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Radian Group Inc. (NYSE:RDN)

Q1 2009 Earnings Call Transcript

May 5, 2009,10:00 am ET

Executives

Terri Williams-Perry – Investor Relations

Sanford A. Ibrahim – Chief Executive Officer

Robert Quint – Vice President Chief Financial Officer

Teresa Bryce – President of Radian Guaranty, Inc.

David J. Beidler – President of Radian Asset Assurance, Inc.

Analysts

Steven Eisman – FrontPoint

Donna Halverstadt – Goldman Sachs

Conor Ryan – Deutsche Bank

Matthew Howlett – Fox-Pitt Kelton

Mark DeVries – Barclays Capital

Joshua Kramer – JPMorgan

Jordan Hymowitz – Philadelphia Financial

Michael Grondahl – Key Colony

Operator

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

I would like to turn the conference over to our host to Ms. Terri Williams-Perry of Investor Relations. Please go ahead.

Terri Williams-Perry

Good morning, and welcome to Radian’s first quarter 2009 conference call. By now you should have all received our press release, which contains the financial results for the quarter. If you have not yet received this, you may obtain it from our Investor relations website at www.radian.biz.

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

Before we begin with our prepared remarks, I would like to remind you that any forward-looking statements that we make this morning should be considered in conjunction with the cautionary statements set forth in the Safe Harbor statement included with our webcast slides and the risk factors included in our 2008, Form 10-K. These are available on our Investor Relations website.

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

Sanford A. Ibrahim

Thank you Terri, and good morning. I will begin with an overview of financial results including key items, which impacted the quarter. I will then provide updates on our Mortgage Insurance and Financial Guaranty businesses, along with comments on our liquidity and capital positions.

Bob and Teresa will follow with details on the financials and the core MI business. We will then open the call for your questions. Before moving onto results, I would like to highlight five important items. First, our Mortgage Insurance franchise remains strong. As we keep tracking high quality new business, our book gets better. Risk enforced written since the beginning of 2008 is growing everyday and represented 22.5% of our total domestic first lien exposure at the end of first quarter 2009.

Second, we continue to uniquely benefit from having Radian asset as a source of capital. Third, we continue to believe that we will have sufficient capital to write high quality and profitable new business insurance throughout 2009. Fourth, our investment portfolio continues to perform well in this stressed environment. And finally, we believe that we have adequate liquidity to pay all claims in our mortgage insurance business for the foreseeable future.

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

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

Now I would like to touch on a number of mortgage insurance related topics, which Teresa will expand upon later in the call. First, our franchise remains strong as we continue to write high quality business. It is important to note that over the past year, we have successfully transformed our business and expect our 2009 book to be almost entirely prime for credit quality. As evidence of this, our first quarter new insurance written was $5.6 billion, 99.8% of which was prime.

Additionally, we continue to expand and diversify our customer base building upon the initiatives we started in 2008. To summarize, we are comfortable with our current mortgage insurance volumes, as we keep writing quality new business, while sheparding our capital prudently. Managing risk continues to be a top priority at Radian, and this includes our loss management strategies on our legacy book, as well as the strong focus on credit quality on our new book.

During the first quarter, we increased direct mailings to customers in default continuing to direct them to third-party counseling services, and are placing more loss litigation specialists on site with servicers to expedite solutions. We offer various forms of claim advance payment through our servicers in an effort to put borrowers in a better situation and avoid foreclosure.

In the first quarter, we saw new developments in government loan modification programs. Claims staked for the quarter were again lower than our previous expectations even as our default inventory and loss reserves increased. While there is still considerable uncertainty regarding the impact of government modification programs on our future reserve levels, even the most conservative projections would result in a positive impact on Radian’s future defaults, claims, reserves and the eventual losses.

Therefore, we will closely monitor activity on government loan programs and expect that volumes will ramp up over the next few months. Meanwhile, our mortgage insurance business has dedicated resources to prepare for the potential increases in both refinances for performing loans and modifications for non-performing loans.

As anticipated, Standard & Poor’s recently completed a ratings review of the entire mortgage insurance industry. Both our holding company Radian Group, and principal mortgage insurance subsidiary, Radian Guaranty, were downgraded. However, it’s important to note that Radian Guaranty remains an approved mortgage insurer to the GSEs, and we currently do not anticipate any change in our ability to insure loans that are sold either to Fannie Mae or Freddie Mac. The reaction from our customers continues to be business as usual.

Now turning to our financial guaranty business. The first quarter was impacted by a significant unrealized loss on derivatives, mainly related to the tightening of our CDS spreads.

Additionally, the credit environment remains challenging, and we continue to experience some credit deterioration in our financial guaranty portfolio during the quarter, primarily related to deterioration in the housing and consumer finance markets, as well as in banking and corporate sectors.

With respect to our largest exposure, which is the Insured Corporate CDO portfolio, we still do not anticipate any credit losses with respect to this portfolio. Despite this financial guaranty portfolio stress, which we expect to persist, we continue to believe that the capital base in Radian Asset is solid, and will ultimately remain largely accessible to Radian Guaranty as our book plays out.

It is also important to underscore that in its recent trading actions S&P decoupled the Financial Guarantee business ratings from Radian Guaranty’s ratings and maintained an investment grade status for Radian Asset.

Earlier in the quarter, the strength of Radian Assets capital position was also noted by Moody’s. As we stated in prior calls, Radian continues to uniquely benefit from having Radian Asset as a source of current capital, as well as potential additional capital in the future for Radian Guaranty. Our dedicated Financial Guaranty team continues to maintain a substained focus on reducing our risk exposure on a steady as well as opportunistic basis.

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

Moving now to liquidity. As we said previously, we believe that we have adequate liquidity in our Mortgage Insurance business to pay all claims for the foreseeable future. We also continue to expect that the Financial Guaranty capital will further contribute to our MI liquidity position over time. We have substantial cash reserves at the holding company and believe we will have sufficient liquidity to continue meeting our obligations to the year through 2010.

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

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

Private Mortgage Insurance continues to play a vital role in the recovery of the U.S. housing market. Mortgage insurance acts as an important catalyst for the housing market by allowing first time buyers to enter the market, which in turn enables other buyers up the ladder to trade up to larger homes.

In my regular interaction with mortgage industry leaders, we at Radian appreciate the value that they place on the role of Mortgage Insurance as the most effective means to access the secondary market for certain loan products.

As I said earlier, Radian is expected to reap benefits from the government loan modification programs. With our claims paying ability and history of loss mitigation, we are well positioned to help these programs succeed, while also ensuring that the important lessons from the current crisis are engrained in the market moving forward.

Radian remains supportive and actively engaged with lenders, servicers, and all government agencies including the GSEs and the FHFA to put the U.S. housing market on the road to recovery. Exploring means of accessing capital remains the high priority for Radian. We continue to examine both the internal and external capital raising opportunities.

In the near term, accessing government support represents the most viable source of external capital. Given the importance of this, we have stayed actively involved in trying to access government support working jointly with our MI peers as well as on our own. We remain engaged in providing information to the FHFA and treasury, and strongly appreciate director Lockhart’s continued advocacy for the MIs. And I encouraged by his comments last week.

I would now like to turn the call over to Bob.

Robert Quint

Thank you S.A., and good morning. I’ll be updating you on the P&L activity and trends for the first quarter of 2009, and our financial position as of March 31, 2009. Our MI provision for losses of $322 million this quarter, reflects the higher delinquency count and the continued aging of existing delinquencies.

Our loss reserve estimate this quarter assumes an increased level of denials and recession, which is a trend that we expect to continue. We are approaching a limit on reinsurance recoverable amount from captive and Smart Home, although almost all of the cash recovery from this reinsurance have not yet been received.

Such receivables are limited to the cash reserves that currently exist within the captive trust accounts. Our paid claims for the quarter were $240 million, consisting of a $152 million of first-liens and $88 million of second-liens. With the second-lien payments including the $65 million settlement, we spoke about last quarter.

Claims paid were again less than expected, although we are still anticipating a jump over the rest of the year as foreclosure moratoriums expire. Looking forward into the second quarter of 2009, we expect the total first and second-lien claims paid will be approximately $300 million, and we are reducing our full year estimated range from last quarters estimate of between $1.4 billion to $1.7 billion, down to our current estimate of $1.2 billion to $1.4 billion.

Within our growth MI loss reserves, at March 31, 2009 of $3.1 billion, there is no explicit credit for future expected loan modification nor have we factored in an expectation that roll rates will jump significantly as foreclosure backlogs are cleared or moratoriums expire. Both of these items will likely become more significant factor over the next year.

We continue to expect the number of delinquencies to increase for the balance of 2009, and although we were encouraged by the delinquency levels, which came down in the month of March, that reduction could have been aided by seasonality.

As in the fourth quarter of 2008, we have determined that no premium deficiency exists on our first-lien Mortgage Insurance business as of March 31, 2009. During the first quarter, we have added $5.6 billion of what we believe is profitable new insurance written to our portfolio, which is incorporated into our first quarter 2009 premium deficiency analysis. As we reported last quarter in January, we paid $65 million to a large second-lien counterparty to unwind most of the second-lien exposure to them eliminating some of the poorest performing second-lien risk on our books.

Second-lien risk enforced has been reduced from $843 million on March 31, 2008 down to $384 million as of March 31, 2009.The loss reserve and premium deficiency reserve for second-liens at March 31, ‘09 is $151 million or approximately 39% of this remaining second-lien exposure, which consist of older vintage more stable performing business.

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

The current fair value liability on international MICDS is $24 million on our remaining two transactions, which represents approximately 3.1 billion of exposure and we continue to see no likelihood that we will incur any credit losses on such exposure.

Our current risk in force on NIMs is $431 million, and the updated total balance sheet liability on NIMs is $236 million. We expect future principal credit losses on NIMs to be substantially all of our exposure, with claim payments expected to occur mostly in 2011 and 2012. Because these credit losses are greater than our liability due to the impact of our non-performance risk, the balance of the expense is expected to be booked in future quarters. Importantly, this future expense will be GAAP only, and will not impact our risk-to-capital ratio as a full statutory premium deficiency for NIMs has already been recorded.

As we’ve been reporting in Financial Guaranty, we have seen a continuing pattern of deteriorating credit performance most notably in our assumed structured finance reinsurance credits. We believe that this is more a continuation of the worsening trends we have seen over the past year than a material change this quarter. With regard to the one problematic CDO of ABS transaction, we still believe that based on current expected cash flows, we will not be required to pay principal until at least 2036.

However, because of continued deterioration within this deal, we now believe that the ultimate principal payment maybe a significant portion of our total exposure of approximately $475 million. There is also a possibility that interest advances for which we expect to be reimbursed, could begin as early as 2010. If this occurs, Radian Assets and Radian Guaranty’s statutory capital would be negatively impacted should we be required to post a loss reserve for the present value of future claims.

We are still projecting unreimbursed interest payments to begin some time around 2017. We released Financial Guaranty contingency reserves relating to assumed reinsurance business by approximately $55 million this quarter, resulting in a direct increase to statutory capital. We are planning to pay the next ordinary dividend of approximately $100 million in mid 2009, which will be paid to Radian Guaranty.

In addition, we’re continuing to evaluate our option to issue a $150 million of preferred stock out of Radian Asset Insurance in connection with our existing soft capital facility. We implemented FAS 163 this quarter, which changed the way a number of items within FGR accounted for, including the upfront recognition of expected future installment premiums and the replacement of our unallocating non-specific loss reserve with the probability weighted loss reserve on all Financial Guaranty insurance credits.

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

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

While our exposure to trust preferred CDOs have also experienced deterioration, we still don’t believe, we will be paying future credit losses on those deals. Our investment portfolio had a reasonably good quarter with a total return for the quarter of just over 2% on the portfolio. We had no material write-downs of any investments in the quarter that we consider other than temporary. We did have a significant reduction in investment income this quarter, primarily as a result of a reduced portfolio yield caused by a shift in our portfolio to shorter-term investment during the last two quarters in preparation for increased claims.

Consolidated operating expenses were in line with expectations, and the current quarter represents a reasonable 2009 run rate. We currently have $367 million of cash at or immediately available to Radian Group. We also expect to receive an IRS refund about to a $105 million this year.

Our current best estimate of tax sharing payments to our subsidiaries that we will be required to make in October 2009 was a $138 million, and October 2010 is $300 million, primarily payments to Radian Guaranty. Based on these projections, we believe we’ll have cash at the holding company to settle our tax sharing and other obligations through the end of 2010.

There is a $315 million of principal coming due in 2011. As a reminder, the primary remaining financial covenant in our amended bank facility is a maintenance of at least $1.5 billion in GAAP equity, and this now excludes all mark-to-market and the $1.5 billion will be reduced to $1.25 billion as of July 1, 2009 and $1 billion as of January 1, 2010. Our comparative equity number for bank covenant purposes at March 31, 2009 was approximately $2.6 billion.

I’d now like to turn the call over to Teresa.

Teresa Bryce

Thank you, Bob, and good morning. At Radian Guaranty, we continue to focus on capital preservation through effective loss management. Earlier in the call, S.A. referenced the readiness of Radian in preparing to handle refinances and modifications as a result of the April 6 launch of the Homeowner Affordability and Stability Plan. Thus far we have not seen a significant surge in modification activity. However, we anticipate that an increase in volumes will result from this plan.

60 lenders have submitted modification request as of April 30 with most of the volume coming from four companies. Clearly, it will take some time for servicers to enhance their readiness to participate in these programs, so they can more aggressively assist potential borrowers and comply with government standards.

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

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

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

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

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

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

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

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

In summary, we continue to stay focused on managing volume and writing quality new business at prudent levels. I would now like to provide you with an update on our work with policy makers in Washington D.C. The mortgage industry continues to have significant support from the FHFA to make government assistance available to the industry.

Active discussions with treasury are occurring. In addition, the domestic state regulators have been actively involved in these discussions. While we cannot predict the outcome at this time, we are hopeful that this collaborative focus will yield the structure that works for all parties and they gets capital release to assist the objective of mortgage insurers to continue writing quality business that support sustainable homeownership and the economy.

In addition, we have continued our efforts to make sure that federal legislators understand and appreciate the continued value of mortgage insurance as they considerably forms the financial services particularly the GSEs.

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

Sanford A. Ibrahim

Thank you, Teresa. Before we take your questions, I would like to close by again emphasizing a few key points about our business. Radian stands to benefit from the various government loan modification and foreclosure reduction programs. These programs could have a big impact on future defaults, claims, reserves, and losses. We believe, we have sufficient capital to continue writing new MI business throughout the year, and we remain focused on managing it prudently.

Meantime, we remain actively engaged in exploring government support for the mortgage insurance industry. As stated earlier, we believe that we have adequate liquidity to pay all claims in the MI business for the foreseeable future. And finally, our mortgage insurance franchise remains strong as we continue to write quality new business, diversify our customer base, mitigate losses, and reduce credit exposure where appropriate.

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

Question-and-Answer Session

Operator

Thank you (Operator instructions).

Sanford A. Ibrahim

Operator, are there any questions?

Operator

Yes, sir. And our first question comes from the line of Steven Eisman from FrontPoint. Please go ahead.

Steven Eisman – FrontPoint

Yeah, hi. You might have discussed it, I had to step out for a second. Could you talk about the level of recessions this quarter, what the trend has been, how you are factoring that into your reserving policies?

Sanford A. Ibrahim

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

Robert Quint

Yeah. Clearly, the trend is up in terms of denials and recessions. And that’s always factored into our reserves; however, the increased level that we have been seeing most recently has impacted the reserves, because we’ve obviously we’ve increased the expectation that, that trend will continue.

Steven Eisman – FrontPoint

And what are the rescission levels as of this quarter?

Robert Quint

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

Steven Eisman – FrontPoint

Okay. Thank you.

Operator

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

Donna Halverstadt – Goldman Sachs

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

Sanford A. Ibrahim

Bob.

Robert Quint

Yeah but the range is still accurate, that $478 was the maximum the $300 is our best estimate based on our projections.

Donna Halverstadt – Goldman Sachs

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

Sanford A. Ibrahim

Clearly, there’s a lot of decisions that remain to be made in Washington, all we can go by at this point is what our customers, which is the Mortgage Insurance and then with the mortgage lender industry community tell us, what we hear from the GSEs and what we pick up from other conversations. And all of those to-date have shown a strong support for the Mortgage Insurance business and the value we bring that’s not surprising given that the industry has paid I think around $15 billion in claims, which is a sum that somebody else would have had to meet either to come up with maybe the tax payers sustains, if the GSEs had done that taken that exposure. The GSEs have been consistently very supportive of the role of the Mortgage Insurance industry and you’ve seen that echoed in several of their comments, I commented on the mortgage lender community and just to give you an idea of how much risk, we bear that somebody else would have to absorb, it’s roughly $180 to $200 billion. So while we cannot comment on what could happen in the future, I feel based on what we are hearing today, I believe, we believe that their strong support for continued Mortgage Insurance presence. Teresa, would, based on your interaction with the industry and with Washington and others, would you like to add to my comments?

Teresa Bryce

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

Donna Halverstadt – Goldman Sachs

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

Sanford A. Ibrahim

Bob?

Robert Quint

There is nothing expected in the immediate future of the Radian Insurance has significant statutory capital, Amerin Guaranty has positive surplus. And we don’t anticipate any payments that you are describing in the near-term.

Donna Halverstadt – Goldman Sachs

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

Operator

And our next question comes from the line of Conor Ryan with Deutsche Bank. Please go ahead.

Conor Ryan – Deutsche Bank

Hey guys, how are you doing? I just had a quick question kind of going through the holding company cash that you’ve outlined, you have $367 plus was at $105 million in refunds, that’s going be kind of $467 less than $138 view in October ’09. The estimate of $300 million due in October 2010, that gets me a kind of $467 of cash versus $438 of obligations through 2010 and then I’m assuming there is going to be interest expense, I was just curious in order to offset that interest expense, do you think that you are going to get what kind of dividend estimate do you have for ’09 or ’10, and what kind of tax rebate estimate could you possibly have in 2010 as well?

Sanford A. Ibrahim

I think Bob can answer to that question.

Robert Quint

The expenses of the holding company including interest are covered by the sub via expense sharing, so that’s not it's a direct expense of the holding company but it’s reimbursed by the subsidiaries, we are not anticipating any dividends to Radian Group from the subsidiaries at this point, one dividend that will be paid in mid ’09 is coming from Radian Asset that’s $100 million, but that will go to Radian Guaranty, the parent company to support its liquidity position.

Conor Ryan – Deutsche Bank

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

Robert Quint

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

Conor Ryan – Deutsche Bank

Okay. Thank you very much guys. I appreciate it.

Robert Quint

Sure.

Operator

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

Matthew Howlett – Fox-Pitt Kelton

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

Sanford A. Ibrahim

Bob?

Robert Quint

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

Matthew Howlett – Fox-Pitt Kelton

Right, okay. Fair enough, and it’s fair to say that the structured book seasons much more quickly and potentially could be nearing their peak default claims?

Robert Quint

Yes, I mean, it’s hard to say that I think, we disclosed that products like such as subprime and I will say the pattern of delinquencies typically emerges faster than prime. So it’s a little bit sooner, but it would be more product related than vintage related.

Matthew Howlett – Fox-Pitt Kelton

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

Teresa Bryce

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

Sanford A. Ibrahim

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

Matthew Howlett – Fox-Pitt Kelton

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Mark DeVries with Barclays Capital. Please go ahead.

Mark DeVries - Barclays Capital

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

Robert Quint

Yeah, that’s right, they are hard to estimate first of all and that certainly the current reserving has a significant roll rate built into it, because it’s based on primarily on a recent path where roll rates have been very high, but we haven’t factored in an increase that’s going to happen, when and if moratoriums are lifted and as well that goes one way the other way, we spoke a lot about modifications, and expecting those to increase, but that also is extremely difficult to factor in, so we wanted to point out that both of those items could impact the reserving in the future, but are not exclusively factored it.

Mark DeVries - Barclays Capital

Okay, so let’s see you view kind of a material impact on your roll rates from either one of those factors then it could not only impact the amount of reserves you said aside for new delinquencies but also existing delinquencies, is that right?

Robert Quint

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

Mark DeVries - Barclays Capital

Okay, great. And also you indicated the recessions are now being factored in, so if you see increasing recessions are ultimately decreasing recessions from here, that we may see an impact on reserve level?

Robert Quint

Recessions have always been factored in because roll rates incorporate the amount of no payable recession into it, now recession rates have been going up, so obviously as they are going up, those rates built into the reserving process go up, if they go up further certainly they will be factored in and if they come down and that will be factored in as well.

Mark DeVries - Barclays Capital

Okay, And is there anything you guys are seeing in the recessions that would give you view as kind of what do you expect those to continue to rise or go down in the future?

Sanford A. Ibrahim

Teresa, do you have a view on that?

Teresa Bryce

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

Mark DeVries - Barclays Capital

Okay, all right. Thank you.

Operator

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

Joshua Kramer – JPMorgan

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

Sanford A. Ibrahim

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

Robert Quint

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

Joshua Kramer – JPMorgan

Okay. Could you give any kind of general quantification of how you expect actual losses to roll on because of the moratorium?

Sanford A. Ibrahim

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

Teresa Bryce

No, I don’t think, we really can make a projection around that, because even as the moratoria expire, there is still a lot of servicers that are working on mod programs and sort of the issue becomes how quickly do those things move forward, and what kind of we were also seeing court backlogs on even the foreclosure that are currently underway. So, I think it’s difficult to know, how many of them will proceed, and how quickly they will proceed, as well as how many of the default will, as S.A said will get modify or refinanced through various programs that are out there.

Sanford A. Ibrahim

I think, Bob made the important point that we have a mechanize, we have a process for reserves where we reserve for the defaults that come in into the extent the defaults break in a direction different from what we have historically seen at the modification programs are more successful and what we’ve seen or more defaults run into foreclosure we could see the positive or negative impacts on the reserves going forward.

Joshua Kramer – JPMorgan

Great. Thanks so much guys.

Operator

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

Jordan Hymowitz – Philadelphia Financial

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

Sanford A. Ibrahim

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

Teresa Bryce

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

Jordan Hymowitz – Philadelphia Financial

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

Sanford A. Ibrahim

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

Operator

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

Michael Grondahl – Key Colony

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

Sanford A. Ibrahim

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

Robert Quint

Yeah, Mike. So, we do this premium deficiency analysis every quarter, and we look at our projected future losses, projected future premiums, and then our loss reserve, and if it’s negative than the requirement is to put up a premium deficiency reserve upfront and set up the liability upfront, so all the $900 million is, it’s a mass, it’s the amount by which we think our future premiums and the loss reserves exceed the future losses, so we are saying that if all goes according to our projections, then there will be a positive results, when all is said and done. Now the reason that went up this quarter was I think two fold one because we wrote $5.6 billion of what we believed is profitable business and that gets factored into the analysis. And two, the increased level of expectations around denials and recessions is really the primary driver in the small decrease in the overall frequency that we are projecting at this point.

Michael Grondahl – Key Colony

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

Robert Quint

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

David J. Beidler

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

Robert Quint

And Mike, and I will just add one more thing. That you look at the duration as well, and many of these deals were done as five year deals or seven year deals and they are well into their life, so over the next few years, we are going to have some that exposure rolling off, and of course that gets factored into our expectations, there might be some deals with deterioration, but they will expire in the near-term, and therefore that leads to our conclusion that we won’t be paying claims on that.

Michael Grondahl – Key Colony

Okay.

Operator

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

Donna Halverstadt – Goldman Sachs

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

Sanford A. Ibrahim

Bob

Robert Quint

Yes, it’s done every quarter absolutely.

Donna Halverstadt – Goldman Sachs

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

Robert Quint

I don’t think, there is any difference in our ability to forecast, this is a number that we have historically had high visibility on, and therefore we are comfortable giving guidance relating to it, and up until recently, we’ve been pretty close on our guidance, I think the last year or so the market has changed and the deferrals and moratoriums have caused us to kind of overshoot with regard to our claim projections and we are still attempting do it as best we can, and I think we’ve said continually that we maybe over shooting again, if these moratoriums getting extended, but we are going to continue to do our best with regard to them.

Donna Halverstadt – Goldman Sachs

Okay. And then I had one other question on, the potential for government capital, just curious, if we think there is a risk and it be a risk to those are secured about the HoldCo of any government capital going directly into the OpCo with the inability to upstream anything to the HoldCo, is that do you think something like that is potentially in the cards?

Sanford A. Ibrahim

Bob, do you want to?

Robert Quint

Yeah, I think there is uncertainty around, we’ve really can’t say exactly what form it would take if that happens, so we will really have to take it as it comes.

Donna Halverstadt – Goldman Sachs

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

Sanford A. Ibrahim

Bob?

Robert Quint

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

Donna Halverstadt – Goldman Sachs

Thanks so much for taking my questions.

Sanford A. Ibrahim

Thanks, Donna.

Operator

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

Sanford A. Ibrahim

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

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference Service. You may now disconnect.

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Source: Radian Group Inc. Q1 2009 Earnings Call Transcript
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