Radian Group Inc (RDN) 2017 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for your patience in standing by. And welcome to the Second Quarter 2017 earnings call. (Operator Instructions) Just a brief reminder, today's conference is being recorded. And I now like to turn the call to Senior Vice President of Investor Relations and Corporate Communications, Emily Riley.

Thank you. And welcome to Radian second quarter 2017 conference call. Our press release, which contains Radian's financial results for the quarter was issued earlier this morning and is posted to the Investor section of our website at www.radian.biz. This press release includes certain non-GAAP measures, which will be discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share, tangible book value per share and Services adjusted EBITDA. A complete description of these measures and their reconciliation to GAAP may be found in press release Exhibits F and G and on the Investors section of our website.

During today's call, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Frank Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call are: Derek Brummer, Executive Vice President and Chief Risk Officer of Radian Group; and Cathy Jackson, Corporate Controller.

Before we begin, I would like to remind you that comments made during 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 or differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2016 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I would like to turn the call over to Rick.

Thank you, Emily. Good morning. I want to thank each of you for joining us today and for your interest in Radian. Today I will provide highlights of our second quarter, and then turn it over to Frank to review the details of our financial position.

I am pleased to report on a strong quarter for Radian with excellent operating results, continued positive trends on the credit environment and a growing industry purchase market where Radian captured an equal share of new business.

As you can see in our press release this morning, we reported a net loss of $27 million or $0.13 per diluted share for the quarter, driven by $131 million in after-tax non-cash impairment charges related to our Mortgage and Real Estate Services segment. On an operating basis, adjusted pretax operating income was $164 million in the second quarter, an increase of 25% compared to the second quarter of 2016.

Adjusted diluted net operating income per share was $0.48, an increase of 26% compared to the second quarter of 2016. And despite the impact of the impairment charges, book value per share grew by 3% year-over-year, to $13.54. Over the same period, tangible book value per share grew by 12% to $13.22.

Before we discuss our operating results further, I'd like to first address our services segment and the impairment of goodwill and other intangible assets. While these charges produced a net GAAP loss for our company, this quarter on a consolidated basis, they did not impact current cash flows, adjusted pretax operating income for tangible book value. So let me address what drove the services segment impairment charge and why now.

As I mentioned in April during our first quarter call, since joining Radian earlier this year in March, I have been focused on reviewing the strategic opportunities and challenges across all of our businesses. I've been actively meeting with employees, customers, regulators, investors, business partners and other stakeholders. I've been reviewing our products, services operations and technology platforms across all our businesses. Evaluated our market and competitive positioning, analyzing the profitability of each business product and service, and working with the teams to enhance the strategic roadmap for our Mortgage Insurance and Service business.

To date, this strategic review process has further reinforced my optimism, regarding our opportunities going forward to grow this company and deliver value for stockholders. One of the results of this process to date is that we've identified changes that needed to be made to our services segment to reposition it strategically, and address the segment's recent financial performance, which was not in line with our internal expectations for growth and profitability in the second quarter. Therefore, we have decided to discontinue certain business initiatives and focus on our core products and services within our services segment, which we believe have higher growth potential. These core products and services are expected to produce more predictable and recurring fee-based revenues and better aligned with customer needs. We believe it is appropriate at this time to take a step back, and refocus so that our services business is strategically better positioned to go forward.

As a result of these changes and in light of recent financial performance below our expectations, we determined that an impairment of goodwill and other intangible assets related to the services segment was necessary. This impairment resulted from a decrease in projected future cash flows based on current market trends and changes to the services segment's business strategy going forward.

We remain committed to the services business. We are diligently working to finalize our plans into better position our services business clients for success. Our goal is to refocus our efforts to drive future growth and profitability and deliver greater value to our customers and shareholders.

As we disclosed this morning in the earnings release, based on our strategic review of the services business clients to date, we have determined to restructure this business and we currently expect to incur charges relating to the changes necessary to reposition the business for sustained profitability. While the restructuring plans are not final, and therefore we cannot provide an estimate of the total expected restructuring charges at this time, we currently expect that these charges would not exceed $25 million on a pretax basis, and depending on finalization and implementation of the restructuring plans, could be materially less. After we complete our strategic review process, we will provide an update during the third quarter.

I continue to be excited about the opportunities ahead for Radian. We have a unique opportunity to leverage our market leading mortgage insurance franchise combined with our core capabilities across the services segment to deliver high value and relevant products and services. Successfully capturing this opportunity will enable us to further deepen customer relationships, grow sustainable revenues and profitability and increase stockholder value.

So let me turn to the Mortgage Insurance segment. We wrote 43% more mortgage insurance business in the second quarter than we did in the first quarter of this year. And 11% more compared to the second quarter of last year. In June, we broke a record for the highest monthly volume flow business ever written in Radian's 40-year history.

The lower refinance activity in the second quarter representing only 9% of NIW, combined with our continued success in capturing new business, helped drive an 8% increase in our Mortgage Insurance portfolio year-over-year.

Radian has one of the largest, high-quality portfolios in our industry, which is the primary driver of future earnings. Despite reports of low housing inventory, economists continue to anticipate purchase originations for 2017 to be approximately 10% higher in 2016. Since private mortgage insurance can be 3 to 5x more likely to be used in a purchase transaction than in a refinance, we are expecting the mortgage insurance market for 2017 to only be modestly smaller than last year.

Based on these market projections and our performance in the first half of the year, we continue to expect to write approximately $50 billion in NIW in 2017, which is comparable to 2016.

Despite supply constraints in many areas, home sales are up from last year with new home sales up 9% and existing home sales up 1%. First time, homebuyers represented 1/3 of residential sales, which helped create increased demand for Private Mortgage Insurance.

Given that those new homebuyers are more likely to seek lower down payment options, we are continuing to see a gradual increase in higher LTV loans. Based on our disciplined approach to pricing that is commensurate with the related risk, we are comfortable with the risk attributes we see in the market today (inaudible) . We will remain diligent in measuring and mentoring the risk mix of our portfolio, and we'll continue to focus on generating strong through-the-cycle returns on required capital.

We continue to benefit from positive credit trends in the second quarter. Frank will discuss the impact on our loss provision in more detail, but these trends are reflected in the 20% year-over-year decline in our total number of primary defaults, and the continued strong cure rates including on our older defaulted loans.

At Radian, our growth strategy included leveraging our core expertise in credit risk management to expand our presence in the mortgage finance industry, write more business and strengthen our franchise.

We continue to participate in the GSE credit risk transfer programs, which were developed by Fannie Mae and Freddie Mac as part of their initiative to increase the role of private capital in the mortgage market. We believe the combination of risk analytics and business intelligence at Radian and Clayton is a unique advantage for us and we feel we are well positioned to assess and price mortgage credit risk for these and future programs.

We will continue to carefully evaluate opportunities, in terms of overall risk, return and market potential. As part of our strategic review, we are not only considering growth strategies that will strengthen our company for the future, we are also sharpening our focus on improving our operational effectiveness to continually improve our service delivery and increase our operating efficiency, managing expenses across the enterprise is strategically important in creating competitive differentiation and to improving profitability and shareholder returns.

Turning to the regulatory and legislative environment, we recently learned from the GSE's that they expect PMIER's 2.0 to become effective in the fourth quarter of 2018. Based on this timing, we expect to receive a draft to the recommended changes late this year. And we -- as we experienced in the past, we anticipate a collaborative and integrative process for discussing any changes. The GSEs have committed to provide the approved insurers with an implementation period of at least 180 days after the requirements are finalized and prior to the effective date.

More broadly, there continues to be active dialogue on housing finance reform and we are encouraged by the consistent support on Capitol Hill for the important role of private capital. We remain actively engaged in the discussions and continue to promote through our contacts on Capitol Hill, and through industry trade associations, including the MBA and USMI, the important role of private mortgage insurance as a permanent source of private capital.

This concept of permanent private capital is a important point of differentiation for our industry, this industry has the only committed source of permanent private capital that continue to underwrite and support credit risk to the market cycles. As a monoline insurer this is our core business and as such, we have built the expertise to effectively manage the risk through the cycles. Different than before the financial crisis, this industry is now much stronger for many reasons: specifically, the lessons learned during the crisis, through the crisis, greater capital strength and financial flexibility, all combined with expanded regulatory oversight and guard rails.

The MI industry plays a very important role as a committed source of permanent private capital to enable the mortgage market to consistently distribute first loss credit risk, playing a very important role in the primary origination market. We believe the key player is that Congress understand us, and as an industry we continue to reinforce the importance of our role as part of any housing finance (inaudible) performance.

For 40 years, we have helped millions of homebuyers achieve their dream of homeownership, providing credit in both good well as challenging times. We believe that we are well positioned to help shape our industry's future and to strengthen our housing finance system.

Now I would like to turn the call over to Frank for details of our financial position.

Thank you, Rick, and good morning, everyone. As Rick mentioned at the top of the call, during the second quarter of 2017, we recorded after-tax impairment charges of $131 million related to pretax impairment charges of $184.4 million and $15.8 million of goodwill and other intangible assets respectively. These charges are related to our services segment and were primarily due to changes in expectations regarding the future growth of certain services product lines, resulting from changes in our business strategy, combined with observed market trends that we expect to persist. These charges do not affect our cash flows, nor are they part of our adjusted pretax operating income per share of $0.48 this quarter. As a result, as of June 30, 2017, the remaining balances of goodwill and other intangible assets reported in our condensed consolidated balance sheet were $10.9 million and $58.9 million, respectively.

And performing the quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the updated accounting standard regarding goodwill and other intangibles. This update simplifies the subsequent measurement of goodwill.

I'll now move onto the key operating elements of our performance. I'll start with the key drivers of our revenue. New insurance written was $14.3 billion during the quarter compared to $10.1 billion last quarter, a 43% increase and an 11% increase over the $12.9 billion produced in the second quarter of 2016.

The new business we are writing today continues to consist of loans with excellent credit and return characteristics. Our 12-month persistency increased from 77.1% in the first quarter of 2017 to 78.5% in the second quarter of 2017 as noted on Exhibit L. Our quarterly annualized persistency decreased from 84.4% in the first quarter of 2017 to 82.8% this quarter. Primary insurance in force increased to $191.6 billion at the end of the quarter, an 8% increase over the same period last year, the highest we've seen in recent years. Based on current trends, including an expanded purchase market and increased persistency, we expect insurance in force to grow accordingly enhancing our strong foundation for future earnings.

Premium yields on our portfolio are dependent on several factors, including the mix of new production and policy cancellations, coupled with the composition of the existing portfolio. Our enhanced portfolio yield disclosures on webcast Slide 13, show the composition of our net premium yields over the most recent 5 quarters. Single premium cancellations resulted in $13.3 million of direct earned premiums this quarter, an increase of $2.9 million compared to prior quarter. As a result, both our total direct and total net portfolio yield this quarter increased by approximately 1 basis point compared to last quarter. As shown on webcast Slide 13, our direct yield on policies remaining in force has been relatively stable at 49 basis points over the last 3 quarters, with the majority of the observed volatility in the total direct yield attributable to single premium policy cancellation activity.

While yields increase modestly this quarter, our longer-term expectation is a gradual decrease with the resulting total direct yield of 48 to 50 basis points. This expected future decrease is due to the natural runoff of higher-priced vintages with growth in our portfolio driven by new insurance written, reflective of current market risk-based pricing. The timing of this gradual decline will depend on several factors, including the pace of cancellations on our higher-priced vintages and the mix of new business we write. In addition, we may continue to see variability among quarters due to single premium policy cancellation activity.

Our expectation remains however, that the levered returns on current PMIER's capital for our future production and our portfolio would remain in the mid-teens due to our continued price discipline and effective use of reinsurance.

Net premiums earned for the quarter increased to $229.1 million from $221.8 million last quarter. This increase was partially due to a slight increase in single premium policy cancellations quarter-over-quarter, but primarily due to the earned premiums from a larger in force portfolio. Investment income was relatively flat quarter-over-quarter from $31 million in the first quarter of 2017 to $30.1 million in the second quarter.

Total services revenue for our Mortgage and Real Estate Services segment was approximately $40 million for the second quarter of 2017 as compared to $40 million in the first quarter, and $42 million in the second quarter of 2016. Importantly, second quarter revenues were significantly below our previous expectations due primarily to lower volumes.

Moving now to our loss provision and credit quality. As noted on Slide 16, during the second quarter 2017, we had positive development of $28.2 million on prior period defaults. This positive development was driven primarily by a reduction in claim rates on existing defaults, based on the observed increase in cure rates on these defaults. We remain optimistic about the trends we see in our credit quality. As such, it's important to note that our primary risk-in-force, including HARP, consists of only 10% legacy business originated before 2009, and that those vintages are contributing positively to earnings, as you can see on Slide 14. This portfolio composition is unique, and it can skew overall performance metrics in total where a legacy versus non-legacy analysis may be more informative.

We segregate our new defaults between our legacy and post legacy portfolios on Slide 18. It's important to also note that only 20% of total primary defaults are from loans written after 2008, and these production vintages are producing a very low level of losses as you can see on Slide 15. And as our post legacy production vintages reach peak default years, which is typically in years 4 to 6, we are seeing an expected increase in default activity, though at a very low rates. Our cure rate was 19.4% for the quarter. Yet another sign of positive credit experience when compared to our defaults.

Given continued high cure rates on new defaults, we reduced our estimated claim rate on new defaults from 11.5% to 11.0% in the second quarter. As in previous periods, we should note that while there is a longer-term expectation of future improvement in our new default-to-claim rate, if current trends continue, the timing of that improvement is difficult to predict.

Overall, the performance of our portfolio remains strong, with positive trends continuing. Further evidence of both the strong credit profile of post prices business as well as greater predictability around the legacy portfolio.

Now turning to expenses. Last quarter, we indicated that our expected future quarterly GAAP, other operating expenses would be between $62 million and $66 million with some variability between quarters and inclusive of the known items of that time. In the second quarter of 2017, however, other operating expenses were $68.8 million compared to $68.4 million in the first quarter of 2017, and $63.2 million in the second quarter of last year.

During the second quarter of 2017, we established an immaterial reserve in order to defend and potentially resolve certain outstanding legal matters. Absent this reserve our quarterly other operating expenses would have been in line with the upper end of our indicated range. As for future expenses, we would still expect that GAAP, other operating expenses inclusive of known items but excluding restructuring charges would remain within our previous $62 million to $66 million range. We also continue to expect our Mortgage Insurance expense ratio to be in the low 20% range over time. Details regarding notable variable items impacting other operating expenses may be found in Exhibit D.

Moving now to taxes. Our overall effective tax rate for the second quarter was 22.9%. This was lower than the 35% statutory rate, primarily due to the tax impact associated with discrete items that were recognized during the second quarter, and their impact relative to a lower absolute level of earnings than in previous quarters. Our expectation for our 2017 annualized effective tax rate, excluding any potential future discrete items is approximately the statutory rate of 35%.

And lastly, we have improved our capital structure by removing the convertible notes and distributing our debt maturities more evenly, as we continue to move forward on our path to returning to investment-grade at the holding company. In the second quarter, we purchased for cash substantially all of the remaining senior convertible notes due 2017. We have given notice that we will settle the remaining outstanding amounts of less than $1 million in cash.

Under the Private Mortgage Insurer Eligibility Requirements or PMIERs, we had available assets of $4.1 billion and our minimum required assets were $3.8 billion as of the end of the second quarter 2017. The excess available assets over the minimum required assets of approximately $300 million represents an 8% PMIERs cushion. In addition, holding company liquidity could be utilized to enhance the cushion if needed, which if fully utilized, would bring our cushion up to approximately 18%. We believe that we will continue to be in compliance with the current PMIERs financial requirements without the need to contribute additional capital to Radian Guaranty from Radian Group. Although subject to fluctuations quarter-to-quarter, it is also expected that Radian Guaranty will continue to build our PMIERs cushion organically over time under the current PMIER's framework. And now, I'll turn the call back over to Rick.

Thank you, Frank. Before we open the call to your questions, let me remind you that despite a GAAP loss of $27 million, we had significant year-over-year growth of 26% for adjusted diluted net operating income per share, 3% for book value per share and 12% for tangible book value per share. NIW increased to 11% year-over-year, and MI in force grew 8% percent, which is the primary driver of future earnings.

We remain committed to our services business. Since joining Radian, it has been -- become clear to me that there is a market need for our diversified set of products, which should position us to increase our relevance, deepen our existing relationship and attract new clients. Now operator, we'd like to open the call to questions.

(Operator Instructions) It looks like first we have the line of Mark DeVries with Barclays.

Rick, I appreciate you indicated you have a lot of optimism around services and see demand there. I was just hoping to get some more time discussing why the decision to restructure that business versus sell it? And also if you could give us some kind of sense as to what kind of improvement in the profitability and returns on that you're looking for following the restructuring?

Yes, so I think from the services business today, we remain committed. We see significant opportunity to leverage the core products and services that we offer through that business to enhance current relationships that we have across the MI business. Yes, really deepen those relationships to broaden really the distribution of those core products and services across the services segment.

So I think as we look at the business strategically, it differentiates us from just being a pure monoline business, which I think we've demonstrated great success with in our core MI business, as you can see from this quarter, we have got great momentum. But adding to that, our ability to provide products and services to those same customers and new customers from our services segment is strategically important to us. It continues to be strategically important. Part of what we have to do is kind of take a step back and kind of refocus on how we approach that opportunity from a business perspective over the coming years, and I think, part of this restructuring is really just to kind of put us in a position to do that. That's what I'm excited about. Had several meetings and discussions with our customers, and what's been very clear to me that as we talk to them about a great relationship we have on the MI side, the opportunity for us to have the discussion with them about the other products and services we offer through our services segment is becoming increasingly relevant and important to them and we become a much more valuable business partner to them in the long term.

So certainly, we look at all options as we consider the path forward. And I think we see strategic value and the opportunity to increase value at this business by penetrating the existing relationships and distribution we have through some of our services products. So I think it's something that we've tried to be very thoughtful about. And as I come in here, I have the opportunity to look at everything new. And I think it's been quite clear to me that the opportunity is there for us to actually do a better job than we've done in the past to penetrate those relationships.

In terms of profitability, going forward, as we go through and complete our restructuring plan, I think we'll have a better view of that kind of going forward. At this point, our objective is to improve profitability, and more importantly, or as important I guess is to improve the sustainability both of revenue and profitability going forward. So I think we're trying to take a step back, refocus the business on the things that we think are core needs of the marketplace, and have more sustainability both in terms of revenue and profitability, and we think we'll see the benefits of those as we go forward, but as we kind of complete our process, Mark will provide more guidance relative to some of the components of that.

Okay. Fair enough. And then Frank, I was just hoping to get your thoughts on your plans for cash the holdco, should we think of that is maybe sitting there, while we wait for PMIERs 2.0 and the event that you need some extra cushion there as opposed to finding some other use for it in the near term?

Yes, so thanks for that question, I think the way that we're thinking about holding company liquidity is actually on a couple of different dimensions: one, is certainly around just the overall capital planning and our desire to return to investment grade, that is an element that we take into consideration there, just having that flexibility. The other option relates to as I mentioned in my prepared remarks, the possibility of using it for PMIER's support. So I wouldn't describe it necessarily as being set aside for a particular use, but really just having that flexibility is important to us. So we don't know what the upcoming PMIERs may say. So it would certainly be premature to suggest that it's, therefore, that. And we do continue to build the PMIERs cushion organically over time at Radian Guaranty. And then I think one thing that's important to remember as we do our own liquidity planning going forward is that we do have an expense sharing arrangement with Radian Guaranty that provides for expense sharing support and cash flow support for the expenses at Radian Group.

Okay. Then for the near term we should expect that most of that cash is just going to remain there at this point?

I would say, the majority of it, yes. That's right.

And next we have the line of Phil Stefano with Deutsche Bank.

Understanding the market share isn't a goal. It feels really to us like you picked a little in the quarter. To what extent is something like the singles quota share helping out there? Especially at a time when peers like Arch seemed to be pulling back on their singles business?

So this is Rick. Phil, Thank you for the question. I think it's a little early to know exactly what market share we picked up. We feel like we had a very strong quarter and we continue to feel good about our position relative to market share. Market share is one aspect of kind of a measurement. Obviously, very focused on the quality and value of the business we create. So it's a little early to also determine kind of how the whole Arch market share redistributes at this point. So I think for us, we feel good about holding our own, the singles mix actually came down to around 23% in our business and I think net of our reinsurance at about 16%. And so I think we see -- continue to see across our NIW, we like the economics of that, the business in total and as we look at our relationships and the relationship value that we get through the mix of both monthlies and singles, we're happy with where what we sit. We continue to monitor that very carefully and look at kind of the mix we see coming through the door. But the good news is, and we're happy to see this that we've seen singles come down as part of our overall mix. And I think from a profitability point of view, we're comfortable with the economics of the business that we're doing today.

I think the quota shares is just a -- Derek can maybe comment a little bit more on that, but we look at it as part of our overall capital management strategy. And it's worked well for us to have those part of our mix.

Okay. Understood. And in the release, there was a note that there was a de minimis number of repurchased, is there anything you can give us around that? And as far as particulars and any thoughts around authorization of a new program?

Sure Phil. This is Frank. So yes, we indicated the de minimis number of shares under the previous share repurchase program. If you'll recall from some of my previous comments about that particular program, the thresholds were value based as far as when we expected to utilize the share repurchase program. And so that's how the thresholds were established. So you can look back over the history of that -- of the effective date of that share repurchase program and sort of track to where the value was.

When I think the de minimis we're talking about less than 1,000 shares were purchased. So it was very, very small amount. As it relates to future repurchase programs, I would just say that, that is certainly a tool that we consider as we look at in our capital planning and in ways to look at capital returns to shareholders. So I would say it was most effective previously when the stock price was at depressed levels. We were able to repurchase some shares, but I would also suggest that last year, we were able to take out, through not only the share repurchase program, but also by the settlement of the convertible notes and cash roughly 11% of our outstanding shares. So there are more ways than just a direct share repurchase to manage that diluted share count.

Understood. But presumably as the convertibles have gone away those options are becoming less?

That is correct.

Phil, just back to your singles question. I just want to go back. Part of that singles is just driven by our customer mix. Some of our customers that preferred the single lender-paid singles product, and I think our strong customer relationships that we have in place have helped us increase NIW and grow insurance in force, which is the primary driver of earnings of course. And the outstanding credit quality for our insurance portfolio illustrates our product mix is excellent. We continue to generate mid-teen levered returns on required capitals. So I think just going back to how we see the mix from the economics where we're comfortable where we sit today. We continue to monitor and we monitor the competitive positions as well. So I think just wanted to kind of come back and recap for you.

Next we have the line of Randy Binner with FBR.

I'll ask one on PMIERs 2.0. And just a question of what your expectation is around how significant any rule changes there might be? And what areas they might fall?

This is Rick. Thank you, Randy for the question. I think at this point we really have no insight other than timing into PMIERs 2.0. So we await the GSCs kind of communication to us, we expect late this year. And I think as we get that, then we'll be able to react. But we have, at this point, really no insight into how those rules are being -- what changes might come into play or what they're thinking. So we're going to have to wait and see what we hear late this year.

We do expect that once we hear their initial feedback on the -- and again late this year, that it will be an integrative, collaborative process as it was the last time, which I didn't get a chance to experience, but I understand it was. So I think the expectation is that, we'll hear, there'll be a process back and forth between the industry and the GSCs, and then once it's finalized, we'll all have a 180 days to kind of comply before the effective date. So I think we're comfortable with the process, and we await kind of their draft.

Sure. So a couple of follow-ups there. And I guess the first is, do you have a sense of why the timing got delayed? I think initially we expected something to come out this spring and then with the 180 notice, is your expectation that you have 180 days to implement or that it will be an exposure draft that you'll have time to comment on to potentially effect changes?

Yes, we'll get their comments late this year. There will be a time, a process to go through this kind of integrative and collaborative process to comment and more towards the finalization of the PMIERs 2. And then beyond that, we would expect to have 180 days to then comply. So it's kind of a sequential process. So they'll communicate us, will go through this kind of back-and-forth comment period. The rules will get finalized and then from that we'll have 180 days. That's our understanding.

Sure. And just on the timing, any sense of why it kind of got pushed almost a year?

No, I don't think we really have any insight on that. We've all just -- as an industry we've, I think been kind of waiting to hear back from the GSCs on this. So I think at this point, we don't really have any insights on the time, why it's taking longer than maybe the expected. But I don’t really think there was a firm timeline, it was just something more of an expectation of every couple of years. So I think we're fine with the timeline that's in front of us, and we feel we'll be in a good position to respond and react as needed.

Next we have the line of Doug Harter with Crédit Suisse.

This quarter showed a noticeable improvement in the year-over-year decline in new notices. Was there anything behind that? Are you seeing any trends that drove that?

I think what we see terms of the trends in the portfolio is what we've seen over the last several years, which is just a gradual decrease in kind of those new defaults. The legacy portfolio, it's gradually burning out over time. Cures are increasing. So nothing significant I would say this quarter just continuation of the positive trends we've been seeing over the last, I would say, several years really.

So I guess looking forward, what do you think or how do you think about the right ways to kind of forecast how quickly they can continue to burn off for how quickly new notices will come in?

Well, I think a lot of that is just going to depend on the distribution, still I think about 66% of our new defaults are coming from the pre-2009 vintages. So it's just a question, and it'll probably be still the majority over the next several years so that's going to I think drive significantly that transition. And also, it's a difficult thing to answer in isolation because also you have to look at the amount of business we're putting on. And where they are in terms of their relative default seasoning peaks. So I think there is -- it's difficult to come up with kind of a simple to rule of thumb with respect to that transition. I would say the trends we've been seeing have been pretty consistent, I would expect to continue over the next couple of years at least.

Next we have the line of Mackenzie Aron with Zelman & Associates.

Just one follow-up question on the Clayton restructuring. The $25 million or less expenses that are expected, is that going to flow-through, through the Clayton business or that be called out as a variable notable item?

Maybe Frank you want to take that on?

Sure. So Mackenzie, I think -- and thanks for that question. I think what's difficult to predict right now because the review is in process and we're just trying to provide some general sense of magnitude on what the charges could be. They could be materially less that the $25 million as we indicated. But I think the profile from a financial-statement standpoint, will really depend on the nature of the expenses. And we don't yet know what those will be.

Okay, and just in terms of timing. Obviously that review is not complete and we won't have clarity until next quarter, but is this something that we'll see playing out over the next 1.5 years? Or roughly how long should we be expecting for this to be pretty finalized and Clayton in a position we're going forward it will be more stabilized?

Sure. So I think for the most part, we should be able to identify the charges in this coming quarter. But as far as recognition goes, it really will depend upon on the type of expense that it is, there is some pretty strict accounting rules around recognition of those charges, depending on what they are. But I would not expect them to be prolonged. So -- but we'll give you a better sense of timing when we release more details on that plan into third quarter.

And Mackenzie, this is Rick. That's the answer on the financial side, in terms of how it will play out. Certainly from a business strategy and our approach to the market, we're positioning to go full speed on that as we speak, as part of this whole strategic review process. So I think, part of it is kind of sizing the expense and doing what we need to do there from a restructuring. The other part is really kind of how we point ourselves into the marketplace and how we align our efforts across different customers. So a lot of activity will occur over the next month or so to kind of position us for that. And that will take place quickly.

And Mackenzie, maybe just one more clarifying on your question or actually my answer to your question. The plans on the restructuring plan that we're talking about is limited in this case to the services business.

Okay. Great. And then just one more, Rick. And I think last quarter you had mentioned that in terms of replacing Teresa and the MI leadership, you would pull from internal resources, is that still the plan at this point?

Yes. So I think as I mentioned last time and it continues to be true is that I really wanted to have an opportunity to get very, very close to the business and work with the team, and not surprising, but certainly a nice benefit is that the team is extremely strong. And I've been able to really start to think about the organization leveraging the team that's here today to go forward. And so as we start to talk more about the strategic path forward, hopefully during this quarter, during the third quarter, our organization will align towards the future as opposed to looking that how we've done things in the past. So we'll evolve the organization going forward based on our path forward. And so -- but the good news is from what -- the team here is extremely strong and extremely talented and has stepped up to the task across all points. And so I couldn't be more happy about that. So...

Next we have the line of Jack Micenko with SIG.

This is Soham Bhonsle on for Jack. The first question was on expenses. Frank, can you give us the legal reserve that you established in the quarter in the expense line?

So I called it out primarily because we were -- our expenses -- our total expenses were above the range that I had provided previously but given that, that item related to litigation matters. I'm not going to get into specifics but I can tell you that we made the decision to satisfy it in an amount to defend what we view as meritless claims and if possible to resolve them on terms that we're comfortable with. But as I also mentioned, the total amount of the reserve is immaterial.

Okay. And then I guess on the premium yield. Could you maybe help me reconcile the uptick in single premium cancellations versus the increasing persistency sequentially. Because I would've thought that a uptick in singles would have suggested a pickup in refis but this was not the case in the quarter.

Yes, so I think that increased persistency that you're referencing is the annual persistency, whereas if you look at the quarter-over-quarter persistency, there actually was a slight down tick.

Okay. And then just last one I guess on investment income. The yield looks like it came down about 4 bps sequentially, so what's going on there? And what's your expectations going forward?

Yes, I wouldn't expect there to be much change going forward, and I would suggest that any quarter-over-quarter changes that you see in yield really just has to do with the natural churn in the portfolio. And as the securities mature and they get reinvested, we've also calibrated our duration to be slightly shorter. So that could have some impact as well.

Next we have the line of Geoffrey Dunn with and partners.

Frank, couple of questions to start with you, Frank. With respect to the incident assumption we're down about 100 bps this year so far, considering seasonality is there more room for that to move this year? Or we sticking with kind of the 100 expectation on an annual basis?

Yes, I think I'll hand that one to Derek.

Sure Jeff, I think it's tough to tell kind of what the transition is. I think what we guided and if you look historically kind of the propensity the role the claim we're kind of those new defaults historically you have trended down to kind of the 10% range. So depending upon trends if they continue this year, we could see an adjustment towards the end of the year but it's difficult to say exactly how rapid that will be.

Okay. And then within the services segment between adjusted and GAAP pretax, we've had that amortization adjustment, is that now fully gone on a go-forward basis? Or is there still some sort of residual adjustment to make there?

There -- so we did not take the other intangibles assets down to 0. There remains about $59 million of remaining intangibles that will continue to be amortized.

Do you know what that quarterly rate is going forward?

I don't, Jeff. But we can certainly look at the financials and get that to you.

All right. And then Rick, now you've had a chance to take a look at the services segment. Obviously, we can look in hindsight and the value that is brought on is different than what was originally anticipated. As it stands today, is there a more value to Radian from what it adds internally than externally?

So make sure I understand your question. So in terms of -- could you just clarify what you mean by internally versus externally?

We'll, I think in hindsight it's clear this was overpaid for. But I think that the company has been positively surprised by what it's done in terms of what it's added capability wise and analytics wise to the MI business. So as it stands today, I think your early question was, why didn't you sell this? I'm curious as to how much value you see to Radian MI from having this service platform relative to the opportunity external.

Yes. Great question. I just wanted to make sure I understand where your question was and what you are focused on. So yes, I think -- look, I think there's -- across our services business we have several key products and services that we have there, increasingly relevant across our MI customer base and also, new customers, obviously, we have customers that are purely services-based customers. But I think, if I just deal with the MI side for one second, as I've gone out and talked to customers, held meetings, brought in not only our MI sales force but our Clayton team in to talk about products and services. It is clear to me that we can become a greater business partner for our customers by providing them some of our core services segment products. For example, our Red Bell kind of valuation products. Our title products in ValuAmerica are highly relevant to the whole origination process connected with the mortgage insurance business, and we've spent a lot of time, I have actually spent a lot of time over the last few months really thinking about how best to approach working with Jeff and the team and our sales team led by Bryan. So we see opportunity to increase the penetration of our customers with a broader set of products that are high value to them and relevant to them and that's been confirmed through these meetings. So I think the thing that's unique about for us is that as we think about our business purely as a monoline insurance business, having the services segment and products allows us to become increasingly relevant to those relationships, a better business partner and bring greater value to our customers, that benefits us, it benefits them. We're a large-scale player in the CFPB days of counter-party management. A company with the net worth we have, the credibility we have, it becomes a very high-quality counter-party to do business with across multiple products.

Our struggle has been how best to position that through kind of our sales processes if you will. And I think you'll hear us talk about that as we go forward as to how we -- we'll approach that differently than we have in the past and I think it will be more effective. But the relevance of those products and services are extremely high. And I think that will help us grow the products and services that we have today across the services segment. Having said that, I think there is also -- just refocusing on what's core from a services perspective, not only across our MI distribution, but across the market. We are bringing back our core loan due diligence and loan review business and really focus on recurring sustainable relationships, leveraging our Red Bell and ValuAmerica products and our Green River REO products. We see organic opportunities in those but really about redefining the products and service on a go-forward basis versus kind of looking at our rearview mirror. So that's where the excitement comes from. As I think there is a need and a demand. We have to make some changes about how we approach the market to be more actually more visible in some ways, and more effective across our customer base, our existing customer base. And also, adjust our products to reflect the market as we see going forward. So those are the shifts that we'll make our focus about how do we increase the growth and penetration of these products going forward. Having said that, this is not an easy shift to make. It doesn't happen just because Rick wishes it would happen tomorrow. This will take a significant amount of focus in activity, but it's important not just from a services perspective, we think it's an important differentiating factor to us as we look at MI relationships and our customer relationships more broadly.

So and I think we have some work to do. We're focused on it. We're going to make the moves necessary to do it, but quite frankly, without the core business we have across the MI business, I think that the services business would've been less exciting 3 or 4 years ago, it would be less exciting today in some ways because of the growth potential comes from our ability to really think about the set and enterprise level.

Next we have the line of Mihir Bhatia with Bank of America.

Just a couple of real quick ones here. The first is on your NIW expectations for the year. I think last quarter you said that in line with last year which is around $50 billion. Since you're running about 15% above and we're halfway through the year. Any updated views on that?

Yes, I think we continue to maintain the position that we expected to be consistent with last year at the $50 billion market mark. We expect the overall NIW market across the industry to be modestly less, I think it's what my comment said relative to last year. So we think the MI share of market, overall market will probably be higher because we see the overall origination market's shrinking, but we think we'll hold our own through this kind of decline in the overall origination market as slight decline in the NIW market. And I think so far, our results are playing out that way, but we'll look and see how the third quarter evolves, and obviously, as we get closer to the year end, we'll have a better view of it but I think at this point we're holding to our guidance.

Okay. And then on your reserves, just a quick question. Your Reserve per default has declined fairly choppily, I guess it declined over the last 2 years, it was 27,000 back in 2015 and it's down to 23,000 now. And is that just the function -- is that a function of just a lower claim rate on new defaults and more cures? Or is there also a severity impact going on in there? Can you maybe tease that out a little bit?

This is Derek. It's a combination of things: one is obviously the low rates on new defaults decreasing over time, a lot of that is also driven by the distribution of the defaults and the default inventory. So generally, the reserve per defaults are going to go down to the extent that the distribution is more heavily concentrated in on loans that have recently defaulted. And you've seen that shift over time as the backlog inventory has kind of cleared out that's probably the biggest driver of that overtime.

Next we have the line of Bose George with KBW.

Just wanted to go back to the insurance in force growth it's at almost 8%, running quite a bit higher than the mid-single digit number, I think you guys have mentioned probably a couple of quarters ago. Just curious your thoughts on how long do you think that level of growth can persist?

This is Rick. Well, thank you for the question. I think that -- look, our expectation is that insurance in force will continue to grow given the expected increase in persistency. So it's kind of difficult to estimate the precise amount of growth because of just the volatility around quarter-to-quarter persistency and refis versus purchase mix. So I think our $191.6 billion of insurance in force is one of the largest books of high quality MI business in our industry. And the vast majority of our existing book today includes business written after 2008 including those loans. Now we're successfully completed through the HARP program. The 8% growth is on the size of the portfolio, I think is -- we're very pleased with that. The primary driver for growth this year -- last year was NIW in part due to relatively high amount of refinance activity. Since we expect similar level of NIW in 2017, with increased purchase volume offsetting the reduction in refis, we expect the largest driver of in force growth will be this persistency. So right now we're looking at it as a positive trend. We expect it to continue the exact amount and magnitude is very difficult. As Frank said, the quarter-over-quarter persistency level actually went down from 84.4 to 82.8, and the annualized persistency actually went up. So that just kind of gives you an indication of some of the quarter-over-quarter volatility, but right now, we expect to see it grow. How much is very hard to answer.

Okay. Fair enough. That makes sense. And then actually just one of the balance sheet. The change in the other comprehensive income relative to 1Q, was that just positive marks on securities?

That's right.

And at this point, we have no further questions in queue. Gently turn it back for any closing remarks.

I want to thank everybody for participating in the call and all the great questions that we received. And look forward to talking to many of you over the coming months. And we'll certainly have more to report as we complete our restructuring plan around the services business. So appreciate the questions, look forward to seeing you all soon. And have a great day. Thank you.

And ladies and gentlemen, that does conclude the conference for this morning. We do thank you very much for your participation, and using our executive teleconference service. You may now disconnect.