Radian Group Inc (RDN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Radian's first quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded. I would like to turn the conference over to our host, Ms. Terri Williams-Perry of Investor Relations. Please go ahead.

Good morning and welcome to Radian's first quarter 2009 conference call.

By now you should have all received our press release, which contains the financial results for the quarter. If you have not yet received this, you may obtain it from our Investor Relations at www.radian.biz.

During this morning's call, you will receive prepared remarks from S.A. Ibrahrim, Radian's Chief Executive Officer, Bob Quint, Chief Financial Officer, and Teresa Bryce, President of Radian Guaranty. Also on hand for the Q&A portion of the call are Dave Beidler, President of Radian Asset Assurance, and Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty.

Before we begin with our prepared remarks, I would like to remind you that any forward-looking statements that we make this morning should be considered in conjunction with the cautionary statements set forth in the safe harbor statement included with our webcast slides and the risk factors included in our 2008 Form 10-K. These are available on our Investor Relations Web site, and now I will turn the call over to S.A.

Thank you, Terri, and good morning.

I will begin with an overview of financial results including key items which impacted the quarter. I will then provide updates on our Mortgage Insurance and Financial Guaranty businesses, along with our comments on our liquidity and capital positions. Bob and Teresa will follow with details on the financials and the core MI business. We will then open the call for your questions. Before moving on to results, would like to highlight five important items.

First, our Mortgage Insurance franchise remains strong. As we keep tracking high quality new business, our book gets better. The risk enforced written since the beginning of 2008 is growing every day and represented 22.5% of our total domestic first [inaudible] exposure at the end of first quarter 2009.

Second, we continue to uniquely benefit from having Radian Asset as a source of capital.

Third, we continue to believe that we will have sufficient capital to write high quality and profitable new business insurance throughout 2009.

Fourth, our investment portfolio continues to perform well in this stressed environment.

And finally, we believe that we have adequate liquidity to pay all claims in our Mortgage Insurance business for the foreseeable future.

Moving on to the financials, this morning we reported a first quarter net loss of $217.4 million or $2.69 per share including a $2.29 per share unrealized loss related to mark to market activity on derivatives. This unrealized loss was primarily driven by the tightening of our credit report swap spread. It is important to note that there was improvement in our operating results, excluding these mark to market losses on derivatives.

Despite the impact of the worst economic environment since the great depression that we have experienced in the last couple of years Radian ended the quarter with a book value of $22.12. In addition, our $6.4 billion investment portfolio continues to remain stable and generate reasonable returns. Bob will provide more details on this and other financials.

Now I would like to touch on a number of Mortgage Insurance related topics which Teresa will expand upon later in the call. First, our franchise remains strong as we continue to write high quality business. It is important to note that over the past year we have successfully transformed our business and expect our 2009 book to be almost entirely prime for credit quality. As evidence of this, our first quarter new insurance written was $5.6 billion, 99.8% of which was prime. Additionally, we continue to expand and diversify our customer base, building upon the initiatives we started in 2008. To summarize, we are comfortable with our current Mortgage Insurance volumes as we keep driving quality new business while sheparding our capital prudently.

Managing risks continues to be a top priority at Radian, and this includes our loss management strategies on our legacy book, as well as the strong focus on credit quality on our new book. During the first quarter, we increased direct mailings to customers in default continuing to direct them to third party counseling services, and are placing more loss litigation specialists on site with servicers to expedite solutions. We offer various forms of claim advance payment through our servicers in an effort to put borrowers in a better situation and avoid foreclosure.

In the first quarter, we saw new developments in government loan modification programs, claims staked for the quarter were again lower than our previous expectations even as our default inventory and loss reserves increased. While there is still considerable uncertainly regarding the impact of government modification programs on our future reserve levels, even the most conservative projections would result in a positive impact on Radian's future defaults, claims, reserves, eventual losses. Therefore, we will closely monitor activity on government loan programs and expect that volumes will ramp up over the next few months.

Meanwhile, our Mortgage Insurance business has dedicated resources to prepare for the potential increases in both refinances for performing loans and modifications for non-performing loans. As anticipated, Standard and Poor's recently completed a ratings review of the entire mortgage insurance industry. Both our holding company, Radian Group, and principle mortgage insurance subsidiary, Radian Guaranty, were downgraded. However, it is important to note that Radian Guaranty remains an approved mortgage insurer to the GSE's and we currently do not anticipate any change in our ability to insure loans that are sold either to Fannie Mae or Freddie Mac. The reaction from our customers continues to be business as usual.

Now turning to our Financial Guarantee business, the first quarter was impacted by a significant unrealized loss on derivatives, mainly related to the tightening of our CDS spreads. Additionally, the credit environment remains challenging and we continue to experience some credit deterioration in our financial guarantee portfolio during the quarter, primarily related to deterioration in the housing and consumer finance markets as well as in banking and corporate sectors. With respect to our largest exposure, which is the Insure Corporate Portfolio, we still do not anticipate any credit losses with respect to this portfolio.

Despite this financial guarantee portfolio stress, which we expect to persist, we continue to believe that the capital base in Radian Asset is solid and will ultimately remain largely accessible to Radian Guaranty as our book plays out. It is also important to underscore that in its recent ratings action actions, S&P decoupled the financial guarantee business ratings from Radian Guaranty's ratings and maintained an investment grade status for Radian Asset. Earlier in the quarter, the strength of Radian Assets capital position was also noted by Moody's.

As we stated in prior calls, Radian continues to uniquely benefit from having Radian Asset as a source of current capital as well as potential additional capital in the future for Radian Guaranty. Our dedicated Financial Guaranty team continues to maintain a sustained focus on reducing our risk exposure on a steady, as well as opportunistic basis.

Two key points we made during our fourth quarter are worth repeating again. First, our portfolio continues to perform better than many other financial guaranty peers. And second, while we currently included approximately $1 billion in statutory capital for the purpose of calculating our MI risk to capital ratio, we have a total of $2.8 billion in claims pay resources in our Financial Guaranty business that may become additional statutory capital in the future.

Moving now to liquidity, as we have said previously, we believe that we have adequate liquidity in our Mortgage Insurance business to pay all claims for the foreseeable future. We also continue to expect that the financial guaranty capital will further contribute to our MI liquidity position over time.

We have substantial cash reserves at the holding company and believe we will have sufficient liquidity to continue meeting our obligations to the year, through the year 2010.

We received $6.4 million of dividends from Sherman in the first quarter and believe that Sherman remains a potential source of future capital once the market recovers. Furthermore, we have no ratings covenant, risk to capital covenant or debt to capitalization covenant in our bank credit facility.

While we keep seeing disruption and uncertainty in the marketplace, we at Radian are managing through the present downturn and positioning for the future. Our focus remains on mitigating the losses and reducing the risk exposure to our past book of business, while originating profitable new Mortgage Insurance business and preparing Radian to benefit from the inevitable economic recovery. Private Mortgage Insurance continues to play a vital role in the recovery of the US housing market.

Mortgage Insurance acts as an important catalyst for the housing market by allowing first-time buyers to enter the market, which in turn enables other buyers of the latter to trade up to larger homes. In my regular interaction with mortgage industry leaders, we at Radian appreciate the value that they place on the role of Mortgage Insurance as the most effective means to access the secondary market for certain loan products.

As I said earlier, Radian is expected to reap benefits from the government loan modification programs. With our claims paying ability and history of loss mitigation, we are well-positioned to help these programs succeed, while also insuring that the important lessons from the current crisis are engrained in the market moving forward. Radian remains supportive and actively engaged with lenders, servicers, and all government agencies including the GSEs and FHFA to put the US housing market on the road to recovery.

Exploring means of accessing capital remains a high priority for Radian. We continue to examine both internal and external capital-raising opportunities. In the near term, accessing government support represents the most viable source of external capital. Given the importance of this, we have stayed actively involved in trying to access government support working jointly with our MI peers as well as on our own.

We remain engaged in providing information to the FHFA and treasury and strongly appreciate director Lockhart's connected advocacy for the MIs and are encouraged by his comments last week. I would now like to turn the call over to Bob.

Thank you, S.A. and good morning.

I will be updating you on the P&L activity and trends for the first quarter of 2009 and our financial position as of March 31st, 2009.

Our MI provision for losses of $322 million this quarter reflects the higher delinquency count and the continued aging of existing delinquencies. Our loss reserve estimate this quarter assumes an increased level of denials and rescissions, which is a trend that we expect to continue. We are approaching a limit on reinsurance recoverable amounts from Captive and SmartHomes, although almost all of the cash recoveries from this reinsurance have not yet been received. Such receivables are limited to the cash reserves that currently exist within the captive trust accounts.

Our paid claims for the quarter were $240 million, consisting of $152 million of first liens and $88 million of second liens, with the second lien payments including the $65 million settlement we spoke about last quarter. Claims paid were again less than expected, although we are still anticipating a jump over the rest of the year as foreclosure moratoriums expire.

Looking forward into the second quarter of 2009, we expect the total first and second lien claims paid will be approximately $300 million and we are reducing our full-year estimated range from last quarter's estimate of between $1.4 billion to $1.7 billion down to an estimate of $1.2 to $1.4 billion. Within our growth MI loss reserves, at March 31st, 2009 of $3.1 billion, there is no explicit credit for future expected loan modification nor have we factored in an expectation that roll rates will jump significantly as foreclosure backlogs are cleared or moratoriums expire. Both of these items will likely become more significant factor over the next year.

We continue to expect the number of delinquencies to increase for the balance of 2009 and although we were encouraged by the delinquency levels which came down in the month of March, that reduction could have been aided by seasonality. As in the fourth quarter of 2008, we have determined that no premium deficiency exists on our first lien Mortgage Insurance business as of March 31st, 2009. During the first quarter we have added $5.6 billion of what we believe is profitable new insurance written to our portfolio, which is incorporated into our first quarter 2009 premium deficiency analysis.

As we reported last quarter, in January we paid $65 million to a large second lien counterparry to unwind most of the second lien exposure to them, eliminating some of the poorest performance second lien risk on our books. Second lien risk enforced has been reduced from $843 million on March 31st, 2008 down to $384 million as of March 31st, 2009. The loss reserve and premium deficiency reserve for second liens at March 31st '09 is $151 million or approximately 39% of this remaining second lien exposure, which consists of older vintage, more stable performing business.

Consistent with our desire to reduce any of our noncore risks on reasonable economic term, we paid $62 million to our counterparty in April to eliminate substantially all of our remaining domestic mortgage insurance CDS exposure, which was $132 million at year-end. This transaction had minimal impact on both GAAP and statutory equity.

The current fair value liability on international MICDS is $24 million on our remaining two transactions, which represents approximately $3.1 billion of exposure, and we continue to see no likelihood that we will incur any credit losses on such exposure. Our current risk enforce on NIMs is $431 million, and the updated total balance sheet liability on NIMs is $236 million. We expect future principle to be substantially all of our exposure with claim payments expected to occur mostly in 2011 and 2012.

Because these credit losses are greater than our liability due to the impact of our non-performance risk, the balance of the expense is expected to be booked in future quarters. Importantly, this future expense will be GAAP only, and will not impact our risk to capital ratio, as a full statutory premium deficiency for NIMs has already been reported.

As we have been reporting in Financial Guaranty, we have seen a continuing pattern of deteriorating credit performance, most notably in our assumed structured finance reinsurance credits. We believe that this is more a continuation of the worsening trend we have seen over the past year, than a material change this quarter.

With regard to the one problematic CDO of ABS transaction, we still believe that based on current expected cash flows we will not be required to pay principle until at least 2036. However, because of continued deterioration within this deal, we now believe that the ultimate principle payment may be a significant portion of our total exposure of approximately $475 million.

There is also a possibility that interest advances for which we expect to be reimbursed could begin as early as 2010. If this occurs, Radian Assets and Radian Guaranty statutory capital would be negatively impacted should we be required to post a loss reserve for the present value of future claims. We are still projecting unreimbursed interest payments to begin some time around 2017.

We released Financial Guaranty contingency reserves relating to assumed reinsurance business by approximately $55 million this quarter resulting in a direct increase to statutory capital. We are planning to pay the next ordinary dividend of approximately $100 million in mid-2009, which will be paid to Radian Guaranty. In addition, we are continuing to evaluate our option to issue $150 million of preferred stock out of Radian Asset Assurance in connection with our existing soft capital facility.

We implemented FAS 163 this quarter, which changed the way a number of items within FG are accounted for, including the up front recognition of expected future installment premiums and the replacement of our unallocated nonspecific loss reserves with the probability weighted loss reserve on all Financial Guaranty insurance credits.

The cumulative effect of adoption, which ran through retained earnings this quarter was a decrease to equity of approximately $38 million. The impact of each specific line on our balance sheet of FAS 163 adoption is detailed in Exhibit E of our press release. In conjunction with FAS 163 adoption, those public finance credits that have been legally defeased, but not terminated will put back into our net par outstanding.

Of the $102.8 billion of net par outstanding as of March 31, 2009, $3.6 billion related to such diffused public finance credits. The change in fair value line was impacted primarily by tightening and Radian's credit spread which contributed to our unrealized fair value loss for the quarter, $284 million. We still do not anticipate any material credit losses in our corporate CDO portfolio, which is by far our biggest Financial Guaranty exposure at $38 billion.

While our exposure to trust preferred CDOs has also experienced deterioration, we still don't believe we will be paying future credit losses on those deals. Our investment portfolio had a reasonably good quarter with a total return for the quarter of just over 2% on the portfolio. We had no material write downs of any investments in the quarter that we consider other than temporary.

We did have a significant reduction in investment income this quarter primarily as a result of a reduced portfolio yield caused by a shift in our portfolio to shorter term investments during the last two quarters in preparation for increased claims. Consolidated operating expenses were in line with expectations and the current quarter represents a reasonable 2009 run rate.

We currently have $367 million of cash at or immediately available to Radian Group. We also expect to receive an IRS refund of up to $105 million this year. Our current best estimate of tax sharing payments to our subsidiaries that we will be required to make in October 2009 is $138 million and October 2010 is $300 million, primarily payments to Radian Guaranty.

Based on these projections, we believe we will have cash at the holding company to settle our cap sharing and other obligations through the end of 2010. There is a $350 million of principle coming due in 2011.

As a reminder, the primary remaining financial covenant in our amended bank facility is a maintenance of at least $1.5 billion in GAAP equity and this now excludes all mark to market and the $1.5 billion will be reduced to $1.25 billion as of July 1st, 2009 and $1 billion as of January 1st, 2010. Our comparative equity number for bank covenant purposes at March 31st, 2009 is approximately $2.6 billion.

And now I would like to turn the call over to Teresa.

Thank you, Bob, and good morning.

At Radian Guaranty, we continue to focus on capital preservation through effective loss management. Earlier in the call, S.A. referenced the readiness of Radian in preparing to handle re-finances and modifications as a result of the April 6 launch of the Homeowner Affordability and Stability Plan.

Thus far, we have not seen a significant surge in modification activity. However, we anticipate that an increase in volumes will result from this plan. Sixty lenders have submitted modification requests as of April 30th, with most of the volume coming from four companies. Clearly, it will take some time for servicers to enhance their readiness to participant in these programs, so they can more aggressively assist potential borrowers and comply the government standards.

Meanwhile, Radian has put in place our performing MI Modification Program and posted our guidelines and details on all programs at www.radian.biz. Our team is making considerable strides in maximizing the number of homeowners that are able to avoid foreclosure; and our loss mitigation area, our efforts toward increasing retention workouts, are showing positive results due to increased direct borrower contact and other outreach efforts.

Our borrower contact rate for our relationship with consumer credit counseling service of the Delaware Valley is now approximately 34% due to our direct mail campaigns and customized content on our borrower Web site. For instance, we have already sent out 45,000 pieces of direct mail. We are also getting more direct inquiries, including financial information from borrowers directly through the Web site so that we can better assist them.

We are putting information in the hands of our borrowers so they can make informed decisions and find the help they need. At the same time, we are working closely with our mortgage servicing partners. Radian is currently offering our servicers several claims advanced options depending on the situation and need. We are improving our models which predict likely outcomes from modification programs, so we can recommend the best possible solution. We are placing more of our loss mitigaters on-site to provide speedier decisions and to make sure Radian insured loans are being addressed.

As S.A. mentioned earlier, we are working to maintain stable market share while writing quality new business. We are prudently managing volumes and believe that we can continue to write quality new business throughout the year while remaining below a risk to capital ratio of 25 to 1 providing that macroeconomic factors are not materially different than our estimates.

During the first quarter, Radian put in place a new set of underwriting guidelines for our customers. Our new changes further objective of recognizing and rewarding the underwriting precision of our lending partners. We are also working closely with lenders who fall outside of our proficiency benchmark to improve their underwriting performance.

As we stated before, we remain focused on the underwriting proficiency of our lending partners and we are confident that this approach will result in continued improvements in the performance of loans insured by Radian. We have been successful in diversifying our customer-base.

During 2008, Radian increased its business from credit unions and community banks as a result of expanding our sales force and more targeted marketing efforts. This diversification trend and business development has continued during the first quarter.

As expected, the quality trends we saw throughout 2008 continued into the first quarter and we expect our 2009 book of business to be almost entirely prime credit quality. Over 70% of the loans we insured during the first quarter came with down payments of 10% or more, and FICO scores averaged over 740.

In summary, we continue to stay focused on managing volume and writing quality new business at prudent levels. I would now like to provide you with an update on our work with policy makers in Washington, DC. The mortgage industry continues to have significant support from the FHFA to make government assistance available to the industry. Active discussions with Treasury are occurring. In addition the Domestic State Regulators have been actively involved in these discussions.

While we cannot predict the outcome at this time, we are hopeful that this collaborative focus will yield the structure that works for all parties and capital rethree assist the objective of mortgage insurers to continue writing quality business that supports sustainable homeownership and the economy. In addition, we have continued our efforts to make sure that federal legislators understand and appreciate the continued value of Mortgage Insurance as they consider reforms to financial services particularly the GSEs.

I will now turn the call over to S.A.

Thank you, Teresa.

Before we take your question, I would like to close by again emphasizing a few key points about our business. Radian stands to benefit from the various government loan modification and foreclosure reduction programs. These programs could have a big impact on future defaults, claims, reserves, and losses.

We believe we have sufficient capital to continue writing new MI business throughout the year and we remain focused on managing it prudently. Meantime, we remain actively engaged in exploring government support for the mortgage insurance industry. As stated earlier, we believe that we have adequate liquidity to pay all claims in the MI business for the foreseeable future.

And finally, our Mortgage Insurance franchise remains strong as we continue to write quality new business, diversify our customer base, mitigate losses, and reduce credit exposure where appropriate.

Thank you. And now Alex, please open the call for questions.

Thank you. (Operator Instructions). One moment for the first question.

Are there any questions.

Yes, sir. Our first question comes from the line of Steven Eastman from Frontpoint. Please go ahead.

Yes. Hi. You might have discussed it. I had to step out for a second. Can you talk about the level of rescissions this is quarter and what the trend has been, how you are factoring that into your reserving policies

I will ask Bob to respond to that question, Steve.

Yes. Clearly the trend is up in terms of denials and rescissions, and that is always factors into our reserves; however, the increased level that we have been seeing most recently has impacted the reserves because obviously we have increased the expectation that that trend will continue.

And what are the rescission levels as of this quarter.

We never disclose the exact rafts, we just talk about trends and the fact that the trends are up.

Okay. Thank you.

Our next question comes from the line of Donna Halverstadt with Goldman Sachs. Please go ahead.

Thank you. Good morning. I had one quick question on the tax payments to subs. You lowered the estimate for October '09 and for October 2010, you mentioned $300 million. Does that mean that the previous range of $300 million to $478 million is no longer a range.

Bob.

Yes. The range still accurate. That $478 million was the maximum. The $300 million is our best estimate based on our projections.

Okay. And then I also had a question with respect to all of the discussions being held with the folks in DC. You made the comment that private Mortgage Insurance has been the most effective way to credit-enhance certain types of mortgages, but as they think about reform particularly at the GSE, do you have any concern that they might decide that the banks keeping participations or buying back loans is something they prefer to see happen in light of everything that has happened over the last two years as opposed to the private Mortgage Insurance maintaining its preferred role in the market?

Clearly there's a lot of decisions that remain to be made in Washington. All we can go by at this point is what our customers, which is is the Mortgage Insurance and Lender industry, community tell us, what we hear from the GSEs and what we pick up from other conversations. And all of those to date have shown a strong support for the Mortgage Insurance business and the value we bring.

That's not surprising given that industry has paid, I think, around $15 billion in claims which is a sum that somebody else would have to come up with, maybe the taxpayers, if the GSEs has had done that, taken that exposure. The GSEs have been consistently very supportive of the role of the Mortgage Insurance industry, and you have seen that echoed in several of their comments.

I commented on the mortgage lender community, and just to give you an idea of how much risk we bear that somebody else would have to absorb, it is roughly $180 billion to $200 billion. So, while we cannot comment on what could happen in the future, I feel based on what we are hearing today, I believe, we believe that there's strong support for continued Mortgage Insurance presence.

Teresa, based on your interaction with the industry and with Washington and others, would you like to add to my comments?

I would just agree with what you said,- S.A. I think you also mentioned in your earlier remarks that we have been getting significant support, and it has been reported in the press, that the director of the FHFA, which of course is the regulator and conservative for the GSEs, has been supportive of support for the MI industry, and I think that is indicative of his views as well.

And then I had one other question, and I will get back in line. I was wonder if you can give us any sort of color on probability of having to make payments under various guarantees, as well as the timing and amounts of any such payments, and I am thinking about things such as the net worth and liquidity maintenance agreement with Radian Insurance, the Guaranteed Enhanced Financial, the potential capital support for CMAC Texas, as well as the Radian Group has for two structured deals that Radian Guaranty did. Any sort of color that you can give us on those potential exposures?

Bob?

There's nothing expected in the immediate future. Radian Insurance has significant statutory capital, Radian Guaranty has positive surplus, and we don't anticipate any payments that you are describing in the near term.

Great. Thanks. I will get back in line for a couple of others.

Our next question comes from the line of Connor Ryan with Deutsche Bank. Please go ahead.

Hey guys, how are you doing? I just had a quick question going through the holding company cash that you outlined; you have $367million plus $105 million in refunds, that's going to be $467 less the $138 view in October '09. The estimate of $300 million due in October of 2010, that gets me a kind of $467 million of cash versus $438 million of obligations through 2010, and then I am assuming there is going to be interest expense.

I was just curious, in order to offset that interest expense, do you think that you are going to get what kind of dividend estimate do you have for '09 or '10 and what kind of tax rebate estimate could you possibly have for 2010 as well.

I think Bob can answer that question.

The expenses of the holding company including interest are covered by the subs via expense sharing, so that it is a direct expense of the holding company, but it is reimbursed by the subsidiaries.

We are not anticipating any dividends to Radian Group from the subsidiaries at this point. The one dividend that will be paid in mid '09 is coming from Radian Asset. That's $100 million, but that will go to Radian Guaranty, the parent company to support its liquidity position.

Okay. And you, I assume, do you guys foresee yourself receiving a tax rebate in 2010 as well? I know it is really far in advance, but --

We haven't put that out there as an expectation.

Okay. Thank you very much, guys. Appreciate it.

Sure.

And our next question comes from the line of Matthew Howlett with Fox-Pitt and Kelton.

Thanks for taking my question. The question is on, when you look at your books of business, when you split it between your flow and your structured and you break it up by vintage, is there a way to estimate how far down the '07 flow book business, that's the one I am focusing on, how far down the delinquency pipeline is. You can't reserve until you get a delinquent, a loan notification in, either through what you have already paid on that book and to what is currently delinquent, how far down the pipeline, if you will, could you estimate you are? Is it 1/3, 40%? Is there anyway to tell?

Bob?

I mean there are typical patterns in terms of how delinquencies developed over the life of a book, and we can look at that and make projections which we do, but of course it is hard to tell, and it is going to be subject to the macroeconomics.

Right. Okay. Fair enough. And it is fair to say that the structured book seasons much more quickly and potentially could be nearing their peak default claims?

I mean it is hard to say that. I think we disclose that products such as subprime and the pattern of delinquencies typically emerges faster than prime, so it is a little bit sooner, but it would be more product related than vintage related.

Okay. Fair enough. And then just the last question, I'm not sure it pertains to you guys but on the second lien program that was just introduced as part of the modification program, are there any second liens on back of, let us say, the structured finance insurance that you have written on the structured side? Were there some CLTVs, will that benefit the structure book at all potentially?

This is Teresa. I think there is some possibility that it could benefit us, and I think what we don't know yet is how many of these loans will be beneficial to us, but I think we see had this as a positive development. But we don't know what the impact will ultimately be.

To the extent that hidden seconds behind any first, the program should have a positive impact.

Great. Thank you.

Thank you. Our next question comes from the line of Mark DeVries with Barclay Capitals.

Just wanted to drill down on the reserve methodology for a minute and just make sure I understand some of the things you said, Bob. Did you indicate that right now the current reserves don't contemplate an acceleration of roll rates from lifting of moratorium and also that it doesn't contemplate any benefits from workouts?

Yes. That's right. They're hard to estimate, first of all, and certainly the current reserving has a significant roll rate built into it because it is based on primarily on the recent path where roll rates have been very high, but we haven't factored in an increase that is going to happen when and if moratoriums are lifted and as well that goes one way.

The other way, we spoke a lot about modifications and expecting those to increase, but that also is extremely difficult to factor in. So, we wanted to point out that both of those items could impact the reserving in the future, but are not explicitly factored in.

Okay. So let's say you view kind of a material impact on your roll rates from either one of those factors and then it could not only impact the amount of reserves you said aside for new delinquencies, but also existing delinquencies? Is that right?

It could, yes, because roll rates impact all of the delinquent loans, sure.

Okay. Great. And also, you indicated that rescissions are now being factored in, so if you see increasing rescissions or alternatively decreasing rescissions from here, that we may see an impact on reserve levels.

Rescissions have always been factored in because roll rates incorporate the amount of no pay or rescission into it. Rescission rates have been going up, so obviously as they're going up, those rates built into the reserving process go up. If they go up further, certainly they could, they will be factored in and if they come down that will be factored in as well.

Is there anything you guys are seeing in the rescissions that would give you a view as to kind of whether you expect those to continue to rise or go down in the future?

Teresa, do you have a view of that?

Yes, I mean I think that we are continuing to review claims as they come in. We are reviewing a larger number of claims as they come through, and we continue to see the issues being around underwriting issues or some fraud issues, but it is really hard to say how, whether we will see that rate of rescission go up or not or whether we will see it, at what point we will see any decline in that rate.

Okay. All right. Thank you.

Our next question comes from the line of Joshua Kramer with JPMorgan. Please go ahead.

Hi there, guys. Thanks for taking my question. I was just wondering whether you thought the end of the foreclosure moratoriums were going to have an affect on you, and if you did, when did you think that impact might stroll on and how large do you think it might be?

Josh, as Bob said in his comments, we expect to see foreclosure activity pick up as the moratoriums get lifted, so clearly if you look at our reserve levels today, we have got in excess of, you know, $3.1 billion. We have a fair amount of default sitting there that have not yet moved into foreclosure, and as they move into foreclosure, we could see that pick up as we see a lift on the moratoriums. On the other hand, there are certain states which still have extended moratoriums and a there is host of government programs that are designed to either forestall or prevent foreclosures from occurring but there is a lot of loan modification programs and the combination of all though those could play in ways that make it very difficult to project, as you may appreciate. Bob or Teresa, do you have anything to add to that?

I would just add to it and say that is a liquidity event. It is not a capital event because these loans are essentially fully reserved for, so when this happens, it is going to impact our liquidity. That's one of the reasons why our claims continue to be lower than our expectations. We have prepared for this by moving a lot of our investments to short term, so we are prepared for the event, but it is a liquidity event; it is not a capital event because it is already out of our capital because it is reserved for.

Can you give any kind of general quantification of how you expect actual losses to roll on because of the moratoriums?

I don't believe we have any projections, but I will let Bob or Teresa add any comments they may have on that.

No, I don't think we really can make a projection around that because even as the moratoria expire, there's still a lot of servicers that are working on mod. programs and sort of the issue becomes how quickly do those things move forward. We are also seeing court backlogs on even the foreclosures that are currently underway, so I think it is difficult to know how many of them will proceed and how quickly they will proceed as well as how many of the defaults will, as they said, will get modified or refinance through various programs that are out there.

I think Bob made the important point that we have a process for reserves where we reserve for the defaults that come in to the extent the defaults drake in a direction different from what we have historically seen that the modification programs are more successful than what we have seen or more defaults from the foreclosure we could see the positive or negative impacts on the reserves going forward.

Great. Thanks so much, guys.

Thank you. Our next question comes from the line of Jordan Hymowitz with Philadelphia Financial. Please go ahead.

Most of my questions have been answered already. My only remaining question is can you provide any update on Lockhart's statement in terms of, you said a statement was made last week regarding eligibility for it -- top programs. Sorry about that.

We would be glad to, to the extent we can, again in our previous quarters call, we recognized and appreciated Director Lockhart's strong support for the Mortgage Insurance industry and his advocacy continues on our behalf, and again that's something we appreciate tremendously. In terms of the specific statements he made last week, I will let Teresa comment on that.

I think that the comments last week were just a continuation of his support for the MI industry receiving tarp funds. And he has been actively engaged in conversations with Treasury to look for a structure that would work for everyone, as well as talking to the domestic regulators to make sure that whatever structure could be adopted would be acceptable to them and would yield capital credit for the MIs, which is obviously what this is all about, so I think in addition to his comments of support he has certainly been actively engaged in those conversations.

Okay. How about the fact that the FHA has been several articles in the papers recently about the potential looming capital needs of that program? The FHA has been dramatically out-competing you guys the past year by offering much lower down payment requirements and basically cheaper MI. In the past month or so now that the FHA losses are starting to come to fruition, have you noticed any sort of further push that way in terms of either regulators in Washington or others realizing the amount of capital cushion you provide relative to the government insuring it directly?

Again, it is inappropriate for us to comment on the FHA situation because we don't have all of the details and it is we are not close enough to comment to it. The point I would like to make, however, is that we believe that the FHA plays very important role in bringing liquidity to housing finance and we hope that roll continues in some shape or form and we do not know, however, how that role if in any way is going to change going forward.

Our next question comes from the line of Michael Grondahl with Key Colony Fund. Please go ahead.

Yes. Thanks, guys. Just two questions. On page 10 of the presentation, where you are talking about the first lien domestic portfolio and the premium deficiency reserve, could you describe what you mean by that line that says cushion? That increased from 4Q to 1Q? And then secondly, can you just give us more granular information on your corporate CDO portfolio and why you are so comfortable that you don't expect to make payments or claims on that.

All right. Bob can address both the first and second comment, and we have Dave ready to jump in if needed in the second part of the question. Bob?

Yes, so we do this premium deficiency analysis every quarter, and we look at our projected future losses, projected future premiums, and our then loss reserve and if it is negative then the requirement is to put up a premium deficiency reserve up front and set up the liability up front; so all the $900 million is, it is mass, it is the amount by which we think our future premiums and the loss reserve exceed the future losses. So we are saying that if all goes according to our projections, then there will be a positive result when all is said and done.

Now, the reason that went up this quarter was I think twofold. One because we wrote $5.6 billion of what we believed is profitable business, and that gets factored into the analysis, and two the increased level of expectations around denials and rescissions is really the primary driver in the small decrease in the overall frequency that we are projecting at this point.

Bob, is it fair say that the $0.9 billion of positive cushion is not reflected in our book value?

Yes. It is future expected results, absolutely. And then with regard to the corporate CDOs and Dave will jump in after I just respond a little bit. Generally speaking, we did very, very high attachment point business, and generally speaking, the underlying credits were investment grade and high quality, so, it is really, despite the deterioration and there has been a great deal of deterioration, the level sat which we attach we believe are sufficient to with stand any future deterioration and the subordination levels therefore, generally speaking won't be eroded and our attachment point won't be reached.

Yes. That's really a good summary; we are watching it extremely closely. We update our information frequently, and we believe that based on current subordination levels and the granularity of that portfolio, we do not expect to pay claims at this time.

Yes, Mike, and I will just add one more thing. You look at the duration as well. Many of these deals were done as five year deals or seven year deals and they are well into their life, so over the next few years, we're going to have some of that exposure rolling off, and of course that gets factored into our expectations. There might be some deals with deterioration, but they will expire in the near term and therefore, that leads to our conclusion that we will not be paying claims on them.

Okay.

And our last question comes from the line of Donna Halverstadt with Goldman Sachs. Please go ahead.

Thank you. I was curious about the deferred tax asset. I think last quarter you said you would be taking a look at it quarterly to think about valuation allowances. I was just curious if that review was done.

Yes. It is done every quarter, absolutely.

All right. And then I was also curious, not only did you give 2009 paid claims guidance last quarter, you just refined it, which is very helpful, given that some of the other MIs will not even give paid claims guidance, I am just curious what gives you the confidence with your book of business to make those sorts of forecasts and what sort of differences you think there might be between Radian's ability to forecast such and that of other players.

Bob?

I do not think there is any difference in our ability to forecast. This is a number that we have historically had high visibility on and therefore we are comfortable giving guidance relating to it. Up until recently, we have been pretty close on our guidance. I think the last year or so, the market has changed and the deferrals and moratoriums have caused us to overshoot with regard to our claim projections.

We are still attempting to do it as best we can, and I think we have said continually that we may be overshooting again if these moratoriums keep getting extended. But, we are going to continue to do our best with regard to them.

Okay, and I had one other question on the potential for government capital. Just curious if you think there is a risk, it would be a risk to those of us who care about the HoldCo, of any government capital going directly into the OpCo with the inability to upstream anything to the HoldCo? Do you think something like that is potentially in the cards?

Bob?

Yes, I think there is uncertainty around. We really cannot say exactly what form it would take if it happened, so we will really have to take it as it comes.

Okay, and I had one last question, and it relates to the operating company's -- a two part question. Any concerning discussions with the regulators on the status on the tax and expense share on your agreements, is the first part; and the second part is how do the main insurance subs, main defined as per your credit facility, look with respect to meeting all their minimum statutory requirements?

The conversations with our regulators in Pennsylvania are very frequent; we communicate with them often and they are aware of all of the agreements that are in place within our company. And with regard to the financial covenants in our credit facility, the one that is most relevant is the one we continue to update every quarter, and that is the GAAP equity covenant.

Thanks so much for taking my questions.

Thanks, Donna.

And with that we return the conference back to Mr. S.A. Ibrahim. Please go ahead, sir.

Thank you, Alex, and thank you all for participating in our first quarter call and look forward to seeing you again next quarter.

And Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference Service.