Radian Group's (RDN) CEO S.A. Ibrahim on Q2 2016 Results - Earnings Call Transcript

| About: Radian Group, (RDN)

Radian Group Inc. (NYSE:RDN)

Q2 2016 Earnings Conference Call

July 28, 2016 10:00 am ET

Executives

Emily Riley - SVP, IR & Corporate Communications

S.A. Ibrahim - CEO, Radian Group Inc.

Teresa Bryce Bazemore - President, Radian Guaranty Inc.

Jeff Tennyson - Interim President, Clayton Holdings LLC

Frank Hall - EVP & CFO, Radian Group Inc.

Derek Brummer - EVP & CRO, Radian Group Inc.

Analysts

Patrick Kealey - FBR

Bose George - KBW

Eric Beardsley - Goldman Sachs

MacKenzie Aron - Zelman & Associates

Douglas Harter - Credit Suisse

Mark DeVries - Barclays

Jack Micenko - SIG

Vivek Agarwal - Wells Fargo

Ron Bobman - Capital Returns

Geoffrey Dunn - Dowling & Partners

Chris Gamaitoni - Autonomous Research

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Radian's Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer period; instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to our host, Emily Riley, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Emily Riley

Thank you, and welcome to Radian's second quarter 2016 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier this morning and is posted to the Investors section of our Web site at www.radian.biz. This press release includes certain non-GAAP measures, which will be discussed during today's call. A complete description of these measures and a reconciliation to GAAP may be found in press release Exhibits F and G and on the Investors section of our Web site.

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

Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2015 Form 10-K and subsequent reports filed with the SEC. These are also available on our Web site.

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

S.A. Ibrahim

Thank you, Emily. Thank you all for joining us and for your interest in Radian.

Before we dive into the details of this quarter, let me first highlight several of our most recent accomplishments. First, in the second quarter, we grew our NIW by 60% from the first quarter of 2016 and 10% from the second quarter of last year. In addition to capturing more high-quality business that we expect to generate attractive returns and strengthening our MI franchise, this new business growth should also help extend our future earnings momentum.

Second, we were able to redeem our entire $325 million surplus note at the earliest possible date enhancing our holding company liquidity position and reflecting Radian's strong financial performance. Third, we announced our intention to accelerate our capital plan with the goal of positioning Radian Group for a return to investment grade ratings in the future. We continue to believe that we are better positioned to drive long-term value today than ever before in Radian's history.

Turning to the quarter's results. Earlier today, we reported net income for the second quarter of 2016 of $98 million or $0.44 per diluted share. Adjusted pre-tax operating income was $131 million for the second quarter of 2016. And adjusted diluted net operating income per share for the second quarter was $0.38. Importantly, book value per share grew for the fourth consecutive quarter to $13.09, an increase of 16% over last year.

And now, turning to the mortgage insurance segment. We continue to improve the quality of our large mortgage insurance in force book which drives future earnings for Radian. We wrote $12.9 billion in new MI business in the second quarter. While we had expected a seasonal increase in volume, we exceeded even our own expectations and in June, our third largest -- and we wrote our third largest monthly volume of primary flow NIW. June also represented our largest month ever for purchase primary flow business, which reflects a positive development in the housing market particularly for our industry.

Estimates for the size of the MI market in the second quarter have increased and now stand at approximately $70 billion. To put this in perspective, this was the size of our industry's entire market for the full year 2011. Based on this market growth, our strong second quarter volume and our significant new business pipeline, we now expect in 2016 to surpass the $41 billion in NIW, we wrote in 2015.

We remain focused on writing as much high-quality new business as possible, while maintaining a well-balanced portfolio mix that we expect to generate a mid-teens levered return on required capital. We grew our mortgage insurance in force by 3% over the second quarter of last year and we continue to expect our in force book to grow and to enhance our strong foundation for future earnings.

Radian success in writing a large share of high-quality and profitable new business after 2008 has helped to improve the composition of our mortgage insurance portfolio and have served as a differentiator within our industry among legacy peers. For the second quarter, our total primary mortgage insurance risk in force consisted of 86% of business written after 2008 or 78% excluding HARP volume. You may find these details on webcast Slide 11.

Slides 12 and 13 compared the loan characteristics of Radian's existing risk in force as of 2003, 2007 and 2011 with the risk in force in the second quarter of 2016. These comparisons are important to understand in terms of dealing with any future economic stress and given that the composition of our risk in force reflects the environment in which the loan was underwritten.

In general, loans written before 2009 reflect the relatively weaker credit environment and underwriting standards of that time as well as a much more lenient regulatory environment. In contrast, loans written after the downturn in 2009 and later reflect a tighter credit environment and more stringent underwriting requirements.

This environment in combination with Radian's own investment in risk management resources, tools and discipline has driven the outstanding credit quality of the loans we ensure. For example, in 2007, only 26% of our primary risk in force consisted of loans with a 740 FICO score or better. In the second quarter of 2016, that high-quality business represents nearly 60% of our risk.

Also in 2007, nearly a quarter of our primary risk in force consisted of higher LTV loans greater than 95%. In the second quarter of 2016 that business represented only 7% of our risk. And back in 2003, nearly 1/3rd of our book consisted of exotic products such as sub-prime, Alt-A, low-doc loans, combined in some cases with teaser ARMs.

In the second quarter of 2016, 95% of our risk in force was prime credit quality. So you can see that the credit quality of today's portfolio is vastly superior to the business written prior to the housing and economic downturn. This is an important aspect of our business and as I have emphasized before, the large volume of high-quality business written after 2008 is the key driver of future earnings for Radian.

Turning to the mortgage origination market, the industry's sources are now projecting a slightly larger market than last year coming in at $1.8 trillion which is expected to consist of fewer refinancings compared to last year and a long awaited increase in penetration from purchase originations.

As I mentioned earlier, we now expect the total MI market to be larger this year than last year given the expected growth in the origination market combined with the fact that private mortgage insurance is 3 to 4x more likely to be used for purchased loans than for refinancings.

Turning to the credit trends, Radian's total number of primary delinquent loans declined again with the year-over-year decrease of 21% as you can see on Slide 18 and our primary default rate fell to 3.4%.

A topic of recent interest has been the potential for an FHA pricing change. While public comments made by the FHA haven't suggested any price actions, it is possible that one could take place. What we do know is that the role of the FHA, which is to provide affordable home financing options for under served Americans, is not reflected in the most recent statistics on FHA volume.

According to that last report to Congress in June, nearly 20% of the business the FHA wrote this year consisted of loans for borrowers with FICO scores between 720 and 850. This clearly runs completely counter to the administration stated goals to reduce the tax payer role and exposure to the housing market to providing home ownership access to the underserved.

If as an industry, the private MI market was able to recapture only half of that business where we now have a pricing advantage; it would increase the overall MI market by more than 10%. There is also a growing preference among many lenders for conventional versus FHA lending and borrowers are often attracted to the cancellation options offered by our product. This combined with the growing number of higher LTV programs focused on private MI that have been introduced by lenders recently could help increase our industry's penetration of the insured market.

Our mortgage and real estate services segment reported second quarter 2016 total revenues of $39 million, which is an increase over last quarter. Overall, the segment saw improvements in most of its business lines, but experienced headwinds from a soft market for single-family rental securitizations, which we believe is improving. What's most important to remember is that the services segment has a diversified source of fee-based revenue for Radian. And the Clayton family of company's broadens our participation in the residential mortgage market value chain with services that complement our MI business and increase the relevance and depth of our customer relationships.

During the second quarter, Clayton was named the first and only rated deal agent by both Morningstar and Fitch. This recognizes Clayton's expertise within the RMBS market and provides some signs of progress in the return of the private label securitization market, where Clayton has historically been an active participant.

In addition, we continue to see progress in our cross-sell initiatives for Radian and Clayton where we are now having success in adding new MI customers based on Clayton services and have broadened and deepened our existing MI customer relationships as well.

And finally, turning to the regulatory and legislative environment, while there are no recent updates on the progress of housing reform legislation, there is an increasing focus on the future of the GSEs and we are actively engaged in those discussions. Part of this discussion involved how to reduce tax payer exposure by allowing private capital to take on more risk, which is referred to as credit risk transfer.

Last month, the FHFA issued a request for information on various credit risk transfer structures. Our industry has received significant support in particular for our ability to provide deeper cover, which would increase coverage to 50% of loans value versus the standard coverage today of approximately 1/3rd. We look forward to hearing more about the input that FHFA receives and to their analysis of next steps.

Separately 25 financial services and residential real estate trade associations and consumer groups sent a letter to the FHFA in May seeking to lower or eliminate the LLPA charged by the GSEs. The objective is to expand the opportunity for affordable home ownership, which would also decrease the total cost to the borrower for a loan with private mortgage insurance.

And now, I would like to turn the call over to Frank for details of our financial position after which I will come back with some comments before we turn to questions.

Frank Hall

Thank S.A., and good morning.

Before I get into the details of the results, let me first draw your attention to our new press release Exhibit D, which is designed to provide further visibility into certain items impacting our premiums earned and other operating expenses. I will discuss these items in more detail shortly and we will continue to break out notable items impacting our results each quarter. We hope you find the information useful.

Turning now to the drivers of our revenue. New insurance written was $12.9 billion during the quarter compared to $8.1 billion last quarter and $11.8 billion in the second quarter of 2015.

As S.A. mentioned the new business we're writing today consists of loans with excellent credit characteristics. For example, more than 60% of NIW in the second quarter consisted of loans with FICO scores greater than or equal to 740 and only 7% of FICO scores low 680.

A direct single premium business represented 26% of our total NIW in the second quarter as compared to 29% in the first quarter. Our retained single premium exposure this quarter was 17% net of the insurance ceded with our singles only quota share reinsurance transaction. Primary insurance in force increased to $177.7 billion during the quarter. Refinancing decreased slightly to 18% of volume this quarter compared to 19% last quarter and was down from 23% a year ago. Our 12-month persistency increased from 79.4% in the first quarter of 2016 to 79.9% in the second quarter of 2016 as noted on Exhibit N.

With respect to help persistency has currently trending, our annualized three-month persistency decreased from 82.3% in the first quarter of 2016 to 78% in the second quarter of 2016 primarily due to an increase in prepayments. Our long-term normalized persistency expectation of low 80s remain unchanged, but given the recent refinance activities we may not see that level of return for several periods. That said, we continue to expect our insurance in force to grow modestly in 2016 due in large part to the strong NIW this year.

Net premiums earned for the quarter increased from $221 million in the first quarter of 2016 to $229.1 million in the second quarter of 2016, primarily as a result of an increase of $5 million due to the accelerated recognition of unearned premiums on single premium policy cancellations and a related increase of approximately $1.8 million profit commission impact under the single premium QSR noted on Exhibit D.

It is also noteworthy to mention that net premiums written for the second quarter were $232 million compared to $26 million in the first quarter of 2016. The first quarter was significantly impacted by a reduction in premiums written related to ceded premiums written on the single premium QSR in the amount of $198 million.

Our investment income increased 6% in the quarter due to greater deployment of liquidity. Our portfolio yield increased slightly to 2.68% for the second quarter end from the first quarter end. Our portfolio duration remained relatively unchanged at approximately five years. These results are consistent with our long-term plans for investment management and take as a consideration regulatory guidelines and the current risk appetite of the organization.

Total services revenue for our mortgage and real estate services segment was approximately $39 million for the quarter as compared to $32 million in the first quarter and $45 million in the second quarter of last year.

As we've mentioned previously and as you can see on Slide 21, we expect fluctuations in revenues in this business as the transactional and seasonal nature of these businesses contributes to greater volatility. This quarter, we experienced significant increases across several business lines. However, business volumes continue to be impacted more notably by the sluggish single-family rental securitization activity, which is served by Green River Capital and Red Bell as well as a continued slow non-agency securitization volume.

Moving now to our loss provision and credit quality; the loss ratio was 21.9% this quarter as compared to 19.6% in the first quarter 2016 and 13.3% in the second quarter of last year. The primary difference in the year-over-year change was due to positive development in prior year defaults as noted on Slide 16. We observed improvement in the level of new defaults, which decreased approximately 5% over new defaults in the second quarter of last year and was flat to the first quarter of 2016. Given trends observed during the quarter our estimated default to claim rate on new defaults was approximately 12.5% consistent with the prior quarter.

As a reminder, we have seen lower historical claim rates on new defaults at around 10%. However, based on the continued experience of our positive trends we still do not expect more than a total 100 basis point decrease in 2016 inclusive of the 50 basis point reduction we realized in the first quarter.

On Slide 16, you will find the presentation we introduced last quarter for the defaults impacting our loss provision. This separates the impact of losses on defaults notices received in the current year from the impact of reserve development on default notices received in prior years. This presentation aligns with the components of our defaults roll forward disclosed on Slide 18. As a result, we hope that this presentation helps you further understand the components and drivers of our provision for losses each quarter.

Generally, the impact of the provision from current quarter defaults is driven by the 9544 new defaults as disclosed in a roll forward multiplied both by our estimated default to claim roll rates for new defaults and by our expected average claim paid. We observed positive development of approximately $6.1 million on current year defaults from prior quarters as a result of a reduction in observed claim rates on those defaults you will see this noted on Slide 16.

Cumulative incurred loss ratios apply to the original notional value of business written after 2008 remain extremely low and are presented on webcast Slide 15. It is also noteworthy to remind you that the majority of our default notices are from our legacy book of business, which now represents only 14% of our portfolio. We see this as further evidence that the credit quality of the [recent advantages] [ph] are very high and are expected to perform very well.

The primary mortgage insurance delinquency rate improved to 3.4% in the second quarter compared to 3.5% in the first quarter of 2016 and 4.3% in the second quarter of 2015. Claims paid for 2016 are still expected to decline significantly from recent years to approximately $400 million.

And now, moving on to expenses, our reported other operating expenses for the quarter were $65.7 million as compared to $59 million in the first quarter of 2016 and $67.7 million in the second quarter of 2015. Exhibit D contains further details regarding key drivers of fluctuations in the period shown. A particular note in the quarter was the impact to compensation expense of $7.3 million related primarily to the accelerated expense associated with annual grants of new equity settled long-term incentive awards.

Employees that are retirement eligible are considered vested immediately and consequently the expense is accelerated. For comparison last year's annual grants and the $4 million accelerated expense associated with them were made in the third quarter. Of the total $7.3 million recognized this quarter approximately $1 million related to the mortgage insurance segment. The expense increase in the second quarter of 2015 of $5.3 million represents the impact of stock price appreciation on the estimated fair value of cash settled equity base long-term incentive awards that were valued in large part relative to the price of Radian versus common stock.

As a reminder based on changes in our long-term incentive program, this type of adjustment will be insignificant in future quarters. Ceding commissions on reinsurance transactions in the second quarter of 2016 were $6.3 million compared to $5.8 million in the first quarter of 2016 and $3.3 million in the second quarter of 2015. We maintain our expectation that the fourth quarter 2016 operating expenses will fully reflect the successful application of our targeted efficiency initiatives that we have discussed previously. We will provide you with updates on our progress as we have made this one of our top priorities for the year. We expect our future revenues to grow at a higher rate than our expenses after these steps were taken thus providing the positive operating leverage we have targeted. Throughout 2016, however, there maybe some seasonal increase in expenses by quarter as is the case this quarter but the goals of the expense reduction initiative remain achievable.

Now moving to taxes, our actual effective tax rate for the second quarter was 37.3%. We currently estimate our annualized effective tax rate for 2016 before discrete items to be approximately 38.4% above the statutory rate of 35% primarily because the material portion of the losses related to our convertible debt repurchases are non-deductable for tax purposes.

And now moving on to capital, our capital activities completed this quarter and recently announced are indications of the improved outlook both for our company and our industry. We have demonstrated both disciple and prudence and will continue to be opportunistic and deliberate in our management of capital. We have also largely completed the capital plan that we outlined late last year whereby we saw to improve our capital structure by removing the convertible notes and distributing our debt maturities more evenly. We continue to move forward on our path to returning to investment grade at the holding company. On June 30th, our operating company Radian Guaranty redeemed its surplus note with Radian Group in full transferring $325 million in cash and securities that is now available liquidity at the holding company bringing the total available liquidity at the parent company to $780 million.

Radian Guaranty maintains a PIMERs available asset cushion of approximately $184 million consistent with our expectations and guidance of approximately 5% to 8% of required assets at the operating company. Keep in mind that in addition to the cushion of the operating company, there is also accessible capital at the parent company that represents another 10% of required asset even after our expected future capital actions.

Following the redemption of the surplus note, Radian Group recently announced its plan to execute a new $125 million common equity share repurchase program, which we plan to initiate as soon as practicable. We have also notified holders of our 2017 senior unsecured notes that we will redeem those securities early in accordance with the no terms. The combination of these plans will result in approximately $340 million use of holding company liquidity. After this use, we expect available holding company liquidity to be approximately $380 million a level that we believe is appropriate and consistent with the goals of our capital plan. Additionally, these capital actions are expected to reduce our debt to capital ratio to below 30% a key target threshold of our capital plans.

Our plans for future capital actions will be in the context of positioning the company for future growth while being mindful of rating agency upgrades and shareholder preferences. We expect further significant improvement in our capital and liquidity position overtime given the help of our mortgage insurance business and we will keep investors well informed of our plans.

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

S.A. Ibrahim

Thank you, Frank.

Before we open the call to your questions, let me take a moment to address the recent announcement of my planned retirement next year. I joined Radian in May 2005 and have now spent more than 11 years at Radian that have been the most demanding as well as rewarding of my professional career. I chose this time to announce my intention to retire because I feel the company is better positioned today to drive long-term value than ever before.

All those who know me will attest that I have been the company's most enthusiastic and unflappable cheerleader even during some of the most challenging of times. During those difficult times, I've been fortunate to be surrounded and supported by an outstanding team throughout Radian to have received encouragement from an energetic and engaged Board and to have enjoyed the loyalty of customers who kept their faith and made it possible for Radian not only to survive, but to thrive.

I look forward to my remaining tenure with the same enthusiasm I had when I joined in 2005, and I remained fully focused on our future. I'm committed to ensuring that we continue to build on our positive momentum and to work with the Board and my successor in ensuring a smooth transition. The thoughtful process that our Board is applying to appointing our company's next CEO will help us find the strongest leader for what I believe are Radian's best years that lie ahead.

And now operator, we would like to open the call to questions.

Question-and-Answer Session

Operator

Sure. [Operator Instructions] And our first question comes from Patrick Kealey with FBR. Please go ahead.

Patrick Kealey

Good morning, everyone. Thanks for taking my question. So I guess starting off with kind of your remarks on the letter to the FHFA regarding LLPAs, maybe if you could give us your thoughts on what the next steps there would be and to the extent you have a view what a reasonable timeframe for any adjustment could be in that process?

Teresa Bryce Bazemore

This is Teresa. And at this point there continues to be dialogue with the FHFA and the GSEs about their pricing. I don't know sort of what the timing will be for any change or whether they will make a change, but there is certainly a lot more focus on this in that, really within the industry views of pricing as higher than it needs to be for the risk that they are taking on. Particularly when you consider that the LLPAs were really put in place during the crisis with respect to what was going on at that time. So some work has been done, analysis has been done, but the timing of any change or whether it will happen I just can't predict.

Patrick Kealey

Okay, great. And then, I guess may be turning to competition within the industry kind of post the pricing adjustments we saw earlier this year maybe can you comment on how you see things playing out right now. And then, as we look further out there has been talk of consolidation within the industry. Can you maybe touch on how you feel with seven players in the industry, is that the right number? And how you think that plays out here as we go forward?

Teresa Bryce Bazemore

So I'll take the first part in terms of sort of how we're seeing the competition. And one of the things we talked about was that as we're starting to see sort of pricing competition moderate. There is still pricing competition, but as we saw it moderate. We thought that gave us a lot of benefits, because we could see sort of our work around ease of business, our focus on customer service, our focus on training and relationships with our customer would help us do well. And I think you saw that in the NIW that we wrote in the second quarter. So we're very pleased with that. So, we're going to continue to compete everyday for every piece of NIW and I'll leave it to S.A to talk little bit about the sort of consolidation in the industry if that might happen.

S.A. Ibrahim

Thanks Teresa. And I'd like to reiterate first Teresa's point that while there are seven players in the industry right now and by the way that was similar to when I joined Radian. As we have demonstrated in the second quarter -- and the kind of stable environment we saw in the second quarter, have the ability to compete successfully and differentiate ourselves. That said, of course, we would welcome consolidation in the industry because fewer players would mean that is greater opportunity for us to write business. And we're encouraged there are some early signs with one of the players having announced their intention to either IPO or perhaps maybe that will lead to a sale of the business. And my view of consolidation is the way consolidation economics work in this industry. Obviously, fewer competitors mean more share for competitor, but also there are some dynamics in terms of market share implications, franchise implications and most importantly the scale benefits that accrue from combining back offices.

Patrick Kealey

Okay, great. Thanks for the time.

Operator

Our next question comes from Bose George with KBW. Please go ahead.

Bose George

Hey, good morning. First question, what was your average premium on the new insurance written now just with the new pricing rolled in just wanted to see where premiums are trending?

Frank Hall

Yes. This is Frank. We were in about 50 basis point range.

Bose George

Okay, great. Thanks. And then, actually switching to insurance in force growth, I mean in the comments you guys noted that you expect modest growth in insurance in force. I guess the first half of the year; it looks like it was about a little over 1%. And do you think annualizing that kind of -- is the run rate that you're thinking in terms of insurance in force growth?

Frank Hall

Yes. Bose what we said is, we do expect to see growth. I don't know that I would necessarily annualize the first half, but we do expect to see growth.

Bose George

Okay, great. Actually there is one more, just what's the share account, rescheduled going forward?

Frank Hall

Let me get that number for you, I want to say its 214 million shares.

Bose George

Okay, perfect. Thank you.

Frank Hall

And let me just clarify that that was for the second quarter.

Operator

Our next question comes from Eric Beardsley with Goldman Sachs. Please go ahead.

Eric Beardsley

Thank you. Just as we think about the provision moving forward, I guess where should we see the most improvement, is it declining new notices, improved claim rates or just more positive development on the back book?

Derek Brummer

Yes. This is Derek. I think where you'll see is a continued improvement in new notices. So we've been running this quarter was down 5% year-over-year, first quarter was down 7%. So you will see it there. And if we revert back as Frank mentioned in his comment kind of the run rate on new defaults -- fall to claim perspective, it's about 10% normalized. So we see return to that then also I think see some positive development there.

Eric Beardsley

Got it. And the extra 50 basis points decline in that claim rate, I guess do you expect to having at some point in the balance of the year, is that more of a 3Q event or a 4Q event?

Frank Hall

This is Frank. Not sure the timing of it and really that estimate is based on the continuation of the trends that we've seen thus far continuing at the levels that we've seen thus far. So that being said, we would expect to see that 50 basis point improvement in the back half, but we couldn't speak to timing.

Eric Beardsley

Got it. And then, just lastly, I guess with the reinsurance environment being relatively strong and you having done some more in the single premium. I guess what's your appetite to, do reinsurance more on the back book. I mean is there a pricing there yet, have you thought about doing that, if there is any [type of] [ph] arbitrage given where the stock prices and potential to free up some cash?

Derek Brummer

Eric, this is Derek. So when we look at reinsurance the book we're writing now was obviously very strong return. So when we look at reinsurance it's really looking opportunities to manage our overall risk mix in terms of our portfolio. So the way we look at it is kind of in terms of our overall capital planning. And we’ll continue to be opportunistic I think in terms of executing in the reinsurance market.

Eric Beardsley

Okay. So nothing specific on whether you would consider doing some on the back book right now?

Derek Brummer

No, nothing at this point.

Eric Beardsley

Okay. Thank you.

Operator

Our next question comes from MacKenzie Aron with Zelman & Associates. Please go ahead.

MacKenzie Aron

Thanks good morning. In terms of this quarter's volume, can you may be quantify how much the incremental business came from some of the newer credit union channels that you've called out as being an area of growth?

Teresa Bryce Bazemore

Hi, MacKenzie. We don't actually sort of separate it out by, so -- what we're getting from each channel. But, we did see growth in the credit union space. But, we also saw growth. And with some of our other customers where we gained share or had share additional customers even outside of the credit union space.

MacKenzie Aron

Okay, great. And then, also just, would be interested in your thoughts around some of these new 97 LTV programs that we've seen announced by some of the largest lenders. Just in terms of how meaningful you think those could be for NIW going forward. And also if you think there is interest or ability for some of your smaller customers to also offer similar products?

Teresa Bryce Bazemore

So, the product have been differing as you look at each one. I mean some of them are being done under the Freddie Home Possible program. Some of them are being done with state FHA, since they do vary kind of a master program. We have seen an increase in the number of 97 that we're doing. And so we think it's positive in terms of expanding access to credit. And we've been able to do quite a bit of training for our customers on both the Fanny & Freddie program. So I think there is an opportunity for certainly some of the smaller customers to participate in those programs as they expand and you saw that, Fanny Mae just recently made some changes to make their program a little bit more accessible. So hopefully that's going to lead to more first time home buyers having an opportunity to participate in the market.

MacKenzie Aron

Okay. Thank you.

Operator

Our next question comes from Douglas Harter with Credit Suisse. Please go ahead.

Douglas Harter

Thanks. When you think about your -- the excess PMIERs capital, I guess how do you think that that should change on an organic basis within the MI-sub?

Frank Hall

Sure. This is Frank. It's a difficult number to estimate. But we do expect to see growth there and it could range anywhere between $25 million and $50 million a quarter. But there are quite a few variables that go into calculating that number. But that general range is probably safe.

Douglas Harter

And I guess if, if it happens in that range would you be able to accelerate or could do anything else in terms of capital return or getting capital out of the MI subsidiary, now that you have gotten the surplus note?

Frank Hall

Yes. That's something that we evaluate when we are doing our overall capital planning. And as you've heard it say our targeted range for a PIMERs cushion is between 5% and 8%. And I think if you extent the math out there few quarters into the out years, you see that we get well beyond the 8% cushion at some point. So that's something that that we are aware of and I would tell you that we are cognizant of it and are looking at, at different ways to manage that within the context of our overall capital structure.

Douglas Harter

Okay. Thank you.

Operator

Our next question comes from Mark DeVries from Barclays. Please go ahead.

Mark DeVries

Yes. Thanks. So it seems like your 10% year-over-year growth in NIW is actually stronger than what we are seeing more broadly in the purchase market, looks relatively flat. To what do you attribute that? Do you think you are gaining share within the MI industry, gaining share from the FHA with higher percentage of 97s or you think you actually seeing just a higher percentage of purchases coming from LTV borrowers?

Teresa Bryce Bazemore

Until everybody reports, it's really difficult for us to get our arms around sort of what all of those dynamics are. Certainly, we have been very focused on our customers growing share with them, some of them have been growing as well. And we did believe and I think we have seen that that pricing started to moderate in terms of some of the competition.

We have again have the opportunity to leverage many of our strength in the marketplace, I think we are seeing that as well. So, it's hard to say which one of those dynamics or what combination of them maybe driving kind of our NIW growth, but we are certainly happy to see it.

Mark DeVries

Okay. Thanks. And on a separate note, we got another announcement this morning from a mortgage [rebids] [ph] shows and to kind of get out of its, its mortgage securitization business because of the challenges there from an economist perspective. So if anything, it seems like the non-agency market is really kind of losing momentum instead of building it. Have you at all thought about revisiting whether it makes sense to unwind investment in mortgage services there?

S.A. Ibrahim

In terms of our investment in mortgage services, if we step back and think about why we made it, the number one reason was to add relevance and depth to our customer relationships, which we believe has gone -- as well a better than we had imagined. And the business very important because complement that continue to perform even in the environment where the private label securitization has not come back to-date. So we are very happy with that investment, it's an important differentiating factor for us particularly in a stable market environment and may have contributed to our success with our customers in that environment.

Our sales force is very excited about it and being a unique company which puts -- we view ourselves as a company run by mortgage lenders who have the ability of putting ourselves in the shoes of our customers. And I continue to get positive feedback from them on our expanded capabilities. That said let me ask Jeff Tennyson, who is the President of our Clayton Group businesses to comment on the securitization -- single family securitization environment.

Jeff Tennyson

Yes. Thanks SA. We are encouraged by the activity we are seeing in all of our business lines while our private label securitization market would enhance those activities, we are continuing to see it grow in various ways. Regarding the private label securitization as SA noted Clayton was selected by Fitch and Morningstar to be the one and only deal agent in that activity. And so we are seeing some progress in its reemergence and we will continue to amount for that and be very active in its development.

S.A. Ibrahim

Remember, interest rates remain down and they go up, so we have to build a business franchise at Radian which can compete and succeed in all interest rate environment. And I believe the combination of businesses we have now positioned Radian to be stronger in any interest rate environment.

Mark DeVries

Okay. Got it. Thank you.

Operator

Our next question comes from Jack Micenko with SIG. Please go ahead.

Jack Micenko

Hey, good morning. Frank, wanted to ask about, how you think about the cadence of the buyback, I know last time you did, you did all in sort of one quarter with the stock and the book value here to-date, are you thinking the similar kind of approach or are you going to spread that out?

Frank Hall

That is something that we will be evaluating and we will in all likelihood utilize it 10b5-1 plan that will set specific price parameters around where the shares are repurchased as far as estimating the timing of it that's probably not a safe thing for me to do. But, it would take a similar approach to what we did last time.

Jack Micenko

Okay. Okay. And then, on the expense discussion, is $58 million sort of right run rate to use and can you talk about what a reduction would be of that number or maybe conversely -- is there an expense ratio target maybe for 4Q or 1Q 2017 that you could sort of help us size the planned efficiencies?

Frank Hall

Sure. What we've said, I will touch on a couple of the metrics that you just said. What we said about the MI expense ratio, we said that we would like to have a long-term expense ratio target of 20%. Now, I would tell you right now relative to the competitors in the industry we are already very low. So this would be an improvement half of an already low start point.

As it relates to a run rate for quarterly expenses, I would estimate fourth quarter of this year to be about $64 million on a GAAP basis and that would be inclusive of the expenses that we cited previously has been implicative related to our technology spend. So, if you and that amount would be approximately $2.5 million to $3 million on a quarterly basis.

Jack Micenko

Okay. And then, related to that, it looks like the margins in mortgage services has come in over the past year. Well, some of those efficiency measures be focused in the mortgage services side as well?

Frank Hall

Absolutely. I mean, we are focused all across the company.

Jack Micenko

Okay, great. Thank you.

Operator

Our next question comes from Vivek Agarwal with Wells Fargo. Please go ahead.

Vivek Agarwal

And thanks. Good morning. I think in your prepared remarks you said that you are expecting the securitization activity for the single-family rentals to pick up. With the single-family rental companies acquiring homes at a slower pace, how do you kind of view that longer term?

S.A. Ibrahim

Jeff, you want to take that?

Jeff Tennyson

Sure. This is Jeff Tennyson. I think as -- in many ways the market has been somewhat soft from just kind of the pent-up from the lack activity within the securitization market and people maintaining their acquisitions on their warehouse lines. That activity is appearing to kind of free-up some of that activity and we are seeing more securitization request and demand from our clients that we are actively given the dominating market share position that we have at Clayton regarding that space, we are seeing increased activity in that arena.

Vivek Agarwal

Okay. And then, Frank, I think you mentioned that you're expecting persistency rates to be a little bit lower than the 80% that you mentioned being sort of a baseline. Given that we had lows in mortgage rates couple of weeks ago, are you expecting the similar type of magnitude on an annualized basis lower for the next -- potentially for the next couple of quarters?

Frank Hall

Yes. It's hard to predict. But, I would say just given the recent prepayment activities and that does affect the entire portfolio. I think lower persistency rates for -- for the next quarter or two or probably within the realm of possibility.

Vivek Agarwal

I know it's hard to predict, but do you have a sense that you can help us with that?

Frank Hall

No. I really don't.

Vivek Agarwal

Okay. Thanks for the comments.

Operator

Our next question comes from Ron Bobman with Capital Returns. Please go ahead.

Ron Bobman

Hi. Thanks a lot. I had a question about through the reinsurance environment obviously it's heated and growing level of interest and participating on the various session opportunities from the PIMERs. And it has gone to the point where some of these reinsurers are actually on a fee for service basis underwriting business for other reinsurers and maybe even other capital providers. And I was wondering why Radian is not doing something to that effect or pursing something to that effect already because I think these reinsurers have been doing it for some time.

Frank Hall

Yes. This is Frank. I would say that we are always evaluating opportunities to increase revenues and to leverage the expertise that we have. We generally don't comment on any specific activities. But, we are seeing the same things, and again, it's within the realm of things that we evaluate from time to time.

S.A. Ibrahim

And as you can see from our history, we have strong relationship with all reinsurers. We have demonstrated our ability to often create unique deals in terms of the reinsurance space. And we remain focused on evaluating not just reinsurance, but all opportunities to see if they [are quite accretive] [ph] or normal to enhance our earnings and our shareholder value.

Ron Bobman

What are the negatives, what are the -- what's the -- what are the negative elements to pursuing it, do you feel it's going to damage your reinsurance relationships or there other frictional items they don't appreciate, do you think it's a temporary phenomena?

Frank Hall

I don't think it's appropriate for us to talk about any specific opinions or thoughts on any specific idea but understanding is --

Rob Bobman

Why is that? I'm sorry. Why is that?

Frank Hall

From a competitive standpoint generally speaking we don't talk about the specifics of any of the things that we feel could create a competitive advantage for us. So, for that reason alone we generally don't comment.

Rob Bobman

Thanks for not helping me.

Operator

Our next question comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Geoffrey Dunn

Thanks. Good morning. Couple of questions. First, Frank, can you get into a little more detail on the development in the incurred loss ratio this quarter. I think you mentioned better cure experience on the 1Q delinquencies, what gave you confidence there? And then, what drove the modest prior year adverse development; was that settlement related or anything like that?

Derek Brummer

Yes. This is Derek. In terms of prior year development, I would consider that noise nothing material. So in terms of the overall trends in the portfolio continue to be positive. So if you look at for instance the increase in the care rate on year-over-year basis that continues to improve. So I would just view that simply as noise in terms of prior year development. You are going to see that move up and down kind of quarter-to-quarter.

Geoffrey Dunn

And how about just the first quarter, I think you commented on better cure?

Derek Brummer

On a year-over-year basis cure rates are up. We saw I would say particular improvement in the 12 month bucket in terms of improved cure rates at the probably highest level we have seen in the number of years.

Geoffrey Dunn

Again, maybe I'm misunderstanding it. For the current year default, prior quarter, the minus $6 million in the incurred loss, I thought that was adjusting the provision you made for the first quarter new notices?

Derek Brummer

Yes, Geoff. So in terms of that and that's really what we are looking at -- there is continued improvement on kind of recent defaults and you are seeing that in really that $6 million number. So that continues, I think the trend we have generally been seeing.

Geoffrey Dunn

Okay. So, if you are seeing continuing trend there, is that type of development something that leads to ultimate revision of the incidence assumption the remaining 50?

Derek Brummer

Yes. Eventually that will beat into our assumption and then making any changes with respect to that. That's what we would factor in, yes.

Geoffrey Dunn

Okay. And then, I want to ask about singles pricing. Obviously, capital charges are up year-over-year, can you quantify how your average singles premium rate this quarter compared to the year ago, we would hope that pricing would be up given the capital charges are up, but we didn't see that from one competitor? How did your numbers trend?

Frank Hall

Generally, Geoff that's flat.

Geoffrey Dunn

So, I ask the same thing in Magic, why should we be okay with that, your capital charges are higher assuming there is not much of a credit mix change. The industries capital charges are up, but your pricing is unchanged despite your rate card filings. Why is that okay?

Frank Hall

Yes. So a couple of things factor into that Geoff. And I think we've shared this before -- we look at returns on a blended basis and on a customer-by-customer basis. So, generally, we can't isolate a particular product set and say we don't want this, we want something else. So given that we have a mix of business to manage to, one of the things that we did last quarter was the reinsurance, the singles only reinsurance transaction. So, we think we are being very disciplined and prudent in managing the returns on the overall business, the product mix that were effectively exposed to et cetera.

So when we look at our blended returns that's why we are confident saying that we are still generating mid-teen returns for the business that we are writing. So that is the entirety of the analysis we do.

Geoffrey Dunn

All right. It sounds like maybe this is a relationship driven thing then? I mean, why write it, if it's becoming sub-par?

Frank Hall

We absolutely take into consideration relationship.

Derek Brummer

But, Geoff, this is Derek. I guess, I wouldn't draw that conclusion with respect to that. You have to look at a couple of things; I mean one is just the increase in terms of capital requirements and that shift in mix. So, you definitely see that this quarter in terms of average FICO, it's up. So the business is of higher quality.

And generally, I think the way the cards have been reconstructed as you see, I would say more consistent returns across that cards. So, I don't think you can draw the conclusion that somehow the returns are sub-par, sub-optimal because of the change. I think there is a lot of moving pieces are going into it.

S.A. Ibrahim

And Geoff, as you know, we have demonstrated very strong discipline in writing business to achieve the desired return on our blended book of business. And in fact, we have been willing to give up business, which did not meet that as demonstrated by our past. I tell investors that the measure of a successful risk company is knowing when to press the gas pedal and when to hit the brakes. And we have demonstrated both, but we managed the business to deliver a targeted return to our shareholders and I'm pretty pleased with what we are achieving in that regard.

Geoffrey Dunn

Okay. Thanks.

Operator

And our final question comes from Chris Gamaitoni with Autonomous Research. Please go ahead.

Chris Gamaitoni

Good morning. Thanks for taking my call. Most of my questions have been answered. One thing is -- when do we think the old books will finally burn out, we are now 10 to 11 years away from -- as an outsider it's hard to get a sense of kind of when they hit the 78% LTV? So do you have an idea of when -- there might be an acceleration and terminations on these legacy books, just give a HPA in time?

Teresa Bryce Bazemore

I mean it's embedded. I mean we have projected with respect to that. But, I mean the run rate you are kind of seeing with respect to that burn off and the shift is renewable book of business. It's a pretty good run rate. I think in terms of that shift. So I would look at that. I don't think there is a significant cliff in terms of that.

Chris Gamaitoni

Interesting metrics. Okay. That's all I had left. Thank you.

Operator

I'd now like to turn the conference back to S.A. Ibrahim for any closing remarks. Please go ahead.

S.A. Ibrahim

Thank you, operator. And thank you all for participating on our call. And once again, I would like to reiterate that our quarter was characterized with strong NIW, stronger earnings in our services business and I believe that we are well-positioned for the future. So with that, I would like to thank you all for participating on today's call.

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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