Radian Group Inc (RDN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Radian's third-quarter 2009 earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder today's call is being recorded.

At this time then I would like to turn the conference over to Terri Williams-Perry. Please go ahead.

Good morning and welcome to Radian's third-quarter 2009 conference call. If you do not have a copy of our press release which contains the financial results for the quarter, you may obtain it from our Investor Relations website at www.radian.biz.

During this morning's call you will receive prepared remarks from S.A. Ibrahim, Radian's Chief Executive Officer, and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce, President of Radian Guaranty; Derek Brummer, Chief Risk Officer 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 statements made in this call will include forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially.

For a discussion of these risks and uncertainties please review 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 and the 2009 Form 10-Q. These are available on our Investor Relations website.

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

Thank you, Terry, and thank you all for joining us. I will begin today with highlights of our third-quarter performance followed by additional details on our Mortgage Insurance and Financial Guaranty businesses. I will then update you on key developments since our last call, primarily on the progress we have made to write new profitable MI business, and also on our capital and liquidity positions.

Bob will follow with specific details of our financial position and important trends. We will then up the call to your questions after some brief summary comments from me.

Beginning with Radian's quarterly results, earlier today we reported a third-quarter net loss of $70.5 million or $0.86 per share. I am pleased to say that these results were favorably impacted by our business mix, a profitable quarter in Financial Guaranty, and positive results in Sherman Financial.

These sources of income together partially offset the impact of our increased MI loss provision. This increased provision was driven by the higher delinquency costs we experienced in the quarter, along with the aging of delinquencies that contributed to an $83 million loss for our Mortgage Insurance business.

While the economic and business environment remained challenging in the third quarter, we successfully executed on several strategies to help ensure Radian's long-term financial strength. We will provide details on these actions later in our remarks.

We know that Radian's financial strength is critical, particularly in today's volatile economy. Most importantly our risk to capital ratio of 16.1 to 1 in the third quarter increased only slightly from the second quarter. We now believe that we can continue writing new MI business into 2010. We are also actively working on strategies to help ensure that we keep writing new business well into the future.

There are several examples of Radian's strength in our quarterly financial results including Radian's book value at September 30, 2009, of $25.91 per share. Mortgage Insurance paid claims that again came in lower than expected and are now forecasted to be less than $1 billion for the year. The new business we are writing, which continues to perform well, and contributed to the net projected future profit of $1.7 billion on our first lien domestic portfolio , our strong $6.5 billion investment portfolio, and the approximately $380 million and liquidity available to Radian group.

I would now like to focus on a few notable trends starting with our Mortgage Insurance business. While claims paid were lower than our forecast, delinquencies continued to rise and we expect that trend to continue in the fourth quarter despite the significantly lower defaults we are experiencing on our second half of 2008 and 2009 books, as shown on slide 14 in our webcast slides.

In October 2009 the Mortgage Insurance default count increased by 3.3% comparing favorably with the 7.3% increase in October 2008 and a 6.4% increase in October 2007. Historically, we typically experience seasonally higher defaults in the fourth quarter.

And while delinquencies continued to increase, particularly for loans underwritten in the troubled underwriting periods of 2006, 2007, and early 2008, we have several potential offsets. First, we are benefiting from our ongoing proactive loss management efforts and have again increased our resources to examine more incoming claims. You can see our third-quarter rescission rates on slide nine on our webcast slides.

Second, we benefit as well from our vast credit protection arrangements. Slide 16 shows the increased value from our captive and SmartHome reinsurance. More importantly, Bob will detail the significant risk management benefits we are realizing on our structured mortgage insurance transactions where we effectively capped Radian's loss exposure.

We also are encouraged by early activity reports for the government homeowner affordability and stability programs, HAMP and HARP, which were announced earlier this year to help responsible homeowners to sensibly restructure or refinance their mortgages. While the government has already reached its November goal of 500,000 trial modifications, the Treasury Department estimates that this represents only 15% of eligible homeowners. Therefore, we are hopeful that the current trial modifications will become permanent and that the program will continue to grow and succeed in reaching additional qualified borrowers.

While it is difficult to gather complete data on these programs from various customers and servicers, we believe that approximately $300 million of insurance in the quarter is included in the HARP program. Nearly 12,800 delinquent loans carrying Radian insurance have been placed in a HAMP trial period to date with 8,400 loans having begun the trial period in the third quarter.

Once again, the new Mortgage Insurance business written in the quarter consisted of loans with excellent credit characteristics. Of our $3.4 billion in new mortgage insurance written in the third quarter 99.9% was prime credit quality and 74.6% had FICO scores of 740 or above.

Even as we shepherd our capital carefully our market share has remained in the 20% range, a level that is much higher than Radian's historical share. We are now successfully competing in the more traditional high-quality mortgage insurance market and as we address our capital needs we will work towards writing as much profitable business as possible.

Radian Asset continues to provide significant capital support to Radian Guaranty. As we announced last quarter we successfully completed an [AM-backed] reinsurance portfolio that added $40 million in statutory surplus in the third quarter and we also received approval to release approximately $143 million of contingency reserve in the fourth quarter of this year. In addition, we expect Radian Asset to pay another ordinary dividend to Radian Guaranty in June 2010 of approximately $90 million.

The current environment in Financial Guaranty is challenging as financial firms, including banks, feel the impact of the economy. However, it is again important to note that while we currently include approximately $935 million in statutory capital, for the purpose of calculating our mortgage insurance risk-to-capital ratio we have an additional $1.6 billion in claims-paying resources in our Financial Guaranty business.

Now let's turn to mortgage insurance capital and holding company liquidity. Once again we believe we can write new mortgage insurance business into 2010 and are working diligently to alleviate any capital concerns for the business well into the future. Radian's risk-to-capital ratio of 16.1 to 1 at September 30 was clearly below the 25 to 1 limit imposed by several states. However, we do expect our ratio to increase in the absence of new capital or risk relief.

Our industry trade association, MICA, made significant progress over the past several months in six of the states that imposed a 25 to 1 risk-to-capital limit including California and Texas. There are now 10 states remaining with a 25 to 1 limit in place without any discretion allowed by the state insurance commissioner. Since the risk-to-capital ratio remains sensitive to the uncertainty around future levels of default, Radian continues to pursue various initiatives designed to manage our risk-to-capital ratio and enable us to write more mortgage insurance business. These initiatives potentially include reinsurance, utilizing our Amerin subsidiary, and continued efforts to commute or restructure our credit exposure. These are important priorities for us and we have made meaningful progress in evaluating reinsurance options and in preparing Amerin to write new business if needed.

We will report significant developments in the future as appropriate and remain focused on executing one or more of these alternatives in order to keep writing new business without interruption.

Now turning to holding company liquidity, we have a series of initiatives with the objective of meeting our liquidity needs through 2010 and reducing our 2011 liquidity needs to a more manageable level. First, we repaid our credit facility which allowed us to repurchase nearly $58 million of our 2011 public debt in the quarter, which in turn reduces the total principal on our 2011 debt to $192 million.

Next, we fully satisfied our October 2009 tax sharing obligation to Radian Guaranty through the use of our equity interest in Sherman. This frees up approximately $100 million in cash at the holding company while preserving any future upside in Sherman's value within the Radian family. We also received $4.6 million in dividends from Sherman in the third quarter.

Finally, we continued to explore the possibility of raising additional capital to support holding company liquidity and to write new mortgage insurance business.

Our primary focus at Radian is to effectively leverage Radian's financial strength, strong customer relationships, and our unique business mix to manage losses and write new high-quality mortgage insurance business. We are positioning our company to succeed as a high-quality mortgage insurer with a strong franchise when the markets recover.

And now I will turn the call over to

Thank you, S.A. Good morning. I will be updating you on the P&L activity and trends for the third quarter of 2009 and our financial position as of September 30, 2009. Our MI provision for losses of $376 million this quarter reflects the higher delinquency counts and continued aging of delinquencies.

Our recent denial and rescission levels continue to be much higher than historical levels and we expect this to continue as long as our delinquencies are concentrated in the poor underwriting periods of 2006, 2007, and early 2008. Because a majority of our loss reserves are in later stage delinquencies or appending claims on loans from the '06, '07, and the early '08 vintages, we have good insights as to what kind of loans these are and what the anticipated rescission rates on these loans will be.

Some updated statistics regarding recent denial and rescission levels are contained in webcast slide number nine. Our actual dollar amount of denials and rescissions for the third quarter of 2009 was approximately $300 million and was approximately $950 million year to date. These figures include loans in deals with remaining deductibles for which we would not have paid a claim.

Paid claims for the quarter were $243 million, consisting of $210 million of first liens and $33 million of second liens, with $22 million of the second lien figure coming from a deal termination. Claims paid were again less than expected.

Please note that net claims paid reported in our disclosure were significantly reduced by recoveries of trust balances from terminated captive reinsurance agreements that are accounted for as claim recoveries. Claim recovery amounts, which do not have a ceded loss recoverable associated with them, positively impact the incurred loss line while recovery on an amount already recorded as a ceded loss recoverable goes against that recoverable and does not impact the P&L.

For example, if we recovered $20 million from a terminated captive that has $10 million of associated ceded losses recoverable, we would record a claim recovery of $20 million, a reduction of incurred losses of $10 million, and a reduction of ceded losses recoverable of $10 million. For the third quarter of 2009 incurred losses were reduced by approximately $68 million for such recoveries.

We expect the total first and second lien claims paid will be approximately $290 million in the fourth quarter, which would bring full-year claims to approximately $940 million which includes $87 million of second lien termination payments. We expect an increase in paid claims in 2010 and we will provide a dollar estimate when we have more visibility with respect to this amount.

We also expect delinquencies to continue to increase over the balance of 2009 based on recent trends and the typical seasonality associated with the fourth quarter. Beyond that change in delinquencies will be dependent on the macroeconomic conditions, the behavior of borrowers of our insured loans, and the impact of the significant private and government modification efforts for which we expect to start seeing more meaningful results soon.

As we do every quarter, we have updated our future projections on existing business and this analysis is depicted on webcast slide number 12. The gross loss number that we show on top of this slide takes into account significant future savings that we expect to realize from the structuring of many of our deals. Some of the worst-performing business on our books is contained within modified pool and pool transactions that contain deductibles and stop-loss features where Radian is not responsible for losses above a certain level.

As an example, approximately 68% of our exposure to the option arm product is contained within modified pool transactions. Capping our losses on such transactions was an important part of Radian's risk management strategy when determining our participation in this business. And in the current stressed environment we believe that these features will reduce our ultimate future losses by well over $1 billion compared to what we believe they would have been without such features. This savings is incorporated in our forecasted numbers.

Second lien risk in-force has been reduced from $354 million on June 30, 2009, to $284 million as of September 30, 2009. The loss reserve and premium deficiency reserve for second liens at September 30 was approximately $91 million.

In Financial Guaranty we experienced worsening credit trends this quarter. With regard to be one problem CDO of ABS transaction, we still believe that based on current expected cash flows, which are very volatile, we will not be required to pay principal until 2036 or later. And that the ultimate principal payment will likely be a significant portion of our total exposure of approximately $468 million.

Interested advances are now expected in 2010 and could occur earlier if deterioration is worse than expected. At such time we would be required to post the loss reserve for the present value of future losses which would negatively impact Radian Assets and thus Radian Guaranty's statutory capital.

The asset class that has deteriorated the most in the third quarter is our TRuPS CDOs which contain underlying collateral that consists mostly of trust-preferred securities issued by regional and community banks. In October our worst-performing TRuPS transaction with a total par exposure of approximately $212 million defaulted due to an abnormally high amount of interest deferrals by banks in early October. We expect to set up a statutory loss reserve in the $50 million to $90 million pretax range in the fourth quarter and this will be subject to adjustment based on changes during the remainder of the fourth quarter.

Banks included in these transactions generally have the option to defer interest for five years before defaulting. However, any deferral has a negative impact on the deal's current cash flow. The ultimate outcome of these deferrals will have a big influence on the ultimate performance of this transaction and our TRuPS portfolio which has total exposure of $2.3 billion.

Our subordination in all of these transactions is substantial; however, we expect some future losses in this portfolio. Details of our TRuPS exposure is presented on webcast slide number 25.

As S.A. mentioned, due to the overall reduction of exposure in our Financial Guaranty portfolio we have just received regulatory approval to transfer approximately $143 million from contingency reserve into surplus. This will benefit weighting asset and thus Radian Guaranty's statutory capital in the fourth quarter, and at this point would more than offset the negative impact from the defaulted TRuPS transaction.

The change in fair value line was impacted this quarter by a significant tightening of credit spreads and the underlying corporate CDO collateral by a tightening of Radian's credit spreads and by credit deterioration in TRuPS CDO portfolio -- all of which contributed to our unrealized fair value loss for the quarter of $31 million. The corporate CDO product had a net gain of approximately $102 million while the TRuPS had a net loss of approximately $110 million.

The fair value line will likely continue to fluctuate. However, we continue to point out instances where we anticipate credit loss.

Our investment portfolio had an excellent quarter with total returns for the quarter of over 6%, including returns on our municipal portfolio in the 12% range. The portfolio gains during the quarter were the reason that our book value grew to just under $26 per share despite our P&L loss. We also had approximately $97 million of P&L investment gains consisting of realized gains of $40.5 million, which includes $12 million of gains from the repurchase of our 2011 debt, and $56 million of net unrealized portfolio gains.

We currently have approximately $380 million of liquidity at or immediately available to Radian Group. Our current best estimate of tax sharing payments that we will be required to make to our subsidiaries by October 2010 is approximately $250 million, which is based on 2009's projected taxable results. This is up a little bit from our prior-quarter projection.

It is also possible for there to be a tax payment due in October 2011 and that will depend on 2010 results. The preliminary estimate for this payment is approximately $44 million and the maximum it could be is $77 million. As S.A. mentioned, the purchase of $58 million of par on our June 2011 debt for a purchase price of approximately $46 million leaves $192 million of par outstanding on the debt that matures in June 2011.

I would now like to turn the call back over to S.A.

Thank you, Bob. Before we open up to your questions we would like to leave you with the following take away points. Radian's book value at September 30, 2009, of $25.91 per share. Radian's risk-to-capital ratio of 16.1 to 1 on September 30, and we now believe that we can comfortably write new MI business into 2010. Mortgage insurance paid claims, again, lower than forecast and now expected to be less than $1 billion for the year. Approximately $380 million in liquidity available to Radian Group. And our continued focus on mitigating and managing our legacy risks and ensuring our ability to write profitable new MI business.

Operator, we are now ready to take questions.

(Operator Instructions) Mike Grasher, Piper Jaffray.

Thank you and good morning. Bob, just going back to the troughs, can you give us a little bit more detail around -- and I understand subordinations are high and they look fairly reasonable here. But can you give us more details or examples around maybe an issue or two that in your experience on foreclosures within any particular issues?

Mike, I think what you mean maybe is defaults. And the predominant reason for the deterioration in the trust is due to deferrals rather than defaults. There have been some defaults, but there have been many more deferrals. So the banks have chosen to defer interest and that impacts the cash flow of the deal.

Okay. So when we read about the Feds going in and closing down community banks here and there are you saying that is no impact at all on your issue?

Well, if there is a default then that would reduce the subordination in the deal. If there is a deferral that is going to impact the cash flows. But then the ultimate outcome of those deferrals, whether the deferrals become defaults -- and like we said they have five years -- or they end up curing, that will impact the ultimate outcome of the deal.

Okay, that is helpful then. And then also with regard to the bulk of new claims that are coming through, can you talk about the vintage that maybe those lie in? Are they still coming through for '06, '07, and '08? Have those changed or can you give us a mix of what the new claim activity looks like?

Hi, this is Teresa Bryce. Most of them we are still seeing are in the vintages of 2006 and 2007. Some obviously for 2008, but clearly it's mostly 2006 and '07.

Okay. And is it your sense that, if you think about the '06/'07 claims that have already come through versus the new ones that are arriving, is there a difference in the type of claim? In other words, is it -- are the earlier claims more related to the fraud and maybe terms for rescissions versus the new ones coming through? Maybe tied to less about credit quality but more about, I guess, the ability to make the mortgage payment or employment-related type of claims?

I think when you look at the vintages we are still seeing issues around misrepresentation and other underwriting issues in the older vintages. I think with respect to any newer defaults and more recent vintages that tends to be more related to unemployment.

Okay. That is helpful. Thank you much.

Mark DeVries, Barclays.

Could you comment on what you are seeing on roll rates for seriously delinquent loans? What percentage of those loans are just sticking around longer due to backlogs with servicers working on modifications? What percentage are curing? And of those that cure, how much of those effectively are just curing due to rescission?

I think we have seen a continuation where many of the late-stage delinquencies are just staying there. So there is this backlog and that is the main reason that claims paid have been lower. So the ultimate outcome of these loans has not been determined yet. Obviously, some will go to claim at which time we will either pay the claim or we will rescind, but most of them have really stayed around in the late-stage delinquency buckets.

Okay, great. And, Bob, could you comment at all on -- if we get an extension of the NOL period, what that might mean for you and how T&L bonds would affect that?

Yes, preliminarily, if that happens we don't think it's going to have a material impact. Certainly it would have a minimal impact on the consolidated situation for Radian.

Okay, thanks.

Steve Stelmach, FBR.

Good morning. Bob, can you just -- you mentioned slide 12 and the cumulative claim frequency. Looks like the assumptions that you are using have improved from 13.5% roughly to about 11%. Is the improvement based solely on denials, I guess a higher expectation for denials and recessions? Or is there something about the underlying quality today that you think is better versus maybe a couple of quarters ago?

Absolutely. I think the main reason it has come down throughout the year is because of denial and rescission estimates, but every quarter we keep adding what we believe is very good business to the mix. And clearly our expected claim rates on the new business is much, much lower so that is going to impact the numbers as well.

Okay. And then just to follow-up on that cure rate question. Can you give us some context of where it was historically, where it is today, and where do you expect it to go absent the rescissions and denials?

I think generally cure rates are down from historic levels. We do expect over time for that to come back and revert back to more historic levels. But they are still very low compared to where they have been in the past.

You would need to see home price appreciation or at least some stabilization for cure rates to improve from here?

Yes, and also certainly modification efforts coming through because those would be cures as well.

Okay. All right, thank you very much.

Mike Grondahl, Northland Securities.

S.A., if you could kind of just walk us through strategically what are the couple things you are working on the most to really continue to write new quality business, to take market share, and kind of continue to plow forward?

Thanks, Mike. There are a couple of things to keep in mind here. First, we have successfully moved Radian's mortgage insurance strategy to focus on traditional high-quality business and have done so based on significant additions we have made to our risk management infrastructure and risk management changes. And on the customer relationship side we have brought on new salespeople.

We are now going after mix size and smaller accounts in a bigger way than Radian used to go historically. Our goal is to put in place a mortgage insurance strategy that positions us well for market recovery.

In terms of our ability to keep writing more mortgage insurance business, I outlined the various initiatives that we are looking at. First, we benefit to the extent that industry efforts in relaxing the 25 to 1 requirement changed. Second, we are fortunate and benefit from having our Amerin entity which we have been preparing and have made progress in getting ready to write business in those states where 25 to 1 still remains a factor.

In addition, we have benefited from the fact that our risk-to-capital ratio for mortgage insurance went up only slightly, and then we outlined the various other strategies that we are working on. All in all the name of -- our focus is really having now repositioned our mortgage insurance business successfully to continue to take advantage of the opportunities in the market.

The market share quarter to quarter will go up and down, but the important point here is we are at a much higher level than our historical market share level.

Okay. Just as a follow up maybe for, Bob. Clearly, the Financial Guaranty business had a reserve release during the third quarter, the $143 million. When that release was taken was it taken with full knowledge that the bank TRuPS portfolio was going to have this fourth quarter hit, so that was kind of factored into it too? Or did that come up after the fact?

Mike, the release is in the fourth quarter so that hasn't occurred in the numbers that you are looking at. That has not occurred, and that is due to the overall reduction of exposure in the portfolio. So it's completely separate. So we are going to take this contingency reserve, move it to surplus. That increases surplus.

But as well in October, we had this trust default which will require a statutory loss reserve, and we just related the two because one will increase surplus, one will decrease surplus. And right now, the one that is going to increase surplus is higher. But other things are going to impact surplus as well, but that is a fourth-quarter event.

Okay. But you are still happy with the reserve release of $143 million, knowing that the TRuPS hit is coming. I guess that was my question.

Yes, that has been approved, so that is going to happen regardless.

Mike, no matter what, we are better off from a statutory capital ratio perspective in having seen the release of that $143 million.

Sure. Then any update on commutations in the Financial Guaranty business? We continue, Mike, to remain engaged in efforts to look for commutation opportunities on a constant basis. We have to deal with the market and the fact that these opportunities take a lot of work.

We are very pleased with the success that we have achieved in the past, and we remain extremely focused. It is one of the biggest priorities in addition to surveillance and managing and mitigating losses in the core Financial Guaranty business.

Okay, okay.

Matthew Howlett, Fox-Pitt Kelton.

Thanks, guys, for taking my question. Just on the reserve per delinquent loan, it trended down a little bit this quarter. There was a peer of yours that mentioned -- that guided -- it continued to trend down in the fourth quarter. You mentioned your delinquencies are going to be up in the fourth quarter. Any guidance around that?

Around reserve per delinquent loan?

Yes.

No, we just said that we expect delinquencies to increase in the fourth quarter. Reserve per delinquent loan depends on a lot of other factors that will change in the fourth quarter.

Okay, fair enough. Let me ask this then, of these 200 million of you said rescissions or denials this quarter, how much reserves did you have against those loans that eventually you rescinded or denied? Could you give us that number?

We can't give you that. I don't have that number. But that is just a dollar amount of rescission, so if you think about we are already incorporating an estimate of rescissions on our entire delinquent portfolio. The dollar amount of rescissions is certainly relevant because it shows you the amount that we are doing, but you can't really relate it to the P&L specifically.

Okay. Just on your assumptions, I know you give the cumulative claim frequency on page 12. Any way you could tell us what that frequency was, that gross number before denials and rescissions?

We haven't done that, Matt, but I think we are giving more and more information around the percentage of the rescission, so you can kind of --.

I can do it that way. Great. Just a last question on HAMP, you gave us the level of loans that have ventured into trial period. The Treasury also puts out what they say is eligible, the 3.1 million. Some MIs have been giving eligibility rates. Is there any way to tell when you look at your delinquency portfolio or your just overall portfolio what could fit under that eligibility window with that?

Hi, this is Teresa. I think, first of all, we have been very pleased with the ramp up that we have seen and the number of loans that have gone into the HAMP modification trial period. So we have seen a huge expansion of that over the last couple of months, particularly as some of the servicers were able to start really pushing these through.

The difficulty I think is that we don't have access to the income information that would allow us to really sort of size the number. And so while we continue to look for opportunities to try to size that I don't think we are comfortable with trying to make that projection about how much of the portfolio is HAMP eligible right now. We do believe that our portfolio will be consistent with the other portfolios.

And that is obviously not baked into your cumulative claim frequency, any potential benefit from HAMP?

There is no specific.

Great, thank you.

Nat Otis, KBW.

Morning. Actually just two quick questions; first one on that $300 million in rescission and denial activity this quarter. Any way to break that out by either product or book year just to get an idea of what the larger percentages are of business that you are rescinding and denying right now?

Now we haven't done that but I can tell you that -- and I mentioned in the remarks -- a substantial portion is from deals where there are deductibles. That whole $300 million is not the amount that we would have paid out because some of it is in deals where the deductibles haven't been exhausted yet. So it's just essentially sustaining the deductible or keeping it there as opposed to avoiding paying a claim.

Is it fair to say that it's still primarily '06/'07 vintage and maybe even majority still all-pay business right now?

Certainly from a vintage standpoint, yes. And that should continue as well.

All right. And then just one last quick follow-up question on something you said earlier. Did you say that in October delinquencies were up 3.3%? Was that the number you gave?

Yes.

Okay, all right. Great, thank you.

And compared to the numbers that we gave for previous two Octobers.

Great, thank you.

Ed Groshans, Ladenburg.

Good morning and thank you for taking my call. I guess, Bob, you mentioned that it wasn't defaults but it was relieved the deferrals of interest in the TRuPS that caused the event to default. And I guess can you just give us some color? I guess what percentage of the portfolio needs to defer interest before it's declared -- have entered default?

Yes, this is Derek Brummer. It depends on the transaction in terms of the percentage of the portfolio that would have to defer, and a lot of that is going to be driven by the fact in terms of how the transaction is hedged.

The particular transaction that we had a default on suffered from the fact that much of the cash flow was going to pay the interest rate hedges. So I think that is very dependent upon the transaction in terms of percentage of deferrals.

Okay. So you could see some other ones have higher levels of deferrals, but not come in at the default depending on how much was hedged out or not?

By the transaction we suffered the interest short fall on, different from our other transactions in a couple of ways. The collateral was of lower quality -- the banks were of lower quality and collateral pool. And number two, more of the cash flow was going to pay the interest rate hedges compared to our other transactions.

Okay. So then I guess if I look at your footnote two and if I guess the parties that hold the notes do call the par amount, is it going to be the par amount less the amount of subordination after deferrals also? Do you need to burn through that first before there is actual cash payment from Radian, I guess is my question?

No, in the instance -- if there is an outstanding event of default on the scheduled termination date of the swap, we would pay par. And our counter party would have the right, if they exercise that, to either provide us with the bond or they would provide us with recoveries on the bonds over time. Meaning paying us any coupon on the bond and ultimate principal recoveries.

Okay. So if they did that it would actually be an immediate cash payment out and then recovery via the receipt of the bonds or future cash flows?

Correct.

Okay, thank you so much.

Amanda Lynam, Goldman Sachs.

Hearing nothing from that line we are going to go to another line. Donna Halverstadt, Goldman Sachs.

Hi, can you hear us now? I had a couple things I wanted to ask you about. One is a topic that has been under debate recently and that is the idea of expanding the carry-back provision from two years to five years for NOLs generated in 2008 and 2009, which could clearly generate some much needed cash for many different types of companies.

A couple questions on that. One, what do you think the odds of that passing are? Two, if it were to pass what amount of tax refund would you expect to get in 2010? And, thirdly, are there any quirks to your situation, whether it be related to tax and loss bond stuff or otherwise, that might prevent you from benefiting from that change in tax law if it is implemented?

Donna, we don't really know the odds of it happening. However, the impact to Radian on a consolidated basis will be negligible. We don't have additional carry-back potential that we would be able to utilize, so on a consolidated basis we don't think the impact will be more than very, very minimal.

There may be some individual company impact and we don't think that would be material, but we haven't really worked through exactly the specifics.

Okay, great. The other thing I wanted to ask you about is after you announced last quarter that you would be playing the Sherman card to satisfy the '09 tax obligation to Radian Guaranty I started wondering what types of things you might be able to do with respect to the 2010 obligation.

And I was wondering if you have had any conversations with regulators about the possibility of extending that payment over a period of some years rather than paying it all in 2010 or if there is any other types of moves you are thinking about other than spending the $250 million of cash in October 2010. Some way to spread it out or use some other asset to pay it off. Anything going on on that front?

Well, at this point we expect to pay it off in cash. Of course, we are always going to look for ways to improve our liquidity and capital situation so there are things that -- certainly things we are discussing and looking at. But at this point the expectation is that we will pay it off in cash.

Okay. And then I also wanted to get an update on something I haven't asked about in a number of quarters and that is what your current outlook is on the hold co having to make any payments under the variety of intracompany guarantees and capital support agreements that it's party to? How are you thinking about those right now, anything on the horizon?

There is nothing material that we expect to happen there. We have made -- as you have seen in our disclosure, we have made some small payments. But we don't think anything -- certainly don't think anything material is on the horizon.

Okay. And the last question I had is with respect to the defaulted TRuPS CDO portfolio, whether or not there is any sort of collateral posting requirements. And just more broadly for each of the MI business as well as for the FG business, for the business that you have written in CDS form is there anything we should be concerned about in terms of collateral postings or terminations?

On the FG side we wouldn't be required to post collateral on the TRuPS or any of our transactions.

And is there anything going on on the mortgage insurance side that you have done in CDS form that we should be concerned about?

No, most of that exposure is either gone or very, very small. But no collateral posting at all.

Great. Thank you very much for taking my questions.

David Polson, AXA Investment Grant Managers.

Thanks for taking my call. I am trying to make sure I understand about the benefits of HAMP and HARP. Right now to what extent are any benefits -- actual or potential benefits -- in the loss reserve numbers from those two programs?

At this point we don't have a specific addition to our loss reserve methodology that makes an assumption about how successful those programs will be. At this juncture so many of them are in the trial modification period that while the number is ramping up significantly, which we think is a good sign, we won't see how that turns out until those start coming out of the trial mod periods which would be we expect later in the fourth quarter into the first quarter of next year.

So, David, the way that would work is any modification essentially becomes a cure and the reserve just comes off the books.

Mathematically.

Well, an actual modification as opposed to a trial one?

That is right.

Yes, it's not considered to be cured or truly modified until the trial -- it comes out of the trial modification period.

I see. Okay, that is very helpful. Now the $1.6 billion that you talk about, the capital and the Financial Guaranty subsidiary -- or I guess that is claimed resources. In the mortgage insurance risk-to-capital ratio is there any benefit in that ratio from the Financial Guaranty capital?

Yes, the $900 million. That surplus of $900 million, the 1.6 that S.A. mentioned is additional claims paying resources. That is going to be contingency reserved on our premiums and other items that are included within claims paying resources.

Now to the extent that contingency reserves release from that and go over to stacked capital that reduces that amount and contributes to our stacked capital.

Got it.

The 143 we talked about moves from that pocket to a pocket where it benefits us.

Right, right. Now speaking of Financial Guaranty and taking from contingency reserves, the $50 million to $90 million to be reserved for that TRuPS, is that just for that $212 million TRuPS?

Yes.

Okay, so that is a big part of that. Can you maybe give us some color as to how much that is kind of unusual in the whole portfolio of TRuPS that you have? Is that sort of a -- does that really stand out from the pack or does that -- if let's say the bank environment continues to get worse or just commercial loans, the commercial real estate environment worsens in 2010, to what extent does that phenomenon bleed into other TRuPS?

We have experienced a deterioration across the portfolio. Like I indicated, that transaction suffered worse for a couple of reasons. Again, just because of the more accelerated deterioration in that particular portfolio and interest rate hedge on payments that had to be made. However, if we see continued deterioration in the banking sector that will affect our other transactions.

Now independent of bank deteriorations, like we said, they have the option of deferring for five years where they could decide for reasons of their own to defer interest payments and then come back and pay them.

Right. And that is where I was kind of going with this. To what extent does up to $90 million of reserves look forward to the potential for --? How conservative is that with regards to deferrals turning into actual permanent non-payments?

Our forecast is conservative. We are giving very little recovery value for a collateral that is currently deferring. If it turns out that a higher portion defers and cures that would obviously affect the ultimate loss in the transaction. But at this point in time we haven't seen an increase in cures, so we are not projecting that in our base case scenario.

Okay. All right, I guess that is all I have got. Thanks.

Brian Gonick, Senvest.

Good morning. I just want to clarify some of the comments on HAMP relative to page 12 where you are showing net projected profit now. Just to confirm that does not assume any benefit from HAMP, is that right?

No explicit benefit from modification.

Okay. And you have 12,000 delinquent loans that are under trial, is that right?

Yes, it's a little over that.

That is our estimate but it's very hard, very difficult to get data and the data is not consistent by lender/servicer, by agency. So it is difficult at this point to get the data. That is our best estimate; it could be higher.

And is there any way to quantify what the reserves would be against those 12,000 loans?

We don't have that information at this point.

There is no reason to believe it's not sort of an average part of the portfolio, and you could probably get in the ballpark.

So if we use what reserves were for delinquent loan at the end of the quarter of $17,000 or whatever, is that a fair number to use or would it be higher potentially?

I wouldn't use anything other than the average to estimate it, Brian. And we don't know.

But it would be aged defaults that would have potentially --

We don't know that.

We don't know that either.

We don't know that so I think that is why it's difficult to say specifically what the number would be.

Right. Do you think in this quarter when you report the fourth quarter you will have some data then on things that have gone or come out of trial?

Well, I think we are certainly hopeful that we will see some of these start going out of the trial mod periods and curing. SO I think we are hopeful that we will start to see some of that activity by the time we report the fourth quarter.

Though it may be more realistic to expect seeing some of that in the first quarter because these flow through a trial period.

Right. But I guess when you report the fourth quarter sometime in, I don't know, February we might have some data at that point on which you can talk about.

I think we would hope so, yes.

Okay, thank you.

Connor Ryan, Deutsche Bank.

Thanks for your time. I was just wondering if you could quickly bridge the hold co cash number from last quarter to this quarter. And just wanted to understand if you got your payments from the IRS this quarter.

No, there haven't been IRS payments for several quarters. The 105, as I recall, was several quarters ago. The main difference from last quarter is we paid $100 million of our credit facility and terminated it. That is the material item and then there were some ins and outs. We sold a small subsidiary and got $19 million, but that is really it.

Okay, great. Thank you.

Nat Otis, KBW.

Thanks. Just one quick follow-up on those -- on the HAMP modifications, once they get through that trial mod period and in theory they are performing again -- and obviously it sounds like you are being appropriately conservative on where they might go from there versus historical levels. Can you give any color on what might happen in the event that someone who went through HAMP, has gone through the trial period, comes out, is completely performing, reserves are released, but then at a certain point in time then starts defaulting again?

Are you going to treat that loan any differently than you would a normal loan that is first coming due or first going delinquent, or would you treat it differently from a reserving standpoint given that it has already gone through the HAMP modification process and might not been succeeding?

No, we would treat it as and give it a normal reserve consistent with the overall reserving levels that we would set up.

All right, great. Thanks.

Jordan Hymowitz, Philadelphia Financial.

Thanks for taking my question. I have two quick questions. One is can you break down your reserves for loans and default on prime versus let's just call it everything else?

Certainly, we haven't done that. No, we haven't done that. I am going to -- you know, it really depends on the aging a lot so it's more than just the loan size, which differs. It's the aging; it's a variety of factors but we haven't broken the reserved for default down by product. We give you the reserves by product, so actually you can come close yourself because you know the delinquencies and you know the reserves.

Okay. My second question is the HAMP and HARP programs, if you all saw the MICA in the month of September the cure to default ratio was much higher. Do you think that was a result of the HAMP and HARP programs finally taking effect? And more specifically, can you comment on your modifications in the month of September versus the quarter as a whole?

I think at this point we really don't know if that is the reason. We are trying to get better data and information about that, but it's really too early for us to know.

Did you see a big increase in your modifications in the month of September versus July and August?

We certainly saw a lot more loans going into the HAMP trial modification period. A significant change in that, yes.

Okay, thank you very much.

[John Evans], [Breeze Associates].

Can you just talk a little bit about -- help us understand with the payments that you have how much money you are still short at the hold co to pay for the '11 bonds? And then maybe help us with your strategy to try to get those paid off, because it seems like if you get those paid off then you have a lot of time to kind of deal with all the other issues.

Well, we gave you the math. We have $380 million of cash. We have got an expected payment October 10 of $250 million, which would leave $130 million and the current par outstanding as $192 million. Now we have repurchased some of that, that is certainly a possibility.

And we are constantly seeking ways to deal with that shortfall, but we have made it a lot smaller over the last few quarters than it has looked previously. So that is something that we are keenly focused on, but right now it's still a ways off in terms of the maturity date.

Do you think that you will have your plan in place before they go current?

Meaning one year, is that what you are saying?

Obviously it's a high priority for us to deal with this and we are hopeful that we can do that as soon as we can.

We are very pleased with the fact that we have been able to shrink it. And as we said, we remain focused on trying ways to either shrink it further to a much more manageable level or to eliminate it.

Right. And then the last question I would ask just relative to that, MGIC they seemed pretty convinced that they would be able to dividend up to the hold co potentially next year. Can you talk a little bit about just -- I mean, I know that is a long time from now, but do you have any thought processes that you maybe able to dividend up to the hold co?

Yes, it's a possibility. Any dividend that we pay from Radian Guaranty would need to be approved by our state regulator, Pennsylvania. So certainly it's a possibility.

And just can you refresh my -- is Pennsylvania at 25 to 1 yet or no?

Pennsylvania never had 25 to 1. It has been at the discretion of the regulator and we have a very good relationship with the Pennsylvania regulator who has been very supportive of our efforts to write new business.

Okay. And then the last question then, you don't anticipate dividend anything up at the end of this year, correct?

That is right.

Okay, thank you.

Great, thank you. And that does end our question-and-answer portion for today's call. At this time then I would like to turn the conference back over to Mr. S.A. Ibrahim.

I would like to thank all the participants for having participated in the call, and thank you again for the questions you asked. As always, we will follow up if you have any issues through our IR group. Thanks.

Great, thank you. And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.