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Radian Group Inc. (NYSE:RDN)

Q4 2007 Earnings Call

February 15, 2008 10:00 am ET

Executives

S.A. Ibrahim - Chief Executive Officer

Bob Quint - Chief Financial Officer

David Applegate - President of Radian Guaranty

Steve Cooke - President of Financial Guaranty business

Analysts

Ron Bobman - Capital Returns

Ross Levin - Arbiter Partners

Mike Maneeze - Bear Stearns

Mike Grasher - Piper Jaffray

Rajiv Patel - Sinova Capital

George Urban - RBS Greenwich Capital

Anand Krishnan - Forrester Research

Mark Ilet - Barclays Capital

David Polson - Bear Stearns

Howard Shapiro - Fox-Pitt Kelton

Brian Horey - Aurelian Management

Craig Carlozzi - Mast Capital

Operator

Ladies and gentlemen, thank you very much for standing by. Welcome to the Radian's fourth quarter 2007 earnings call. At this time all participation lines are in a listen-only mode. Later, there will be an opportunity for questions with instructions given at that time (Operator Instructions).

As a reminder, today's conference call is being recorded. After the prepared remark Radian management will be happy to take your questions. Please limit yourself to one question and if necessary one follow-up. If you have additional questions following the call please contact Radian directly. I will now like to turn the conference over to your host Mr. S.A. Ibrahim. Please go ahead.

Sanford Ibrahim

Thank you, operator. Thank you everyone for joining us today. This is S.A. Ibrahim, Chief Executive Officer of Radian; with me here are Bob Quint, Chief Financial Officer; David Applegate, President of Radian Guaranty, Steve Cooke, President of our Financial Guaranty business; as well as other members of our management team.

First let me 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 live and the statements contained in our SEC filings.

As always I will start off by making some opening remarks followed by Bob Quint with detail comments on the fourth quarter and full year. Steve Cooke and David Applegate will then give more color on Financial Guaranty and Mortgage Insurance. I will then wrap up with some closing remarks prior to taking your questions.

I will begin by commenting on 2007 moving on to our view what lies ahead, how we are position to deal with the near-term challenges and how we are positioning ourselves to benefit when the current cycle moves into recovery phase.

2007 was indeed an extremely challenging year for Radian and the industry. Market conditions have continued to deteriorate since our last update and we believe that the housing downturn will continue to challenge us during 2008 and into 2009.

In financial terms, 2007 was clearly disappointing. In the fourth quarter Radian reported a net loss of $618 million and diluted net loss per share of $7.74. After the impact of the last two quarters losses driven primarily by the C-BASS write-down, credit losses, higher reserves and mark-to-market adjustments, book value at year end 2007 was $35.10. We have a solid investment portfolio of $6.4 billion and we have strong claims paying resources in both our businesses.

Our Mortgage Insurance paid claims in the fourth quarter were in-line with our guidance. Our loss reserves continued to increase, reflecting the challenging credit environment and we ended this year with $1.3 billion in reserves, which translates into over eight quarters with claims paid coverage.

We have 72% reserved against on exposure to NIMs and 41% reserved, against our entire Seconds exposure with about 68% of our exposure to underperforming seconds deal covered at this point. I must point out that Radian have consistently been raising our reserve levels over the last couple of years.

Looking back at the past decade, the Mortgage Insurance industry had to deal with the mortgage environment with the traditional prime loan market eroded. Not only as the GSE share declined, but as MI penetration was further impacted by secondary market and portfolio alternatives such as 80-10-10s. At the same time non-prime loans began to represent a larger percentage of the market.

In response to this the industry and Radian spend much of the decade venturing outside the prime arena. Writing what have turned out to be unprofitable business. Based on these lessons we are focused on high quality loans. Transitioning away from the past has not been easy. We have to balance our customer commitments and franchise.

At Radian, we have been revising and adjusting our underwriting criteria on an ongoing basis. In mid 2006, we tightened our sub-prime criteria and reduced our Wall Street sub-prime bulk volume dramatically. In 2007, we continued to tighten underwriting standards. These actions underscore Radian's commitment to high quality loans and this is of the highest priority for the Mortgage Insurance team, for the corporate team, for me and for our Board.

The changes we have made have already had an impact on our business mix. Our higher percentage of prime business is one of several positive trends we have seen. Penetration and persistency are increasing. We are adding to our sales force and have seen growth in our market share, despite rate increases and stopped credit the credit guideline modifications.

We are excited about these as well as other positive changes being made in our Mortgage Insurance business and Dave will go into greater detail in just a few minutes. By focusing on managing our past book of business, improving the quality of our new business, maintaining a strong franchise and taking actions that improve our financial strength, we aim to position ourselves to participate in and benefit from the attractive Mortgage Insurance environment. While we are disappointed by the S&P downgrade of Radian Guaranty to AA minus, we will do everything we can to maintain our AA ratings.

Turning now to our Financial Guaranty business, this business was profitable during 2007, adjusting for the mark-to-market losses. As you will hear from Steve, the fourth quarter was impacted by difficult environment as the industry received increased scrutiny on its exposure to sub-prime mortgages and the impact of potential ratings downgrades. We have benefited from deliberately

We have benefited from deliberately limiting mortgage exposure in our Financial Guaranty book, which had the relatively small sub-prime and RMBS exposure. Our view on Financial Guaranty is that we continue to see opportunities in reinsurance and in the direct public finance sectors on which we have historically focused, as well as selective sectors non-CDO structure finance. We'll continue to be disciplined and focused on business that make sense even if it means doing less business in the near future.

Before I turn this to Bob, I would like to make one more comment. We are dealing with the near-term mortgage industry challenges, as well as taking advantage of new Mortgage Insurance opportunities, which require us to actively prepare for different scenarios.

Under some of these scenarios, it is possible that we may need more capital. It's not to protect our ratings then to insure greater market confidence. I will not go into detail about our capital raising initiatives on today's call, other than to acknowledge that we have been looking at alternatives. When looking at our capital position, we will have to balance various considerations and do what is in the best interest of our shareholders. Meantime we continue to believe that we are adequately capitalized in both of our businesses at this time.

In addition to the value of our Mortgage Insurance business, when considering the value of our company, we think it's important to also consider the significant embedded value within our Financial Guaranty business as well as our ownerships stake in Sherman. Just to give you some numbers on the Financial Guaranty business, we have qualified statutory capital of $1.6 billion, plus an addition of substantial amount of combined unearned premiums and present value of future installment premiums and on top of that we have mark-to-market reserves that we expect to revert over time.

Now with that I will turn over to Bob.

Bob Quint

Thank you and good morning. For this quarter I'll be updating you on many of the unusual items that impacted our financial statements in the third quarter as well as going over the highlights of the normal P&L activity. The first item is the C-BASS situation, in the third quarter we wrote-off our entire $468 million equity investment and less the $50 million demand note on the balance sheet, because we believe that would be collectable.

The collectibility of the note has become more uncertain and likely won't be known for several years, but regardless of that based on the equity method of accounting a full write-off of the note is necessary, due to the fourth quarter operating loss from C-BASS that has further impaired its equity. The $50 million write-off is located in the equity and affiliates line in our income statement. We have no further exposure to C-BASS.

Next is the NIMs mark-to-market. As of September 30th, we've booked $432 million of negative marks which included $372 million of projected client payments. The risk enforced at September 30th was $712 million. Since then our risk has been reduced by another $108 million to $604 million at yearend '07 and was down by another $13 million to $591 million in January.

The updated balance sheet mark on the NIM is $434 million and importantly projected claims have not changed materially since our third quarter expectation. With total risk enforced at year end of $604 million our derivative liability is 72% of our total exposure. There is no further exposure beyond that.

The next item is Second Lien. The premium deficiency necessary because future projected losses and expenses are greater than future expected premiums booked in the third quarter of $155 million had an expectation of approximately $300 million of present value of future credit losses along with future premiums and expenses.

An updated projection at 12/31 is a net increase in the PDR and the balance sheet of $41 million to $196 million and that's mostly due to an update of the projected present value of future losses to $378 million. The risk enforced on second liens is $925 at 12/31 and Dave will go into more detail about that exposure.

Out traditional MI business loss provision reflects the higher delinquencies and claims that occurred this quarter. Our paid claims came in at $165 million, right on our previously forecasted number consisting of $136 million of first liens and $29 million of second liens.

Looking forward into 2008, due to deteriorating default experience in the fourth quarter and a continuation of claim rate increases, we now expect the claims paid will be approximately $200 million in the first quarter and in the $1 billion range for the year. Both of these numbers include second lien loss payments.

The very large increase in delinquencies combined with roll-rate adjustments and larger loan balances have required us to book an increase to the loss reserves of $465 million for the quarter, which brings our provision for losses for the fourth quarter to $630 million. This reserve change keeps our reserve levels very strong by any measure.

We have been consistent in keeping reserves strong. In any kind of stress scenario, we expect substantial recoveries from both captive and Smart Home reinsurance. On our previous call we estimated the recoveries in one stress scenario at $270 million, all of which would occur after 2008. Recoveries in a more severe stress will be significantly higher.

Flow premiums earned have continued over the near term, which reflects the flow insurance in force grow due to good penetration and persistency, which has gotten up into the low 80s. Remember, last quarter had $17 million positive adjustment that impacts the comparison to this quarter. Dave will be talking about our mix of business, which has clearly improved recently.

Financial Guaranty results this quarter reflected another increase to the allocated non-specific reserves of $50 million for the transaction that was discussed in our Financial Guaranty call in September. This deal which was originated in 2003 has a total maximum exposure of $100 million and it is now 100% reserved for.

The net mark-to-market adjustment Financial Guaranty for the quarter is $397 million, which includes $289 million related to the corporate CDO portfolio that we do not believe has credit losses embedded in it. As such, we expect this mark to turnaround over time or when spreads tighten.

Another $120 million is related to other derivative transactions, including a small number of AAA CDOs of ABS and CMBS. Because this number was more difficult to determine and utilized more judgment due to a lack of market absorbable indices, it is subject to possible adjustments.

The Financial Guaranty mark-to-market loss is GAAP only and has no impact on Radian assets' claim paying resources for regulatory purposes, for rating agency purposes.

The Domestic Mortgage Insurance CDS business had a further negative market this quarter of $45 million and the current mark-to-market at year end is negative $87 million. The total exposure on this business is $212 million and based on our observations of deal performance to-date, we expect the $32 million of this risk will likely be a credit loss, $48 million could potentially be a credit loss and $132 million will likely not be a credit loss.

These deals are domestic or MBS swaps rated between BBB and A in range from May '05 vintage to January '06 vintage with the majority of exposure from 2005 vintage production. The international CDS had a positive mark for the quarter of $2 million. Although the notional exposure on this business is very high at $8.2 billion, please remember that Radian's attachment point is Super AAA and we see no reasonable scenario in which we would incur any credit losses in this exposure. In both deals our attachment point is over 10 times expected losses.

Sherman performed well in difficult environment this quarter. Sherman has an option to acquire our remaining interest and we will continue to evaluate Sherman as the potential source of additional capital. We have expenses contain in several unusual items in 2007. We have looked at a potential run rate for the expense line and have a Policy acquisition and other operating expenses.

Into 2008, an average stated on the third quarter call, we expect that number to be in the $80 million range per quarter on a consolidated basis. This number reflects number of expense reduction that has already taken place along with certain MI initiative that Dave will talk more about.

Our liquidity position remained strong. Cash flow for the fourth quarter and for the year was positive, and none of the unusual items that have created losses for the quarter and a year represent immediate liquidity event. The C-BASS impairment and spread related mark-to-market movement will never be a direct liquidity event.

Radian's capital position was bolstered by $100 million contribution made to Financial Guaranty last quarter and the $278 million cash proceeds from Sherman received last quarter. Our common stock dividend requirement is minimum, that being said, as S.A. mentioned the depth of the current cycle is unknown and we are actively evaluating alternative in case capital is required at some point in the future, to support the existing and perspective risk in our MI business.

We continued to have $200 million available under our existing credit line, although we have no plans to draw that money down. Our MI risk to capital is 14.4 to 1 at 12/31/2007, however if we exclude the Super AAA international default swap, which need very little capital support that risk. The risk to capital is 11.6. We are constantly in contact with the rating agencies regarding our capital adequacy.

At year end, the total statutory surplus, which includes contingency reserve in our Mortgage Insurance business, is $2.9 billion and we have another $1.5 billion in loss reserve. Due to deteriorating market conditions you should no longer rely on our projection of ultimate losses presented in our September 5th investor presentation or the loss ratio projection presented in our third quarter 10-Q.

We now believe that losses will exceed those projections, although is unclear to us at this point by how much given the prevailing uncertainty in the market. We continually look at a variety of reasonable stress scenarios and in each case we have ample claims paying ability.

Our investment portfolio did exactly what it was mentioned during the stress environment. It's extremely safe credit profile and this is on liquidity and our policy of not investing in residential mortgages has proven sound and the value of our portfolio has held up very well this year.

As I said our current book value stand at $35.10 and that include the substantial derivative liability in our Financial Guaranty business that we expect to turn around overtime.

I'd now like to turn the call over to Steve Cooke, President of our Financial Guaranty Business.

Steve Cooke

Thanks Bob. In keeping with what my colleagues have been saying these are certainly unprecedented time in the Financial Guaranty Insurance industry. Throughout it all our goal is going be continue to demonstrate that we are well capitalized business on a standalone basis, with stable rating and limited exposure to vulnerable asset classes.

As we said in the past, we continue to pursue strategic alternative, which potentially further enhance the value of our Financial Guaranty business. We believe we have more than adequate capital when viewed in light of our outstanding exposure.

Production levels have been impacted by uncertainty and were less than optimum in the fourth quarter due to overall market concerns about subprime exposures, as well as specific concerns about the Financial Guaranty insurance industry.

As Bob mentioned earlier, the net mark-to-market adjustment for Financial Guaranty the $397 million much of which is related to our synthetic investment grade corporate CDO exposure. While the impact of the adjustment on the 2007 financial statements significant.

It is important to remember that virtually this entire amount is a result of the widening of credit spreads, prior to the downturn in the credit markets and not due to deterioration in the credit quality of this portfolio or erosion of underlying collateral. Provided the credit quality remains as strong as it has today. Radian asset will release mark-to-market gains in the future as the CDO transactions mature.

We continue to vigorously monitor all segments of our insurance portfolio with a particular emphasis on our non-CDO RMBS portfolio and on our CDO portfolio with a particular emphasis on our CDO ABS exposure and CDO CMBS exposure.

Let me spend some time focusing on our CDO of ABS portfolio. As you may remember from our third quarter earnings call, we have exposure on only three direct CDO of ABS transactions, and one assumed CDO of ABS transactions with that one assumed transaction having a net par outstanding of approximately $1 million.

As Bob mentioned earlier, with respect to one of those transactions our only direct market value transaction that we referred to in our third quarter earnings call and on our earlier Financial Guaranty investor call we are now 100% reserved.

With respect to the two other transactions, for one no credits were downgraded or placed on negative watch by Moody's or S&P between July of 2007 and January of this year. In the other 22 credits were downgraded during that same period representing $114.3 million out of a total collateral pool of $625.9 million, with subordination equaling a $125.8 million. Remember that subordination is not eroded until there is a credit default as supposed to only a downgrade.

I'm worried about our assumed CDO exposure. Although our assumed CDO portfolio only constitutes $1.8 billion or 4.4% of our total CDO portfolio, we have spent considerable time analyzing data from the companies for who we assumed the business, to provide you with more granularity concerning that exposure. Based on our review of approximately 398 credits two deals are on our intensified surveillance list totaling $15.3 million in net par outstanding and three deals totaling $1.5 million in net par outstanding or on our case reserve list.

CDOs and COOs of high yield corporate names constitute almost 60% of the assumed CDO portfolio. Both the assumed CDOs and COOs have performed well to date. The COOs are supported by loans to large high yield cooperation's in middle market company. We expect any potential future deterioration in credit quality to be mitigated by our senior position and the capital structures.

However it’s still remains the case that more than 80% our entire CDO portfolio is synthetic investment grade corporate CDO exposure. All of which attach at the AAA level or higher, with an average attachment point of 2.4 times the AAA level and a weighted average tenure of 5.8 years. 75% have attachment points of at least two times the AAA level.

On an outstanding notional basis at least 91%, down slightly from 95% at the end of the third quarter of the CDO transactions we have insured that's assuming a typical portfolio of 100 to 150 reference corporate entities, can sustain at least 15 defaults using a standard 30% recovery assumption or without Radian assets having to incur a loss.

What remains clear is that each of these statements continue to retain overall credit quality without any evidence of material credit deterioration. We believe that the AA niche will continue to provide meaningful business opportunities going forward. It is a niche in which we have operated successfully by design over many years and we hope to continue to do so in the future. I would like to turn the call now over to my colleague Dave Applegate.

Dave Applegate

Thank you, Steve. Good morning. Although these are clearly challenging times, I can assure you I am pleased to be here at Radian. And a long-term potential of this business is significant and I look forward to reporting better performance in the future.

The Q4 performance $335 million was the total after tax loss and the full year loss for MI was $693 million after tax. Bob did a very thorough job explaining the financial charges on our NIMS, the second lien deficiency and CDS, but I do want to update you briefly on those.

As a reminder, we have reserved $434 million of what is now at the end of January $591 million risk in force. On the second liens we have total risk in force of $925 million. We have a very seasoned risk in force book of $451 million that is performing well in which we have few concerns over.

Unfortunately, as we have stated before we have risk in force of $ 473 million concentrated with two originators that is performing poorly. We have now put-up reserves of $ 323 million against these books for total coverage against risk in force of 68%. Although not insignificant in terms of exposure, we have a clear sizing of the box in these sectors.

Now turning to our fourth quarter reserve build up, in Q4 we had a $465 million in reserves pushing our total reserve position against our primary risk in force and full polices to $1.2 billion. The reserve build up reflects an update to our roll to loss ratios, cure rates have clearly dropped, and loans are moving more quickly to late stage to fall with less probability of recovery.

In addition in Q4, we experienced a large increase in overall defaults. Defaults in our primary book increased 20%; default rate now stands at 6.8. Some specific drivers of our up-tick in defaults, California and Florida make up 18% of our primary risk in force, but accounted for a 37% increase in defaults in Q4. These markets are clearly seeing rapid declines in property values.

On Alt-A, which makes up 18% of our risk in force they accounted for a 41% increase in our defaults. 31% of our Alt-A risk in force is in California and Florida. These sectors are driving a material force in our underperformance, but it is fair to say that a majority of the country is seeing some level of weakness. From a vintage perspective of 2006 is performing poorly and as noted before, but the first half of 2007's originations are also weak. In particular we have focused on above 95 LTVs.

On the bright side, the rate of decay in the auto states and our primary sub-prime book is slowing. The clear underlying driver of weakness is sliding property values. Property values are likely to fall 6% to 8% nationally in 2008.

Falling home prices combined with liberal credits has magnitude exposure or magnified exposure. We are clearly changing what we can control. In Q3, we made some significant changes in our Alt-A guidelines restricting various combinations of low-doc and high LTV loans. Those changes our corporate life focus on prime business and the industry shift to better credit or having a positive impact.

At year end our primary risk in force is stratified as follows and is very consistent with the industry as a whole. Total primary risk in force of $31.6 billion is broken out 72% prime, 18% Alt-A and 10% A minus to sub-prime. Actions we took in Q3 started to have an impact on our Q4 mix.

In Q4 we added primary risk of $3.4 billion of which 77% was prime, 16% Alt-A, 7% A minus sub-prime. We classify Streamlined Doc program with one of our premier client as Alt-A. This book has no defaults for '07 and has a 740 average FICO score. If we classify that as prime the mixed percentage of Q4 improves to 87% prime.

In Q4, we announced additional guideline restrictions that went in to effect on February 4th that further contracted LTVs. The most important part of these changes is the implementation of a declining market policy. In any region of the country with a quarter-over-quarter decline in value based on the most recent [OFAO] data, we reduced the maximum LTV by 5%, based on our process approximately 60% of the country is experiencing declines and we are reducing risk by reducing LTVs.

We are reviewing our own loan performance and tightening industry credit trends and we are making further changes to our guidelines in the next 30 days. We also announced the series of price changes that will go into effect on April 1st, the goal of our price and guideline changes is to improve our risk reward posture and generate appropriate returns on new business.

On the existing risk in force, we have made and are making numerous investments in loss litigation. We are increasing our direct mailing campaign in a partner with committee service group to contact our borrowers to increase borrower information flow. We are making enhancements to our website to educate consumers on their financial options and most importantly Radian is expanding staff to more effectively manage workout options.

We are also placing staff on-site with our servicer partners to improve communication and workflow to act quickly to reduce loss exposure. We recently launched a unique strategy called Fast Advance where we advanced two of the servicer up to 15% of the claim amount to invest in a rate buy down, short sale or loan modification to cure a defaulted loan.

In these turbulent terms, we are moving aggressively to reserve capital and increase communication with our clients and partners. On that front, we have routine dialogue with Fannie and Freddie, keeping them informed of loss mitigation strategies, capital accuracy and guideline changes. They have made it clear to us that they are very supportive of our actions and are committed to a strong partnership which is in our mutual best interest.

In addition, we are support of Freddie Mac's recent announcements overall and their specific rule change which caps the ceding level at 25% on lender, partner captive risk sharing agreements. A lower cede will help us build capital faster. On a related note, one of our more prominent clients has decided not to place new business in their captive.

Turning to some additional positive developments, quickly changing markets do create opportunities. MI penetration reached 18% in Q4 and Radian's market share in Q4 improved slightly versus the previous quarter to 15%. We are expanding our sales force and are increasing our services to clients to build a client value proposition that will allow us to grow quality share in the future.

We will not sacrifice quality for growth, but we do see opportunities and we want to expand our presence with our clients to partner with them at this critical cross road.

S.A. Ibrahim

Thanks Dave. I want to conclude by saying that we have come through a difficult year and the environment continues to be very challenging. These challenges will remain with us for the near future and may well intensify before they abate.

Our book value is $35.10 we have said before and this does not include any upsides from the future revertful of mark-to-market adjustments, the value of unearned and contracted premiums and the opportunity to write profitable new business. At the same time, future losses and mark-to-market adjustments would negatively impact our book value. Our claims paying resources in both business segments are strong and we stand to benefit from a profitable and bulk capitalized Financial Guaranty business.

With that, operator we are now ready to start questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Ron Bobman with Capital Returns. Please go ahead.

Ron Bobman - Capital Returns

Everybody must be sleeping in this morning and must be first on the line. I had a question about the MI business and the captive balances. You provided us sort of the distribution of Prime, Alt-A and A minus/subprime for risk in force as well as I think sort of new business risk in force rating. I am curious to know with respect to your MI book of business that's subject to captive protection and recoverables. How that's split up between the relative books of business Prime, Alt-A, and A minus.

Bob Quint

Most of the captive reinsurance is on our Prime business, but I would say that majority of the captive business is on our Prime business. The majority of the Smart Home is on subprime and then secondary is Alt-A.

Ron Bobman - Capital Returns

Would you mind reminding me or teaching me what do you mean by Smart Home?

Bob Quint

Smart home is a capital markets reinsurance transaction that we did in '05 and '06, its essentially reinsurance on our portion of our subprime portfolio.

Ron Bobman - Capital Returns

Okay, being closer to these kind of parties then presumably anyone else in the call. Are you hopeful or expecting Fannie to follow Freddie's sort of amendments with respect to limiting or eliminating the deep-cedes as well as the A minus, AA minus threshold abeyance?

Dave Applegate

This is Dave Applegate. Fannie Mae I am sure will take that under consideration. It will be difficult to speculate on exactly what they would do. We certainly are pleased with what Freddie has done to-date.

Operator

Thank you and next will go to the line of Ross Levin with Arbiter Partners. Please go ahead.

Ross Levin - Arbiter Partners

Hi guys, Arbiter actually. Two questions, first of all with respect to the mark-to-market on guaranteed CDO portfolio. There has been something I guess considerable move in terms of corporate credit spreads sort of prices that which corporate CDO exposure in the AAA tranche is trading, since December 31st.

Could you just give us a little bit of guidance on understanding of where that might lead you in terms of mark-to-market that would be very helpful? And also I know that, you probably knows your competitor took a premium deficiency reserve against bulk transactions, but if they refer to as Wall Street bulk transaction -- are you guys looking taking some sort of premium deficiency reserve against other segments of the book beyond the second?

S.A. Ibrahim

I'll take the second question first. With regard to premium deficiency last quarter we took a premium deficiency on our second-lien business because we seeing that business to be a separate line, that was separately sold and measured. With regard to 2006 and 2007 vintage Wall Street securitization, we really did very little of that business, instead we took risk on those deals to our NIM guarantees, which we taken marks on throughout 2007.

So, we do not contemplate any other kind of segregation of our book with regard to premium deficiency. With regard to spread, obviously at the end of the first quarter we will take in to account then prevailing spread in determining our mark-to-market on all of our business.

Ross Levin - Arbiter Partners

Okay.

Operator

And next we will go to line of [Mike Maneeze with Bear Stearns]. Please go ahead.

Mike Maneeze - Bear Stearns

Hi. Just a question on the bulk production you guys had in the fourth quarter. Can you just talk a little bit about that looks like you guys were about $3 billion of bulk, just wanted to understand kind of what's the strategy there, kind of what sort of pricing were looking at and what we can expect from that channel in the future. Thanks.

Dave Applegate

This is Dave Applegate. Overall I think we're going to see a decrease in the amount of bulk transactions. The bulk transactions we've been doing we definitely see a significant improvement in credit quality and we've been able to adjust our pricing obviously quickly on bulk versus our other published pricing. So the mix is improving, overall we think it will decline as a percentage of business, but the returns are fair, forecast to be pretty attractive.

Mike Maneeze - Bear Stearns

So, I mean as far as -- do you also have a breakdown of the risk in force by vintage year for restructured? Just curious to know like what percentage of the structured book is might post '05 for capital.

Dave Applegate

We could do achieve that.

Mike Maneeze - Bear Stearns

Okay.

Dave Applegate

We can do in the follow-up. We definitely have it. We just don't have access to at the moment.

Mike Maneeze - Bear Stearns

Okay. Thanks.

Operator

And our next question will come from the line of Mike Grasher with Piper Jaffray. Please go ahead.

Mike Grasher - Piper Jaffray

Thank you. Good morning, gentlemen. Bob I may have missed this in your opening remarks that, did you mention any expected impairment on your marks to-date?

Bob Quint

In which one, Mike.

Mike Grasher - Piper Jaffray

Across the board? The marks on the derivatives in particular?

Bob Quint

Oh, they were all updated. All of our marks have to be updated every quarter, so the current marks are updated for year end. The NIMS mark really didn't change essentially, is very, very close to what it was at the third quarter, the marks on the CDS and the MI went up and the marks on the Financial Guaranty business went up, the negative marks went up substantially, but as we mentioned with mostly spread related as compared to any kind of credit impairment.

Operator

Then we will next go the line of [Rajiv Patel with Sinova Capital]. Please go ahead.

Rajiv Patel – Sinova Capital

Hey you guys. Thanks for taking my call. Quick question on your line of credit the $200 million, which you reference which you guys haven't even touched, have the terms of it change at all, if you were to cut a draw down on a given, the different rating agency actions and what's occurred in the market, have the terms, which are backing the line of credit, have they changed at all?

S.A. Ibrahim

No, they haven't.

Rajiv Patel

And so that facility is fully opened to you guys currently?

S.A. Ibrahim

It's available although we have no plans about to draw down any more.

Rajiv Patel

Okay. Great Thanks a lot.

Operator

Thank you. And next we move to the line of [George Urban with RBS Greenwich Capital] Please go ahead.

George Urban - RBS Greenwich Capital

Oh. Hi guys. It's George here. Can we just circle back on the loss projections for going Bob said we're not going to provide projections out. Is there some other metric we could use or something little less granular for example, do you think premiums going out and you I know with the fees potential losses given the protections given by Smart Home and captive reinsurers, is there any kind of thing we can look at?

Bob Quint

Well, there is obviously there is a lot of uncertainty in the markets, so I think at this time what we are doing is looking at a variety of different stress scenarios and as we said we believe our capital will be adequate to pay claims in all of those check scenarios. But we are not -- at the time we don't have a revised sort of base, anything like that because of the uncertainty around the near-term future.

George Urban - RBS Greenwich Capital

Okay. And can you just update on the IRS tax payment?

Bob Quint

Its still something that we expect to happen, but we have not received notice yet, so its been sort of pushed forward, likely sometime in '08.

George Urban - RBS Greenwich Capital

Okay, thanks Bob.

Bob Quint

It's alright.

Operator

(Operator Instructions) And we will go next go to the line of [Anand Krishnan with Forrester Research]. Please go ahead.

Anand Krishnan - Forrester Research

Hi, good morning. I just wanted to follow up on the structured piece of the business. You mentioned you did very little of Wall Street deals in '06. Can you give a sense for your overall structured book, how much is Wall Street related? I am also trying to compare your delinquencies in that structured business. It's running at like almost 50 percentage of where MGIC is running, so I just wanted to make sure if all of that is related to you not playing as much on the Wall Streets side? Thanks.

Bob Quint

Yeah, as we said with regard to the Wall Street securitizations we really curbed that kind of business in the beginning of '06, so we did very little in '06 and almost none in '07. We gave you some of the prior to that, so there is some of that business within our risk in force, but it's generally older vintage.

Operator

Thank you, and next will go to line of [Mark Ilet with Barclays Capital]. Please go ahead.

Mark Ilet - Barclays Capital

Yeah, hi quick one, I am sorry if you answered this already. Could you just update us on your cash balance of the whole call please?

Bob Quint

Its about the same as it was in the third quarter so those are some thing over $100 million.

Mark Ilet - Barclays Capital

Okay, thank you.

S.A. Ibrahim

Operator, are there any more questions?

Operator

Yes, we'll next go to the line of David Polson with Bear Stearns. Please go ahead.

David Polson - Bear Stearns

Yes, hi. Do you have some kind of breakout on how much of your investments are insured by financial guarantors?

S.A. Ibrahim

In our investment portfolio?

David Polson - Bear Stearns

Yes, investment portfolio, yes.

Bob Quint

Yeah, we are getting more curious.

David Polson - Bear Stearns

Okay.

Bob Quint

That's 25% of the portfolio or about $1.6 billion.

David Polson - Bear Stearns

Do you have an idea of what the underlying rating is of that portfolio and is it almost on [immunities] or?

Bob Quint

Yes, it is.

David Polson - Bear Stearns

Okay.

Bob Quint

And the underlying ratings are pretty high. They are 40% plus AAA, 20% AA, almost another 20% A, almost entirely investment credit.

David Polson - Bear Stearns

Great, thanks.

Operator

Then we'll next go to the line of Howard Shapiro with Fox-Pitt Kelton. Please go ahead.

Howard Shapiro - Fox-Pitt Kelton

Hi, thank you. SA, you mentioned earlier in the call that you are comfortable with your capital position, especially relative to rating agency action can you just give us a sense I assume you've spoken with the rating agencies. What kind of risk to capital level are you comfortable with, what kind of level are they comfortable with and at least one of them has talked about looking at profitability in to 2009 as part of the criteria, so if you are comfortable can you give us any sense as to what that means for 2009? Thanks.

S.A. Ibrahim

Thanks Howard. First let me talk about the rating agency capital discussions to-date. In our discussions and as Bob mentioned we're in constant communications with the rating agencies, capital hasn't been the number one issue. Having said that we have to prepare for an environment where the rating agencies would change the way they view capital in this uncertain environment and we have to look at different scenarios for our business and see under what scenarios we would need additional capital. It's not for rating agency purposes, like I said it may serve a more important role in building customer confidence.

In terms of your question on the level of risk to capital. I think to some extent we have been painted as being having a very high risk to capital ratio largely because of those two large international deals we have which are really for all intents and purposes Financial Guaranty type deals and the rating agencies in all our interaction with them have been very comfortable with those deals requiring very low capital and when you adjust for those as Bob mentioned our risk to capital ratio is very comfortable.

Operator

Thank you and next we'll go to the line of Brian Horey with Aurelian Management. Please go ahead.

Brian Horey - Aurelian Management

Hi my question relates to the Financial Guaranty business. You discussed I believe $212 million of total exposure to domestic RMBS securities is that correct?

Bob Quint

Yeah, that's in the MI business.

Brian Horey - Aurelian Management

So that's in the MI business. Okay. And I think you said that those were rated BBB to A minus, do I have that right?

Bob Quint

Between BBB and single A.

Brian Horey - Aurelian Management

Single A. Okay, and can you give us anymore detail on what category those are, are they Prime, Alt-A what's your geography what the loan to value mentioned in that group?

Bob Quint

We didn't give that information it's $212 million of total exposure there and so we didn't break it down as specifically as you are asking.

Operator

And our next question will come from the line of Craig Carlozzi of Mast Capital. Please go ahead.

Craig Carlozzi - Mast Capital

Yeah. Hello. Couple of housekeeping and I have a follow-up question as well. At yearend what you estimate your RBC ratio to be at your operating company the Mortgage Insurance operating company and what is your statutory surplus not including the contingency reserve estimated with where you are at?

Bob Quint

If we don't measure our business on RBC, so it's not a concept that we use and I don't have that number. The $2.9 billion included contingency reserve I don’t have that number without, the substantial part of that is contingency reserve.

Craig Carlozzi - Mast Capital

Okay. And could you remind me what the IRS tax payment is how much you expect that to be?

Bob Quint

The disclosure we made was approximately $84 million.

Craig Carlozzi - Mast Capital

$84 million and so if you have $100 million of cash the whole current year so you expect to make $84 million presumably of interest in [whole co] expenses as well. How do you expect to bridge that liquidity gap without drawing down on your $200 million available credit facility?

Bob Quint

Well, as we have disclosed that $84 million is allowed to be collected from the subsidiary at which the level that the taxes do.

Operator

Thank you. And now we will now turn the call back to Radian management team for closing comments. Please go ahead.

S.A. Ibrahim

I would like to thank everyone for participating in the call. Thank you and we will see you next quarter.

Operator

Ladies and gentlemen, that does conclude the call for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.

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Source: Radian Group Inc Q4 2007 Earnings Call Transcript
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