw a 50 number and a 38 number. Which one -- is that around 50?

The 38 was the net of tax, I believe.

On a pretax business, 50, which brings it to about $75 million for the quarter. Fair to say going forward those three items are kind of nonrecurring? Have I missed anything in there? Is there anything less or anything more that we should add?

Certainly the $15 million was unusual. Now we do have a substantial unearned premium so if we get cancellations on those, that could show up in earned premium, but it was an unusual -- clearly it was unusual. The second one was –

Your 34% loss provision versus 43 for almost –

Based on the fact the claims paid are going up, clearly we do expect them to bounce up.

That would be about $10 million. And then the change in the value of the derivatives pretax about 50ish -- that all comes to $75 million on a pretax line. It seems like kind of a big number. I want to be sure that we don't put this -- what should we do with it going forward with these three particular items? If there's anything else we should know about as we go forward in the model.

Well, there were a couple of -- and these are a little smaller but there were a couple of unusual expenses this quarter. We had the $3.5 million write-off for the CoCo bond debt issuance. We had some severance. I think expenses were a little bit higher. The tax rate was a little bit higher as well. Those do offset. And yes, I think you generally have it right.

Got it. Thank you. Last question, financial guaranty. So, if you take $100 million dividend out of there to Radian, does that impact at all what we see as the financial guaranty reserves on the balance sheet? That $212 million number?

That would only impact the equity.

Okay. So the reserve just stays the same? That doesn't impact Radian's view – a credit rating view of someone like Financial Guaranty?

Clearly, this is something that -- we have to make sure all of our constituencies are comfortable with before we do it.

Got it. Thanks, Bob.

Next question comes from Geoffrey Dunn.

Thank you, just a couple of follow-ups on the financial guaranty side. First of all, on the trade credit book, was there an option to sell that book of business to somebody and realize an up-front capital boost or is it not big enough or not worth doing that?

It is a possibility, Geoff, but as I said we can put it into runoff, that it is the more likely scenario.

I just want to make sure and clarify since there a lot of questions on the CDOs. The mark to market you are doing the synthetic CDOs that we often see in the financial guaranty world where you've got the pool of corporate, significant cushion in front of you, nothing hybrid beyond what we are accustomed to seeing in other financial guarantors?

For the most part.

Same kind of thing in the new synthetic product you wrote in the mortgage business this quarter?

Yes, in fact that is the deal that we – where the underlying assets on mortgage loans, we could put loan level MI on or pool. This is just a different form that we are using and it happens to be a high attachment, so there is a big deductible, but it is the same assets.

Thank you for clarifying.

Bob, this is Steve, I just wanted to follow up on Laura's question earlier. We have no direct exposure to Revco in our direct book or CDO book. We are waiting to hear back, and the primaries are still reporting to us with respect to our assumed book and we will let you know when we find that out from them.

There are no further questions. Are there any closing remarks?

I would like to thank you all for joining us this morning and for the questions. Thank you again, and we will talk to you again next quarter.

This concludes today's Radian Group conference call.