Radian Group Inc (RDN) 2005 Q4 法說會逐字稿

Good morning. My name is [Catherine], 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 session. (Operator Instructions)

I would now like to turn the call over to Mona Zeehandelaar, Senior Vice Presidents of Investor Relations and Corporate Communications. Ma'am, you may begin your conference.

Good morning, and thank you for joining us today. With me on the call are S.A. Ibrahim, Chief Executive Officer of Radian; Bob Quint, Chief Financial Officer; Mark Casale, who was promoted to the head of our domestic mortgage insurance business in November; 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 will take your questions. You will note several new disclosures this quarter, including in the mortgage segment the breakout of bulk and flow statistics, launch reserve by product, and more details of other risks, which includes our international, credit to bulk swap and seconds business. In the financial guaranty segment, you'll see facultative and treaty reinsurance statistics. I hope you will find these useful in understanding our business and results.

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 is a brief primer on Smart Home.

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, 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 data 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 10-K for the 2004 fiscal year.

Now it's my pleasure to introduce you to S.A.

Thank you, Mona. Good morning, and thank you for joining us for today's call. In a moment, Bob and I will spend some time providing you with details on our fourth quarter, which represents another solid earnings period for Radian. But first, I would like to begin with a few key comments that I hope will provide the appropriate context as we continue through this call and discuss our results.

First, we have stated previously that one of our key goals is to import our financial guaranty expertise into Radian's Mortgage Insurance business. I'm pleased to say that we are making very good progress in this effort. This is important. Our financial guaranty expertise provides us with excellent opportunities to develop unique and creative credit solutions for our customers in the acquisition, management, and distribution of local credit risk.

Second, this expertise also enables us to effectively manage our own mortgage risk. Third, as we promised in earlier calls, we continue to make progress in building a very strong leadership team that is highly focused on value creation.

Let me spend a moment discussing each of these points. Our financial guaranty knowledge, experience, and infrastructure allow us to take risks on the same assets as traditional mortgage insurance, but in different transactional forms that enable us to provide the most efficient execution for investors and issuers. Our expertise in deal structuring and our ability to transact in various ways, ranging from a credit default swap to a traditional mortgage insurance policy, a second to pay full policy or bond wrap, provides Radian with an advantage over competitors who may not be able to offer such customized solutions. It is important to remember that, regardless of the form a transaction takes, we are taking credit risks on the same underlying mortgage collateral.

The second point I mentioned dealt with effectively managing and sometimes distributing our mortgage risk. Smart Home is an example of the financial solution that Radian utilizes in order to help us grow our business in nonprime mortgage markets while protecting us from catastrophic downside risk, protecting our book value, and improving our risk profile.

The third point I want to emphasize is that we continue to make progress in building a very strong team that is focused on creating value with the right balance between emphasizing profitability; controlling expenses; developing and pursuing growth opportunities; and as I said before, foremost given the nature of our business, prudently managing risk. In recent months, for instance, we have significantly enhanced our financial guaranty, mortgage insurance, and credit risk management, adding highly experienced new leaders. Most recently, we promoted Mark Casale to head domestic mortgage insurance. We are refocusing Roy Kasmar on international and strategic initiatives, an important part of our strategy moving forward.

Mark is uniquely qualified to lead our domestic mortgage insurance business, balancing the growth potential of our structured business with the long-term relationships and steady earnings of our traditional channels. He has extensive experience in capital markets, which he most recently headed, and deep knowledge of the mortgage industry. And like many of us in key leadership positions at Radian, Mark's experience includes being in our customers' shoes and seeing things from our customers' perspective. Going forward, Roy will focus on strategic initiatives that fit with our core strategic vision of residential mortgage credit risk management.

It is premature to discuss details or metrics with you. However, our expectation would be to find opportunities that capture a larger share of revenues generated by mortgage-related activities and seek synergies with our existing business.

I ask you to remain mindful of these key points as both Bob and I go through the remainder of today's presentation. I believe they provide valuable insights that are helpful to understanding our current business, as well as to view where we are attempting to take Radian.

Now let's turn to some highlights for the fourth quarter. I stated in our last call that we were optimistic about our prospects to continue producing solid earnings and adding to book value, even while facing challenges in our business. We also discussed the key role that capital management plays in [attracting] these challenges.

I am pleased to report this morning that we continue to do well in each of those areas. We grew book value year over year by 10.3% to $44.11 at December 31, '05, and adjusted book value by 13.4% to $62.03. You can view our webcast slides for a reconciliation of adjusted book value to actual GAAP book value.

Return on equity, another important metric we use to run our business, continues to be within our target range of 12% to 15%. In addition to producing solid earnings and growing book value, capital management was a key priority and a significant complement of our EPS growth in 2005.

During the fourth quarter, we completed the 3 million share repurchase program authorized by the Board last August by purchasing 400,000 shares at a cost of $24.8 million, with an average price of $58.57 per share. For all of 2005, we repurchased a total of 10.8 million shares, or approximately 12% of our outstanding shares, at December 31, 2004, at a cost of $533.9 million, with an average price of $49.58 per share. We are confident that we have demonstrated our commitment to managing capital efficiency by finding the right balance between having the capital to cover the risk we take as part of our business, but also being disciplined in achieving capital efficiency.

Clearly, it is a priority to find ways to deploy our capital profitably. However, if such opportunities don't exist, we will not hesitate to return capital to our shareholders.

We are currently analyzing our capital plan, and will be bringing a recommendation to our Board of Directors in February. As we indicated last quarter, it is likely that share repurchases will decrease substantially 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.

As Bob touched on during our last call, the accounting for our derivative contracts often results in some volatility from period to period in the change in fair value. During the third quarter, we incurred a large gain relating to the fair value of derivatives. This quarter, we are showing a large marked-to-market loss, but overall, a positive aggregate [mark] for the year. Bob will discuss this in more detail.

In the Mortgage Insurance segment, primary insurance in force continued to grow, up slightly from the third quarter to $109.7 billion. We believe this positive trend, driven by rising interest rates and improving MI penetration will continue, albeit slowly. The increased [probability] of Mortgage Insurance deductibility would certainly be another positive driver.

We do have some concern with the relatively large increase in defaults in the fourth quarter, although the majority of increase can be explained by the aging of the second loss pool insurance business, which we don't expect to result in [plain] payments, and defaults related to the Katrina, Rita, and Wilma hurricanes, the effect of which we will see develop over time.

We are analyzing the other defaults very carefully, recognizing that seasonality may be the prime driver. In the meantime, we continue to add to our strong reserve position, and will carefully monitor the monthly default statistics as we always do.

Premium income was strong, as we continue to augment traditional mortgage insurance with structured transactions, which you can see reported in both the structured line and the other risk written disclosures. Other risk includes pool, seconds, credit defaults swaps, and international business.

As we have been stating, we believe these products represent growth opportunities for the mortgage insurance business. We see this as an opportunity to leverage our superior structuring capabilities and expertise in managing mortgage credit -- mortgage-related risk, while at the same kind remaining well positioned to benefit from cyclical improvement in traditional MI markets.

International mortgage is also an area of focus for us. We continue to succeed in developing the international mortgage business, which includes financial guaranty type transactions as well as loan-level mortgage insurance through our partnership with Standard Chartered in Hong Kong.

It is essential that you understand that the expected timetable recording international expansion, given the disciplined nature of our approach, is not going to produce meaningful financial results in the near term. In the interim, however, we will keep you informed of our progress.

In the fourth quarter, you can see that international risk written was $7.3 billion. And again, Bob will discuss this in more detail.

On the credit risk management side, we recently announced that we completed our third and largest Smart Home reinsurance transaction to help manage the Company's exposure to nonprime mortgage risk. We've included a few webcast slides on Smart Home which we hope will aid in your understanding.

Turning to financial guaranty, 2005 was a year of significant transition. We changed [manage methods], we placed [rate] credit into runoff, we focused on improving expenses, and we strengthened the credit risk infrastructure. I am encouraged by the progress we are making.

As a demonstration of the liability of the AA franchise, and as proof of the success we have achieved in a challenging credit spread environment, you should take particular note of the new business we wrote. Total gross par insured for 2005 increased for all product lines, adding up to an impressive 24.7 billion, up 72% from 14.3 billion in 2004. We were able to achieve this growth while maintaining our credit discipline and focusing on higher-credit business with a superior risk/return profile.

We are making good progress in shifting the balance from reinsurance to higher-return direct business, and within the reinsurance business, from treaty to higher-return facultative business. We continue to look at every aspect of the financial guaranty business to address its challenges with respect to profitability, strategic focus, and the credit agency negative outlooks. Although a tight spread continue to challenge the financial guaranty business, we believe that we now have a business that is better positioned to benefit from a widening credit spread environment.

Turning to financial services, we are extremely pleased again with the performance of both C-BASS and Sherman, which continue to be strong contributors to Radian's results. Given that both C-BASS and Sherman are privately held, we believe that our investors have a unique opportunity to benefit from the outstanding performance of both of these companies.

In closing, I would like to quickly recap some of the key points made this morning. First, we have been successful in importing our financial guaranty expertise into Radian's mortgage business. Second, this expertise has also enabled us to more effectively manage our own mortgage risk. Third, we continue to make progress in building a very strong team that is focused on value creation.

We are pleased with Radian's performance and prospects. We believe we have the right strategy and the right team for the future.

Bob will now provide additional information on our results, and provide more details about the fourth quarter. Following his remarks, we will take your questions. Bob?

Thank you, S.A., and good morning. As always, I'll be providing detail and color about our quarterly financial results.

On the MI side, earned premium again benefited this quarter from an acceleration this time of about $10 million compared to the $15 million last quarter resulting from loan cancellations reported within a single premium policy, which resulted in our taking all the unearned premium associated with the canceled loans into earned premium. The fact that we have a substantial unearned premium reserve in MI, one that has grown a lot this year to a current total of almost 213 million, means that this amount will be earned at some time in the future, which is very good. However, sporadic levels of cancellations in such business will move the booking of this earned premium around somewhat. We don't believe that the level of cancellations that occurred in the third and fourth quarters is likely to repeat in the same magnitude in 2006, as we believe there has been some catch-up in the members reported to us.

We are pleased to see an increase in persistency to 61.5% for the fourth quarter annualized, and to 58.2% for the year. We are hopeful that this trend will continue in 2006.

The amount of business included in nontraditional other risk written this quarter was substantial, and we do expect this to continue as more of our credit protection is written in a less traditional form. Examples this quarter were a huge notional exposure of $7.3 billion, a AAA attachment to two international mortgage securitizations, one on German mortgages and the other on Danish mortgages. Both of these transactions, which were done in credit default swap form, are similar to business written by the large AAA financial guaranty companies in that they attach at a AAA, extremely remote risk level and go all the way up to the top of the capital structure. While the notional exposure is very, very large, we believe that the credit risk in these transactions is very small.

In addition, we did two much smaller domestic credit defaults swaps, each rated BBB, on underlying mortgage collateral that we are very familiar with. You will notice, as Mona mentioned, that we are breaking out more and more information about these products, and will make an effort to improve the disclosure around these products every quarter.

The provision for losses on the MI side this quarter was impacted by an increase in claims paid and a substantial increase in delinquencies, reflecting many things, including hurricane-related delinquencies which, at year end, represented 6,700 delinquencies with a related loss reserve of $58.5 million, including 3,700 delinquencies with a reserve of 27.6 million for Hurricane Katrina.

Also, as you can see disclosed, there are 2,700 delinquencies, most of which are new this quarter, in deals where we are in a second loss position and therefore there is no current loss reserve necessary. It's worth clarifying the second loss position delinquencies. These are mostly pool insurance transactions written during the last year where there is a substantial deductible sitting in front of our risk position.

From a loss provision perspective, we calculate what the reserve would have been if there were no deductible. And if the existing deductible is enough to cover the reserve it won't be booked. Losses will only be booked if and when, and to the extent that the deductible is smaller than the reserve amount.

Clearly, there is uncertainty around the ultimate outcome of the hurricane-related delinquencies, in part due to the existence of forbearance agreements, and we will update our reserve figures as this outcome becomes clearer. At this point, our reserving for these loans is exactly the same as for any other delinquent loans. We therefore have not taken a view that these loans will perform better or worse than any other delinquencies.

In reviewing our claims inventory, we do expect that paid claims next quarter will be similar to this quarter. And after that, we expect the next few subsequent quarters claims paid to increase modestly.

Our loss reserve continues to be above the midpoint of the range that our model produces because of our continued concern about the housing market. However, on the margin, we are slightly less concerned [when] we were in the third quarter due to recent economic forecasts and jobs data.

As S.A. mentioned, we closed our third Smart Home transaction during the quarter, which is a much larger deal and increases the amount of our primary nonprime risk in force covered by Smart Home to about 13%. It is our goal to increase that percentage substantially in 2006.

Of course, that presents another challenge for 2006 earned premium, as there will be a larger component of ceded premiums related to the Smart Home transactions to somewhere in the $20 million range from $3 million in 2005.

Expenses on the MI side were impacted this quarter by a $3.5 million expense related to Smart Home. However, because we plan to continue the Smart Home program in 2006, it is our expectation that the fourth-quarter run rate for expenses will closely approximate 2006 expenses, excluding the incremental impact of stock option expensing.

Financial guaranty had another strong quarter of written and earned premium, the earned number again been helped by refunding. As we said last quarter, exiting the trade credit business will have the impact over the next year or two of reducing premiums and losses, and will reduce the loss ratio in the financial guaranty business, but it should not impact our overall profitability in a material way. You'll see that financial guaranty premiums earned were down a little from last quarter, but they were up if you excluded the trade credit difference.

As occurred last quarter, financial guaranty losses for this quarter were on the low side, reflecting the reduction in trade credit premiums and due to more favorable results compared to reserve levels in the trade credit business that occurred during the quarter. Financial services again performed very well, and we believe importantly that both C-BASS and Sherman have built great franchises that are able to produce relatively consistent earnings through a variety of cycles. In the fourth quarter in particular, C-BASS was a very active purchaser of subprime loans, as they were able to take advantage of some disruption in the market. Sherman has continued to prudently build its credit card origination business to supplement its portfolio business and to look at other selective opportunities in the unsecured consumer asset space. We are excited about the opportunities both these companies have to continue to post strong earnings in '06, although it will be difficult to duplicate 2005, especially for Sherman, whose earnings contain a large component from gains on sales of portfolios that are very difficult to anticipate.

As S.A. mentioned, you will notice a large marked-to-market loss for the quarter, which still leaves a positive aggregate mark of $26.2 million on our balance sheet at year end. The primary reason for this negative marks this period was a refinement we made in the quarter to our [mark to] model for corporate CDOs which uses actual credit spreads by individual name, when available, as compared to our previous version of the model, which used average spreads for similarly rated names. Whereas most out of our deals have minimal differences between the two methods, we do have one credit derivative transaction which was discussed in our third quarter 10-Q as being on our intensified surveillance list, which had a big difference generated by the refined method due to the greater spread volatility and the high yield corporate names that are contained in the deal.

As we discussed in the 10-Q, the ultimate outcome of this deal is very hard to project due to its long dated expiration and uncertainty about the performance of the individual high-yield names. But clearly, we have seen some credit deterioration to date. Under the refined model, the current mark on the transaction is negative $50 million.

As I described last quarter, any marked-to-market P&L movement will ultimately zero out over the duration of a transaction as long as there is no payment, either as a result of a claim or in the settlement of a derivative contract. If we believe a payment is likely, and we can estimate the amount, or we actually do make a payment, it will always be disclosed separately.

I would now like to turn the call over for questions.

(Operator Instructions). David Hochstim, Bear Stearns.

Bob, I wondered -- could you just explained again the reserving policy on hurricane-related delinquencies, and why you are reserving much at all? Don't you (technical difficulty) loans and not the properties, and don't the properties have to be restored to original condition?

That's right, David. And if there's property damage, we have to receive the proceeds, and the property has to be restored before we'll pay a claim.

However, what we've decided at this point is that we don't have enough information about the ultimate outcome of all these delinquencies to change our reserving. So we have chosen to reserve exactly the same as we do for any other delinquencies. There are certain loans that are in heavily damaged areas. There are a lot of loans that are not in heavily damaged areas. There are things like forbearance agreements. There's government assistance. There's still a very much uncertain outcome.

So to change our reserving, we felt we needed more specific reasons and more specific evidence that would lead us to go one way or the other. And absent that, that's what we have done. So all hurricane-related delinquencies have a reserve exactly as if they were in any other part of the country at this point. And obviously, over time, as better information comes in, we will update that.

Okay. So could you just remind us how many loans have you identified in those areas, and what the dollar amount of reserve associated with them are?

Yes. All of the delinquencies, which include all the hurricanes and delinquencies in all of those areas, are about 6,700. And the reserve is 58.5 million. And then we broke out Katrina, being obviously the most devastating, with 3,700 delinquencies and $27.6 million in reserve.

All right. And then the -- could you just talk a little bit about the improvements you are seeing in market conditions? I guess S.A. was talking about some increases in market share. Could you talk more specifically about what's going on in the flow business, and where you are seeing some new business, and what's happening with captives?

The early indications we have are encouraging that the conditions appear to be right for a cyclical bounce back in MI penetration. We are encouraged by the persistency impact of rising interest rates. And our strategy in being able to offer our customers a variety of solutions seems to be working in helping us do business with customers that we otherwise would not have been able to do.

In terms of captives, there really is nothing new to report. I'll ask Mark Casale, our new leader for the domestic mortgage insurance business, if he has any more color to add to this.

Not a lot of color to add. The two things to back up S.A.'s points -- yes, we see from a macroenvironment things are relatively steady with rates going up. We do expect or hope to see persistency go up. But from -- impact on the flow business, we don't see anything at this time.

Paul Miller, FBR.

You really went into a lot of good detail, which I do like about the annual premium earned of 77 basis points. But can you give us a bottom line -- is that annual premium of 77 basis points -- is that doable into the future, or is it going to come down as prepaids come down, and some of these bigger deals start to run off here a little bit? Just for my model, can you give us more insight into that?

Yes. I think -- obviously, the earned premium trend will go with the way the business grows, and if we can get the business growing. Now, business did grow in the fourth quarter on the primary side. And clearly if we can keep that going, and we believe we can, albeit pretty slowly, that's going to impact earned premium.

And we have the other risk written, which we've emphasized a lot, and we hope to continue to grow that part of the business. Some of that business has very high premium rates, some has extremely low premium rates like the international deals we talked about. So depending on where that grows, and really, the mix of that, the average rate could be impacted. But that's another area where we think we can grow earned premium.

The detailed discussion about the cancellations is really -- that's kind of a wild card. We have built this strong unearned premium reserve, which is great, because that's going to come into earned premium, and the life of mortgages isn't that long, as we know, anymore -- so over three or four years, that's going to come into premium. But that's going to probably generate the most fluctuation from quarter to quarter because of maybe the sporadic cancellations in that.

So it might jump around a little bit quarter to quarter, but overall, we feel good about the earned premium, and we think, given growth in the traditional business resuming, building the other risk in force and risk written, and then this big unearned premium coming in, we feel good about the prospects for earned premium.

So is 77 a good run rate going forward, or it's just too hard to make a guess on that?

I think it's very difficult. Now, given the current mix, it is good. But given a change in mix, if we start doing these larger deals with lower premium, that could always change it. But it's not going to change dramatically. You'll always see it coming, and you'll see why due to the change in mix. So I think it's a fair estimate, not given any kind of change in mix.

And then with the higher premiums, the initial response are that you are taking on more risk. So would this lead to higher paid claims down the road? Should we expect that type of behavior, or do you think you're increasing that premium without additional risk?

Well, certainly, the highest premium deals on the primary side are the are the A- deals that are first loss. And those are going to have higher losses and higher paid claims. So clearly, there is correlation there between a higher premium rate, usually, and losses. Now, we try to give visibility on claims, because we do have that. So I think we've given what we know about claims -- that we expect them to be flat next quarter, and up modestly over the next few quarters after that.

When you do take on more risk, isn't it more like vintage risk? Like if you are adding more risk today, wouldn't it really play out in '07 or '08, or do you think it will happen quicker than that?

Yes, certainly it takes a while for the losses to develop -- on the nonprime, a little bit sooner. On a lot of these products that we are writing second loss and credit default swap at BBB, things like that, in the expected scenario, there is no loss payment. Those would only be loss payment if there are adverse developments. So to the extent we write more of that, that will be premium, and hopefully without loss payment.

And S.A., another quick question for you is that you guys do a pretty good job talking about how you are bringing in the financial guaranty expertise to be more competitive out there in the market and to steal some market share. Why would somebody come to you rather than, say, a MGIC or a PMI or somebody? Are you really adding that much more value, and how are you doing that?

I hope the customers think that we are nicer guys, but you know (laughter). But on a more serious note, we do have an array of products that we believe is broader. And again, I'll ask Paul to describe a couple examples -- I'm sorry, Mark to just give a couple of examples.

Two ways where we don't really compete head-to-head with MGIC is on the net interest margin securities, where we wrap at the BBB layer and above. And that really is a great example of importing the financial guaranty technology into the business.

The other probably more relevant example to today's market, and something that we executed two times in the fourth quarter, is where we wrote single-name credit default swaps -- again, [against] the same underlying mortgage collateral where we write loan-level MI. And again, we have that [energy rating] insurance which we do [it]. So again, it's two products that we offer and are active in the marketplace that our competition just does not do at this time.

The competition is just -- okay, okay. I was just wondering if you had some examples of where you guys are really doing very well. (multiple speakers)

Okay, those are two examples.

Brad Ball, Smith Barney.

Bob, you were talking about the expenses related to Smart Home. I wonder if you could elaborate on the increasing expenses in the fourth quarter, and your comment about using that as a run rate for '06. And then also, I think you mentioned that Smart Home would likely be ceding something like 20 million of premiums, or would produce about 20 million of ceded premiums in 2006 -- just want to confirm that.

Yes, the expenses broken out for Smart Home this quarter were 3.5 million, so that was a big part of the increase in expenses. And we do expect to do some of that in '06, I think -- and to say it's a onetime thing isn't really fair, because we'll probably be doing a good deal of that in '06, and (multiple speakers)

And I'm sorry -- is that product development in marketing and staffing and things like that?

That's issuance.

No, that's issuance.

Just the cost of issuance, okay.

Exactly. And that ends up being expensed. And then of course, it's reinsurance, so we are ceding premiums to the [SPV], which is essentially the reinsurance company. And if we are doing more of that, the ceded premiums are going to go up. And the range -- this really depends on how much we do and pricing and the market, so it's an estimate. But the range is in the $20 million range, but it could be a little more than that. And that was a very small number in '05, and that would show up on the premiums ceded line, or a reduction to premium.

Now, that's something we've talked about in the past, where we do this consciously because we protect our book value and protect against catastrophic losses and downside. So we are doing this very consciously because we think it's the right thing to do while we have grown our nonprime exposure. But it does cost us, both in terms of the expense line and the premiums ceded line.

So the offset, just to confirm, is a continued expansion of your nonprime exposure. You think the nonprime market will continue recent momentum and grow itself, and you'll continue to expand in it?

Clearly, that's an offset -- our ability to write this business in a more comfortable way. And the other offset is capital. We do get capital relief for the reinsurance. And the capital markets are a very efficient way to obtain that capital relief. So it does provide us benefit that we think is very positive.

An important point here to note, though, is just because we have the ability and the inclination and the determination to do Smart Home transactions does not mean that we lose discipline when we underwrite nonprime deals. We remain as disciplined as we would be if we were to originate and hold those risks. Some Smart Home is an opportunity to continue to be disciplined in not holding those risks and determining what we are going to keep on the balance sheet or not, that at the time we originate those -- that risk, we continue to be very disciplined.

Okay. And just separately, MGIC gave guidance on the outlook for C-BASS and Sherman. They said to expect earnings to be down 5% in '06. Your comments were a little more qualitative, but it sounded like you're basically saying the same thing. I just want to hear if that's the case with you guys.

Yes, I think we'll hold to what we said. It's going to be tough to duplicate. They both had incredible years. It's going to be tough to duplicate these years. And for Sherman specifically, some decent portion of their earnings was generated by these gains. So it's going to be very hard. But we wouldn't give numbers there.

Geoff Dunn, KBW.

A number of areas I need some help clarifying. First, Bob, can you go over again the premium acceleration that affected the quarter and how that's being treated?

Yes, we have this one policy that makes up a big part of the unearned premium reserve on MI. And we have received over the last two quarters cancellation notices relating to this policy, and accelerated -- essentially taken that unearned premium into earned premium during the quarter. So we broke that out, because even though cancellations will occur on a normal basis in the policy, and we'll be taking some level of premium into earned, we think that the last two quarters has been kind of outsized, because we believe there's been some catch-up.

That was a 10 million impact this quarter?

Right.

So that would say, ex that number, that your premium level is more like 73 [bips], so if you are running as much of an accelerated premium outlook in '06, it would sound like we should definitely not be assuming 77 as a run rate.

Well, I think if you look at it that way, you can look at it that way. The other way to look at it is that some part of that 213 million is going to come into earned premium. We just don't know necessarily which quarter and to what extent.

So to say that you have to take that out totally probably isn't right. 213 million is a lot of unearned premium, and if you even take it in over three or four years, which -- mortgages don't last more than that these days. It's a decent amount of earned premium that I think will come in. So the only point there is that it might be a little jumpy from quarter to quarter, but some level is going to come in each quarter -- that, we know.

Okay. So somewhere in the range of those two numbers, all right --

That's right.

The second question I had is on the delinquencies. In the third quarter, how much of your delinquencies or loans delinquent were due to hurricane-related exposures?

At the end of the third quarter, it was up 3,500, so the change from third to fourth quarter was 3,200, taking it to 6,700.

So it looks like that almost all of the sequential and year-over-year delinquency increase completely related to hurricanes?

Certainly, you can attribute a lot of the increase to that.

Okay. And I've never seen you guys release reserves. It sounds to me that -- how the MI policy works -- that reserving for these kind of delinquencies, like any other, probably ends up being incredibly conservative. How do you plan to address your reserves as you get more information on these? And if it plays out like we would expect the policies to play out, would you just be reserving less, or would you actually consider releasing these reserves back out if they prove unnecessary?

Well, if they are unnecessary, we have to release them. So if the loans cure or there's a payoff of the mortgage, they're not going to be delinquencies anymore, and the reserve will be released. We don't feel like we have enough information about the ultimate outcome yet to be making decisions like that, because a lot of these delinquencies are in less damaged areas. Unemployment is high in these areas. So the economics in these areas are still very questionable. So we couldn't make an assumption that a lot of these delinquencies will just go away and shouldn't have a reserve. But if they do, then they won't have a reserve attached to them.

Based on the information that you've collected, what do you think the delinquency pattern as affected by hurricanes will look like in the next couple of quarters? Do you think you have your hands around most of your exposures, and as such, maybe we're kind of at the top end of what the hurricane delinquencies might look like? And if that's the case, how do you look at your reserving needs in '06?

It's a very difficult question to answer. The only thing we can say is that so far, while we were expecting -- and I believe the rest of the industry was expecting some parallel behavior between the Katrina, Rita, and Wilma hurricanes and what happened previously with Andrew, we are seeing some differences. And therefore, it is difficult to estimate how bad it's likely to behave. There are longer forbearance periods, there's a lot going on in there. And therefore, we have chosen to be more careful in our modeling in treating them the same as any other delinquencies. I think you make a good point, and we would hope that the pattern that we saw with Andrew now comes into play, but we don't quite count on it.

Bruce Harting, Lehman Brothers.

It sounds like you're going to make some marketshare gains here regardless of what happens from a macro perspective in your various businesses. But can you comment a little bit on what happened over the last four or five years, where particularly in the Alt-A, A- and subprime areas, there was a pretty enormous migration to private-label securities? And if the inkling of spread widening we've seen in the last couple of weeks or months at that end, the subordinated tranches of those private-label deals, continues into '06, especially as we get reset risk -- and maybe you have a little bit of a reversion back to agency securities for some of the higher quality loans that were in those private-label deals, is that good or bad for you? And can you just describe that sort of evolution over the last two or three years, and how you see the next two to three unfolding with regard to your fee structure?

You have painted a very good picture of what's been happening in the mortgage market as a whole over the last few years. As I have said in various presentations and articles, and I've been quoted, our view is that the mortgage industry has gone through an evolution. Going back in the past, it was dominated by firsts, which was largely in originated and [holding loan] portfolio. Then it became dominated by [DFCs]. And in the most current period starting in the last five or so years, it has been dominated by the secondary market.

As we tag along on that industry through risk enhancement solutions, we have had to recognize the fact that there are traditional MI-type solutions, as well as there are secondary market solutions, 80-10-10s being an example -- nobody quite in the industry thinks of them that way, but being an example of an alternative. But there are other secondary market alternatives.

Strategically, as we look at where we want to take the business, we have taken a view that while we still are very comfortable, we like the MI business, we are good at it, we are comfortable with it, we have demonstrated success in it, we cannot count on being a one-trick pony going forward. We have to have in our arsenal a variety of solutions that we can offer to the customers without just giving them convoluted arguments that say hey, MI is the best for you. We have to give them what makes sense for them to achieve the [best execution]. We can't preach to them. We have to respond to what their needs are.

I think one of the things that makes us different, as I have stated numerous times, at Radian is we have a lot of people here in key leadership positions who have been in the customers' shoes. So we try and think through things from a customer's perspective. And while I would not -- it would be difficult to hazard a guess as to what the future holds, my expectation is the future will be a mix. There will be certain times when traditional MI solutions make sense for the customer. There will be certain times when more capital market solutions will make sense for the customers. And there's a whole bunch of new hybrid solutions particularly driven by credit default swaps, and that technology that will evolve in the future. And we want to be positioned where we can be a good partner to our customers in giving them what they need to achieve their execution needs. And I'll let Mark (technical difficulty), who with that intent -- it is precisely because we view the market that way that we put Mark Casale in the role he's in. And I'll let him add a little bit more color.

Yes, I mean, first, I think you make good points. With wider spreads, two things happen. I think the [DSEs] do come back into play. And I also think you'll see some of the hedge fund appetite that we've seen has been enormous over the past four years in some of the lower-rated tranches. And they start to wane a little bit as -- what we think is probably a renewed appreciation for credit risk.

And I think how we're going to manage that process or manage the business going forward is -- when S.A. talks about importing financial guaranty technology in the mortgage insurance business, what we've been able to do day-to-day is -- I think we feel very comfortable going up and down the capital structure. So we have the products -- we play at the equity layer with loan-level MI, but we also play at the BBB layer in net interest margin securities. And we'll either go all the way up to AAA, where credit default swaps go -- we are positioning the business to take advantage when spread widens in certain parts of the capital structure to be able to participate -- so again, not be a one-trick pony, but really play up and down the capital structure and have different products, and be able to execute in different forms our ability to underwrite credit risk.

It's safe to say as credit spreads widen, and people realize that they weren't really getting paid for their risk and everybody looked like a genius because there were no losses, as we get into a new part of the cycle that's better for your profitability and you'll have more products to address that growing risk awareness, that --

That's a very --

In addition to rising persistency, which sounds like you think is going to continue to rise through the balance of this year.

That's a very good point, Bruce, because there's also the likelihood of regulatory guidance, which banks and holders of whole loans, particularly second mortgages, are going to probably take seriously in terms of managing the exposure they have, which may mean that the appetite for second mortgages going forward will be less than what we've seen in the past.

And it is important to remember, and we constantly try to remind our investors, that while we put a lot of emphasis on importing financial guaranty technology into our mortgage insurance business and are positioned to deal with the more capital markets environment, we still have a very successful, thriving, and competitive mortgage insurance business. And we will benefit, just like anybody else, from a cyclical bounceback in traditional MI business. And we like that business.

Rob Ryan, Merrill Lynch.

I still need a little bit of help on operating expenses. In the third quarter, we had $3.5 million probably mostly in the mortgage insurance segment, and 2 million in financial guaranty of what were defined as nonrecurring, sort of unusual type things.

Now this quarter, there was Smart Home, although additional issuances of Smart Home can occur in the future, so occasionally we might see that again. Also, I believe you're going to start stock option expensing -- or you did as of January 1st, and that's going to be a new element of the overall operating expenses, which I would imagine you're going to allocate to the various segments in some proportional way.

So what does this all sort of shake out for in terms of an '06 operating expense compared to '05, which had at least a little bit of noise in it?

Well, what I said about '06 operating expenses is that if you look at the fourth quarter number, that represents a good run rate for '06. Now, that excludes stock option expensing. That would be separate. And we have disclosed what those expense numbers would have been for the last several years, so I think you'll see a good representation in our disclosure of what that will be.

So are you talking about the mortgage insurance segment, or in total?

In total. I said it when I referred to mortgage insurance. But in total, there -- of course, every quarter there could be a number of items going one way or another that are too small to mention. And that will continue.

But as a run rate, obviously we've spoken in the past about IT expenditures and things like that. But as a run rate, I think the best we can tell you, which I think is pretty good information, that if you look at the fourth quarter '05, that represents a good run rate, but that doesn't include stock option expensing.

Okay. Looking just at the mortgage insurance number, the 45.3, the question then becomes why is that a good run rate for '06, given sort of the magnitude of the increase versus '05?

Okay, that 45.3 includes 3.5 for Smart Home, and also any other expense in the Company either is going to be directly in MI or, if it's an allocated kind of expense, more of that allocation is going to MI anyway. So the lion's share of the expense in the business are in mortgage insurance.

What type of expenses are we talking about? Is it again the information technology or something else? Obviously, stock options -- we can understand that that's the first time.

Clearly, information technology, where we've ramped up efforts toward the end of the year, which has increased the run rate from first quarter through to the fourth quarter. And that will continue.

So the other thing is we're investing in strategic initiatives. That's where Roy's focus is now. So there have been some expenses there, and those will continue. Certainly that's a part of it. There's no other thing that is standing out as worth mentioning, but in aggregate, that's where the number will be.

Michael Grasher, Piper Jaffray.

My questions have been answered. Thank you.

Jim Shanahan, Wachovia Securities.

Related to this $7.3 billion that you discussed for two international mortgage securitizations, what is the level of subordination in those securitizations to your AAA attachment point, and what have the cumulative losses been for similar transactions?

I won't give you the specific attachment point, but I can tell you that the attachment points is very remote, and its many, many multiples of any historical losses that have ever occurred. (technical difficulty) we deem it to be an extremely remote risk position. And it also goes up to the top of the capital structure. So it starts at a remote position, and then it goes up to obviously the very most remote position.

And following on the conversation earlier about credit spread widening, how do wider credit spread impact the Smart Home opportunity?

It will make it more expensive for us to issue a Smart Home. But presumably, we'll have more premium in our business with which to do that. So Smart Home is a capital markets execution. We don't fool ourselves to think that we could always do it and at a certain price. But clearly, that would impact the issuance, and would make it more expensive to issue.

Now, it might make it more expensive to issue in certain tranches, and we could issue other tranches. So we do have flexibility there. As S.A. said, we always ensure these loans as if we're going to hold them. And then we'd look at Smart Home as an opportunity.

I guess one final question, maybe for Mona -- what is the latest regarding a potential investor or analyst day in March of this year?

That was a tentative date, Jim. I saw that you issued in your report that we were tentatively figuring one out. That date is not going to work. There are other investor days happening. So we are back to the drawing board, and we'll advise you of a date when we make one.

Is this more likely then to be a second quarter event at this point?

I would say it will not be first quarter. So I would say --

Okay. That's helpful.

Eric Wasserstrom, UBS.

Just quickly, S.A. -- I appreciate your comments on the financial guaranty business. But could you may be give us a sense of what '06 looks like to you, and in particular, what you think the competitive environment will be in terms of perhaps AAA-rated players continuing to seek out business selectively in your core market?

I'd be delighted to, and I will turn to Steve to add color on that. But first, let me make a couple of introductory comments.

Like I've said, and we've been talking to you throughout the year -- we've been repositioning the financial guaranty business, both structurally and strategically. And one of the key elements of the repositioning is instead of competing with a AAA head on and trying to be like them, we are focusing on trying to be a better and better version of a AA player. And with that, I will let Steve Cooke answer your question by adding more color.

And I'd say that if you were looking at our competition generically, they fall into three categories -- other financial guaranty insurance companies, whose presence, quite frankly, we see in certain of our -- the segments of the markets in which we participate -- not all of them. I think if you have continuing tightened spreads, it probably increases additional pressure on some of the AAA companies to participate in some of the segments which heretofore have been within our province. I will say, however, that we have been still quite successful in maintaining a real market presence in those areas where we have the most experience and presence in the market.

The other competitive forces that we face -- and these tend to be more, for example, on the structured finance side -- are senior subordinated structures. We've also had to deal with basically cash-flush investors who have been taking yield. The way in which we've tried to deal with that -- and I think we've dealt with that quite successfully in '05 -- is something else that S.A. alluded to before, just looking at the significant increase in new par written for 2004 to 2005 -- is that particularly -- I'll use structured finance as an example -- what we had been there was to move higher up the credit spectrum. So we had a higher credit quality business with a superior risk/return profile, even notwithstanding the fact that we were typically operating at a lower premium -- lower credit spread environment.

Great. And so if you were to sort of categorize what you think the competitive challenges are -- of the three that you just mentioned, how would you prioritize them?

Well, I actually think that the challenges are more dealing with the existing structures, the senior substructures and those sort of seeking yield than it is from the other insurers. In fact, some of you may have seen an article which appeared in the Bond Buyer yesterday -- based on preliminary results from 2005, I'm showing the amount of insured penetration of various insurers in the market. And I think, looking at that, you'll see that we have done quite well -- in fact, even better than some of the AAA insurers in the market overall.

And there are no questions at this time.

Well, thank you, everybody, for joining us this morning. And we'll be talking to you next quarter.

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