Radian Group Inc. (RDN) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Radian’s Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to now turn our conference over to our host, Emily Riley, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you and welcome to Radian’s third quarter 2015 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 website 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 the reconciliation to GAAP maybe found in press release exhibits E, F and G and on the Investors section of our website. 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; Joe D’Urso, President of Clayton; 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 2014 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now, I would like to turn the call over to S.A.

Thank you, Emily. Thank you all for joining us and for your interest in Radian. I am pleased to report the results of our third quarter and highlight several topics and trends important to our businesses. Following my comments, Frank will cover the details of our financial position. Then I will summarize a few key points before opening the call to your questions. Turning to the quarter’s results, earlier today, we reported net income for the third quarter of 2015 of $70 million, or $0.29 per diluted share. This compares to net income for the third quarter of 2014 of $154 million, or $0.67 per diluted share. You will find the key drivers of our GAAP EPS on Slide 8 of our webcast presentation. Adjusted pre-tax operating income was $116 million for the third quarter of 2015 compared to the third quarter of last year of $126 million. Adjusted diluted net operating income per share for the third quarter of 2015 was $0.31. As you may recall, there were several favorable significant items that impacted both premiums earned and incurred losses in the third quarter of last year. While this may make the comparisons of our year-over-year results more challenging, I am pleased to report that in the third quarter of this year, we successfully wrote more high-quality mortgage insurance business in the quarter and grew our mortgage insurance in force continued to experience extremely low loss levels in our post-2008 MI books, made progress in further reducing our legacy MI exposure, and expanded the scope of services we offer through our fee-based businesses. And now turning to the mortgage insurance segment, we continued to improve the composition of our mortgage insurance portfolio, which is the primary driver of future earnings for Radian. The high-quality and profitable new business we wrote after 2008 now represents 83% of our total primary insurance risk in force, or 74%, excluding HARP volume. You may find these details on webcast Slide 12. We wrote $11.2 billion of new MI business in the third quarter. Year-to-date, we wrote $32.3 billion, an 18% increase over the $27.3 billion written in the first three quarters of 2014. I am pleased to report that we are on track to surpass the $37 billion in NIW we wrote in 2014. While we expect the decline in refinancings in 2016 to impact overall mortgage originations volume, we expect increased penetration from purchase originations, where private mortgage insurance is three to four times more likely to be used than for refis. As a result, we are expecting lower refi and higher purchase volume next year thus projecting a total market for mortgage insurance that is comparable to this year. There are many encouraging statistics that point to growth in household formations over the next several years. Mortgage rates remained below 4% and we are seeing a shift in consumer attitude towards home ownership versus renting, particularly over the last 12 months. Single-family housing starts reached a 7-year high in 2015 and new home sales are also on the rise. Let me take a moment now to address MI price competition given the high level of interest we have seen within the investment community. At Radian, we are focused on writing as much high-quality new MI business as possible while maintaining a well-balanced portfolio and business mix that we expect to generate after-tax returns in the low to mid-teens. In order to maintain this return threshold, we have opted not to compete with certain pricing discounts. While this decision has modestly impacted our market share, we have often been able to offset the impact with the addition of new customers and by increasing the amount of business we had received from existing customers. Notwithstanding competition this year, we are projecting that 2015 will be our second best year for primary flow NIW writing in excess of $40 billion. We continue to strive for the best balance of new business volume and returns on our capital. At Radian, we have had outstanding success in creating new business relationships and growing existing ones. Driven by a customer-focused culture, our sales team brought in 35 new customers in the third quarter and more than 100 total in 2015. We sharpened our focus on credit unions earlier this year garnering a 19% increase in new business from this growing segment compared to the third quarter of last year. We also continue to focus on expanding home ownership among low to moderate income borrowers, particularly first time homebuyers. The volume of 97% LTV business we insured grew slightly in the third quarter, representing 3.5% of NIW. Nearly 75% of that business utilizes our mortgage assure program which attracts new homebuyers by providing job loss protection for lenders and borrowers. Turning to the credit environment, the positive credit trends from the first half of the year continued into the second half due to a strong economy as did the favorable impact of our portfolio from both the legacy as well as newer businesses. Slide 13 shows that for the nine months ended September 30, 2015, earned premiums less incurred losses from our 2009 and later MI vintages, were $472 million compared to $352 million for the first nine months ended September 30, 2014 and only $20 million lower than full year 2014. What’s most important to remember is that the earned premium for the large and profitable books of business returned after 2008 is expected to serve as the foundation for growth in profits over the next several years. And as we grow our mortgage insurance in force with new profitable business, we are further strengthening and extending that foundation of future earnings growth. Turning to our mortgage and real estate services segment, third quarter total revenues were $43 million compared to $45 million for the second quarter of 2015 and $42 million for the third quarter of 2014. Exhibit E of the press release provides the five quarter trend for this segment and also includes the adjusted pretax operating income before corporate allocations of $5.7 million. You will find further historical details on Slide 29. As you may have seen earlier this month, Clayton announced its acquisition of ValuAmerica, a Pittsburg based national title agency, appraisal management company and technology provider. The addition of ValuAmerica expands the scope of title and valuation services Clayton offers to our mortgage clients and it’s consistent with our strategy of being a complete solution provider to the mortgage and real estate industries. These services also bring new opportunity to differentiate Radian among its MI peers. Turning to the regulatory and legislative topics important to mortgage insurance business, PMIERs will become effective on December 31, 2015 and we believe that these new capital rules will have instilled even greater confidence in the long-term value and role of the MI industry. At Radian, we expect to comply using only a portion of our holding company cash. While housing policy discussions on Capitol Hill have not yet resulted in significant legislative change, we remain actively engaged with key policymakers and here support for the important role of private capital including private mortgage insurance in the future housing finance. Discussions continue regarding expanding our industry’s role in front end risk sharing including deeper MI coverage that would further protect the GFEs from risk and reduce borrower costs. Last week, an analysis prepared by Milliman on deeper MI coverage was issued by our industry trade association USMI. The study demonstrated how housing finance risks would be significantly reduced for the GFEs and for tax payers through the use of private MI while also reducing borrower costs. Now, I would like to turn the call over to Frank.

Thank you, S.A. and good morning. Before I get into the details of our results, I would like to address a few points of clarification to aid in the analysis of these results. As a reminder, our segment income statements in Exhibit E present additional detail by segregating the allocated corporate expenses and interest expense into separate line items. This presentation is intended to provide more transparency into the direct costs and contributions of the segments and we have also included a more conventional metric for our services business of earnings before interest, taxes, depreciation and amortization or EBITDA. You will also note some reduction in available holding company liquidity that will take place in the fourth quarter to support the redemption of convertible notes and the purchase of ValuAmerica. I will further discuss the capital and liquidity position and plans for Radian shortly. And finally, you may note that our effective tax rate for the quarter is 39%. Our tax rate this quarter continues to be elevated due to the residual effects of the tax treatment of our capital transactions in the second quarter of 2015 and its impact on our annualized effective tax rate. Those items will continue to impact our annualized effective tax rates utilized for our tax provision estimate for 2015. The tax rate is expected to be closer to our statutory effective rate of 35% beginning in 2016. Moving now to the drivers of our revenue, new insurance written was $11.2 billion during the quarter compared to $11.8 billion last quarter and $11.2 billion in the third quarter of 2014. Refinancing decreased again as expected to 13% of volume this quarter compared to 23% last quarter and 16% a year ago. We continue to expect our full year 2015 NIW and insurance in force to be higher than the full year 2014. Single premium business represented 27% of our total NIW in the third quarter, a decline from 32% in the second quarter. This continued decline is consistent with both the market conditions of diminishing refinancings and our deliberate actions related to pricing. Primary insurance in force increased to $174.9 billion during the quarter, our 12-month persistency declined from 80.1% in the second quarter of 2015 to 79.2% in the third quarter of 2015 as noted on Exhibit M. To give more context with respect to how persistency is currently trending, our annualized 3-month persistency increased from 76.2% in the second quarter of 2015 to 80.5% in the third quarter. Second quarter 2015 persistency was modestly impacted by our previously disclosed reconciliation with servicers resulting in higher cancellations. Earned premiums for the quarter were down approximately $10 million from the second quarter, primarily related to a reduction in the acceleration of unearned premium recognition on single premium policy cancellations related to refinance activity. This acceleration contributed $13 million to unearned premium this quarter as compared to $25 million in the second quarter. Acceleration of premiums enhances the returns on our book of single premium business and is an illustration of why we prefer a mix of singles and monthlies in our portfolio. The current quarter also benefited from a reduction to our accrual for recession related premium refunds of approximately $5 million. Investment income increased slightly in the quarter due to the further deployment of liquidity from the sale of our financial guarantee business earlier in the year. Our portfolio yield increased to 2.1% at quarter end and is expected to increase further as we deploy this liquidity into longer duration instruments. We expect our duration to extend from approximately 3.8 years to 4.8 years over the next several quarters. Total services revenue for our mortgage and real estate services segment was $43 million for the quarter as compared to $45 million in the second quarter. As we have mentioned previously and as you can see on Slide 29, we expect fluctuations in revenues in this business as the transactional nature of these businesses contributes to greater volatility in revenue. We have also enhanced our presentation on the services segment to include greater insights into the products and services and the range of historical percentage of revenue each of these components has contributed. On Slide 27 and 28 we have listed the five distinct business lines for our services segment. These slides illustrate the percentage of revenue for each business line since 2014, the market segments and clients we serve and today’s primary revenue drivers. In the last column you will see the potential future revenue drivers as the industry conditions may change and evolve. Moving now to our loss provision and credit quality, the loss ratio was 28.2% this quarter as compared to 13.3% in the second quarter and 22.5% in the third quarter of last year. We observe further improvements in new defaults on a net quarterly basis which decreased 15% over new defaults in the third quarter of last year. We continued to see positive credit trends such as a decrease in the number of new defaults and improved tier rates. However, we have determined to wait until actual results further substantiate these trends before we further reduce our estimated claim rate on new defaults from its current level of 14%. To the extent these trends continue as expected, we would also expect to further reduce our estimated claim rate on new defaults. As a reminder we have experienced historical claim rates on new defaults as low as 10%. Cumulative incurred loss ratios of business written after 2008 remain extremely low and are presented on webcast Slide 15. The primary mortgage insurance delinquency rate was 4.1% in the third quarter compared to 4.3% in the second quarter of 2015. Our expected paid claims for the full year 2015 are estimated to be approximately $700,000 inclusive of the BofA settlement. Claims for 2016 are expected to be approximately $400 million to $450 million. Moving now to expenses, other operating expenses for the quarter were $65.1 million as compared to $67.7 million last quarter and $51.2 million in the third quarter 2014. Fully allocated operating expenses this quarter were comprised of approximately $52 million for our mortgage insurance segment and $13 million for our services segment. This should approximate normalized operating expense run rates and we are continually evaluating opportunities for ongoing efficiency and improvements in our expenses. And finally, I will turn to a discussion on capital and liquidity. Currently, we have holding company available funds of approximately $710 million. The reduction from last quarter’s available funds of $735 million is related to fourth quarter 2015 cash outflows for the exercise of a holder’s conversion option on our 2019 convertible debt instruments as well as a negotiated exchange on our 2017 convertible debt and cash proceeds utilized for the Clayton acquisition of ValuAmerica. We continue to expect to be in compliance with PMIERs by utilizing approximately $320 million of holding company liquidity. This is needed for day one compliance. Also keep in mind, the capital will continue to build organically at a strong rate within Radian Guarantee. Assumed in this statement is full PMIERs benefit of our only outstanding quota share reinsurance arrangement. Prior to December 31, we expected to have completed our evaluation of ways to optimize our compliance by maximizing the inclusion of available assets, such as corporate owned life insurance and potential further optimization through additional reinsurance. We will also further evaluate the appropriate cushions to hold at Radian Group and Radian Guarantee to ensure both continual compliance with PMIERs and to support our organic growth expectations as we continue to write strong volumes of NIW. We will provide additional information on these cushions as we further refine our analysis. I will now turn the call back over to S.A.

Thank you, Frank. Before we open the call to your questions, let me emphasize. First, I am pleased with our continued ability to write more high-quality MI business, while also growing our mortgage insurance in force maintaining attractive returns and delivering our second best year in primary flow NIW volume. Second, we are creating a diversified source of revenue in growing fee-based income to our services segment, while also deepening our relationship with our MI customers. And finally, I am excited about the future prospects for Radian as we enhance and seek new opportunities for our existing products and services. Now, operator, we would like to open the call to your questions.

[Operator Instructions] And our first question comes from the line of Eric Beardsley with Goldman Sachs. Please go ahead.

Hi, thank you. Just had a couple of questions. First on the premiums, I think you mentioned $13 million acceleration of unearned premiums from singles, just how should we think about that moving forward? Is that something that goes to zero at some point? Presumably, you have a little bit of a benefit moving forward.

Yes, I would not expect it to go to zero. And I think it’s correlated obviously to refinance activity and other metrics such as that. $13 million for the quarter again compared to $25 million last quarter, obviously our singles production was down from 32% to 27% again correlated to refinance activity. So, it’s hard to gauge what that number looks like going forward. I think it – again I would correlate it to what your expectations are around refinance activity, but I would not project zero.

Got it. So, I guess all else equal, would you say that premium rate is stable here and I guess with that, how do you evaluate reinsurance opportunities, I guess, the trade-off between ROE and earnings?

Yes. So, as far as the premium rate being stable, I think there were not too many influences of that premium rate this quarter. So, I think it’s sort of the normalized level right now. The impact on it going forward of course will depend on future pricing decisions etcetera, but as it relates to how we are thinking about reinsurance, we have said historically at least over the last couple of quarters we do not need reinsurance as part of our capital plan to comply with PMIERs, but we will look at it more strategically in the risk management context. So, it’s something that we are continually evaluating and looking for ways to utilize it to optimize our balance sheet. Joe D’Urso: Yes, this is Joe. I think I want to add in terms of how we think about reinsurance and how we utilize it is looking at from a cost of capital perspective and then also looking at, I would say, overall leverage from the holding company and kind of thinking about our future ready, so that’s the other thing I think that would factor into that.

We believe particularly at this time there are many attractive reinsurance alternatives available and we will evaluate the trade-off specifically to your question, Eric, between the returns and earnings and look at those opportunities where they make sense, but it’s great to be in a position where we have so many reinsurance alternatives available that can further strengthen our profitability going forward if we utilize them.

Okay. And then just really quickly, I guess do you have any initial thoughts on what the cushion for PMIERs might be? So, if I think about this, you have $710 million of liquidity today expected downstream $320 million leaving you with $390 million and I guess you have talked about doing something with the 2019 converts early next year? I guess, is that something that you use cash for or do you need to have a bigger cushion for that at the hold co?

Frank will answer that, but keep in mind at some point we are going to accrete capital within the mortgage insurance subsidiary.

That’s right. So the way that I probably will guide you at this point on the cushion is really in the context of the analysis that we are undertaking presently, which is to understand what the likely stress scenarios are and also what the organic growth scenarios look like. So, because PMIERs is a retrospective analysis, we need to always be in compliance. So, we need to have a fairly well-established forward look on both of those items, stress and growth and of course we always need to be in compliance. And Derek, I don’t know if you have anything else to add on that?

Yes, I think philosophically, the only thing I would add is why we will try and get as close as possible to the cushion we need within the financial guarantee entity. Our bias is to keep more of that cushion at the hold co level if we can to give us more flexibility.

That’s right.

Great, thank you.

Next question comes from the line of Jeremy Campbell with Barclays. Please go ahead.

Hey, thanks guys. So, just wanted to clarify a point on that previous question, so the $320 million you guys talked about potentially down-streaming to the sub, that brings you basically just in line with recorded assets with PMIERs, does that contemplate any kind of cushion?

That’s correct.

Okay, great. And then I think as they touched on pricing competition earlier, I think it was more in the lender space, so we have seen some smaller competitors come out with new pricing methodologies for the monthly product over the past couple of months. Can you guys just share your thoughts on these recent competitive actions and the potential for future pricing pressure in the monthly product moving forward?

Sure. So, this is Teresa and I would be happy to take that question. So, first of all, I think the important thing is that in particular the recent approach by Arch is more of a sort of black box model and its risk-based pricing. So, we already have risk-based pricing in that. We established pricing levels and rate card granularity by evaluating applicable loan attributes in the resulting cash flow and loss sensitivities. And we’ve actually made those more granular over the last few years and we’ve also improved our risk analytic tools, which allow us to have even more the view of what we should be doing from a pricing point of view. So, what those – particular strategy does is to give even more granularity, but it also is more opaque to lenders and others in terms of what is happening in terms of that pricing model. So, we’re going to continue to assess what our strategic position are to be with respect to whether or not we do something more granular or similar approach to that. The other thing that we are evaluating is how this translates out for lenders, because there are some concerns about the ability to use those types of models in a trip friendly way. So, we’re having those conversations with lenders, but I think it’s important to note, most importantly that we already use – use pricing and we have the tools to develop it in a more granular way if we so choose to do so.

Got it. And then just broadly speaking you don’t foresee any kind of near-term pricing pressure overall?

Well, it’s very difficult right now, because we’re still seeing competition from a pricing point of view in the market. But, we also are hearing consistently from our customers that competitors are saying they are going to moderate their pricing as a result of the PMIERs. So, we’ve done some filings related to that and so we’re continuing to make final decisions about where we’re going to lay and, because we want to make sure that we are competitive while also continuing to balance the return that we’re getting on the business. So, it’s hard to say at this point, I think we’ll have more visibility into that over the next month or so.

Great, thanks guys.

And make sure that we are pleased with the fact that and a competitive environment like this again, we’ve been able to, we can still write record amount of NIW at attractive returns, balancing all factors.

Our next question comes from the line of MacKenzie Kelley with Zelman & Associates. Please go ahead.

Thanks. Just one more question on the competition side, are there other avenues that you are seeing that impacted the higher competition, whether it would be just increased demand for contract underwriting or maybe any leniency in credit standards or anything else that we should be aware that might not necessarily show up just in price?

Sure. So, hi MacKenzie. I think the first thing is we’re not really seeing any thing from a credit standard point of view, I think that’s been relatively stable. I think we’ve seen some demand for contract underwriting over the course of the year, but as you would imagine as refis have subsided we started to see some of that demand reduced as well. So, I don’t think there are sort of major drivers, I mean we continue to focus on bringing in new customers. We continue to focus on the credit union strategy that S.A. talked about. And we are continuing to focus on how do we add value, for instance as we talked about all of the services that Clayton is able to provide especially as those have grown over the last few quarter. We’re really starting to see interest by our customers and having the opportunity to come to Radian and get not only the mortgage insurance, but also other services. So, we think that is going to be important for us going forward.

We just came back as you know from the mortgage bankers’ association annual convention and we’re encouraged to see continued interest particularly on the part of some of the smaller customers, because the larger customers already use some Clayton services on using some of the Clayton products. And more importantly use them on a subscription basis as oppose to a transaction braces. So while this is in a very early stage, we are encouraged by that, because in large measure while we like Clayton for its fee revenue opportunities, it’s very important to note that one of our major strategic track is to differentiate ourselves from our competition by offering particularly our small customers who value that, a deeper relationship. And we are starting to see the beginnings of that.

Great. And then also just on your market share, when you are looking at the success that you’ve had in bringing on, I think it was 40 new lenders last quarter and I know few quantified at this quarter and then the success on the credit union side, but balancing that against any changes and allocation from your existing accounts. Do you think market share from here is still under pressure and is that already baked into your estimate, or how are you kind of thinking going forward that market share, we should be thinking about that?

So, I think we certainly are focused on kind of bringing in NIW that’s profitable and the good news is, again that we are projecting this is going to be our second best year in primary flow NIW writing in excess of $40 billion. So, I think that’s been essentially our primary focus. And is that, what we’re seeing is that these growth initiatives, do have an impact that the – the share erosion that we’ve seen this year has been a lot of the price competition particular has it sort of heated up during the year, prior to PMIERs going into affected. I think we’ve see some moderation and so to some of that competition that’s what we would expect based on what we’re hearing in the marketplace. So, we’re going to continue to focus on those growth initiatives, and making sure we’re providing value to our customers. We’ve also been very focused on providing competitively differentiated service levels and we think that’s also having traction in the marketplace. So, I think that’s how we’re looking at it and we’re really pleased with the amount of NIW that we are writing this year.

Alright, thank you.

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

Thank you. Good morning. S.A., we keep referring to price competition in the market, but is this more just the natural evolution of MI pricing in a more sophisticated underwriting world, where you get rid of the cross subsidization of the high FICO and actually price the business appropriately? And if that’s the case what else changes in the model if we have to adapt to that type of environment going forward?

So Geoff, if you look at high FICO as long as I know even from having been the user of MI to being an offer of MI, the industry is always priced better on high FICO products and higher credit quality products. So, I don’t think there is anything new to that, what is new is we have players who are coming into the market trying to garner the foothold and in many cases the only way they can do it is through aggressive pricing strategies. And we are dealing with that as an environment now. How long it clacks and how long it plays out remains to be seen based than largely determined by access to capital and other factors that will drive the ability for that to continue. But there is also the PMIERs related discipline we expect to come in. And the important thing is, we as a company that sign up our strength have been able to deal it in the manner, where we’ve been able to still write record NIW, still maintain attractive returns while dealing with that competitive environment, and we are building other tools such as the relationship drivers which will allow us to compete in that environment. Should pricing remain the way it is after PMIERs comes into a fact though from everything we hear and believe it could be tempered after PMIERs goes into effect?

Yes and this is Derek. I would add, I mean the trends we’re seeing in pricing is one towards increased granularity, probably think the returns have flattened out across the card, which also I think is probably a positive trend. I think the other thing you are seeing in some actions for instance taken by – and by us in terms of increased rates on the single premium is also probably comprising the differential returns between monthly and singles. And then the final factor I would point out, which S.A. alluded to as the PMIERs also put kind of 4, in terms of capital and provides that with a consistent capital framework to look at MI company versus MI company, which we also think provides probably a floor in terms of how fact pricing can go down.

Okay. So, if I interpret there, you are saying if you expect return to flatten out across the card, you are expecting cross subsidization to go away from the high FICOs?

I think that where we have seen some competitors move in terms of planning out those returns. Yes, I wouldn’t expect you’d – probably would see that trend over time.

Okay. And then if you needed to adopt a black box option, so I don’t think the rate curve is ever going to go away, because Radian is in position to adopt that within the 6 to 12 month period?

We have Teresa mentioned Geoff. We have the analytical tools. We have the frameworks to do that and we always look at that option. The only thing now is to figure out whether it really if something that will help us achieve our objectives and whether we can do it in light of the new TRID rules in a manner what that makes us comfortable with it being TRID friendly.

In short, yes.

Okay, great. Thank you.

Our next question comes from the line of Jack Micenko from SIG. Please go ahead.

Hi, good morning. I am wondering if there is any pricing differential between credit unions and regular customer, you had mentioned some nice growth in credit union. I am wondering if that’s just increased sales effort, if there is a broader pricing differential there?

So there has been a separate rate card for credit unions for quite some time, so there is no difference in that regard. I think when we talk about our credit union strategy. We actually brought on more sales people that are specifically focused on credit unions. And we also broadened the use of our mortgage assured product with credit unions. And so that’s how we focused on that. But the pricing differential has been there for some time.

Okay. And then I am maybe a little surprised to hear extending duration on the investment portfolio, I guess at this point in the cycle, I guess Frank 2.1 yield here you said you are going to extend about a year, I mean how should we think about that on the yield for that book going forward with the extension?

Yes. I wouldn’t want to guide you too much on precise number of basis points, but I think you can estimate what that might look like. Again, the complexion and the composition of the investment portfolio, I would not expect to change other than it would be more fully invested, it’s probably the best way to think about that.

Okay, great. And then just one last one, I mean I think in Slide 15 this quarter the ‘10 and ‘11 books have suitable paths set for your window and appear to be continuing to move past peak loss ratios, I mean is there anything that you guys think changes that directional trend over time?

Well, the only thing that would change it is some sort of macroeconomic dislocation. So I would say a recession would be the only thing that I would think would likely reverse that. So in the guidance we have given in the past on this I think holds true so really that 2010 to 2012 book, we see those loss ratios that are settling out in the single digits. And then the ’13 and ’14 again pretty early in the development. So – but we see those trending I would say below 15%. But again that will take time to develop.

Okay, thank you.

Our next question comes from the line of Doug Harter with Credit Suisse. Please go ahead.

Thanks. Just hoping you could clarify the comments that you made around claim rates and kind of what you are looking for before you would sort of lower the expected claim rate?

Yes. This is Derek. I mean in terms of the claim rate I think what we saw over the last quarter you get some seasonal impact when you move from second quarter to third quarter. So, you see for instance our cure rates on – are two to three mispayment bucket in ‘04 to ‘11 decreased slightly, that’s not atypical moving second quarter to third quarter. So really what we are looking for is further development in terms of that and seeing what for instance the impact is going to be in the fourth quarter. I would say overall and Frank alluded to this, if overall positive trends continue I would expect that we would see reduction in future quarters. And historically in a normalized environment and where you had I would say an expanding economy we have seen world rates on new defaults as well as 10%. So if you kind of think about it over time that might be more above a base line in a normalized environment.

And I guess if that comes through, would we expect to see that in more prior period development or would we see that in sort of the current period encrypts [ph]?

I think you would see it in prior period development. And again that’s what you saw in the past, so for instance in previous quarter. So in first and second quarter we actually decreased our world declaim rates on our new defaults and that flow through that line. So, you would have seen that in kind of in the comparison in previous quarters.

Great, thank you.

Your next question comes from the line of Bose George with KBW. Please go ahead.

Pricing by the competitors, does it look like the blended ROE can still end up in roughly the same?

Sorry, Bose we couldn’t hear you at the beginning.

So I just had a follow-up on the pricing, just from what you see in terms of pricing by the competitors, does it look like the blended ROE can end up in roughly the same point?

Are you asking if every – based on pricing, how does everybody?

Is the returns on some of the higher FICO loans are going down, is there a corresponding offset to the returns on the lower credit quality loans where pricing apparently has been increased by some of the competitors?

Yes, the question I think thing is if the cross subsidization is going down, what is the offset to lower pricing at the higher FICO levels that we will still achieve the blended return target.

Obviously, when we are kind of setting the returns what you are going to look at is the volume. So obviously you have higher volume in those higher FICO buckets. But what you are going to try to do is that the rates take into account your volume to keep I think your overall return to somewhat stable, so that would be the objective. And over time, I think what we would expect to see and we have seen this trend to some extend is have the book of business from a FICO perspective decrease a bit over time that’s been a pretty steady decrease. But we would factor that in, in terms of our projections in our projected returns.

Okay, great. Thanks. And then just one unrelated question, when you recapture the 50% of your seeded premium in 2016, does that work out you ran $15 million a year of premiums?

Frank.

Yes. Let’s see we have – last quarter we had recognized I think $6 million into the premium, bear with me just a moment.

Bose we may need to get back on that.

Okay.

Yes. I don’t think we have that number at hand.

Right.

And our next question comes from the line of Sean Dargan with Macquarie. Please go ahead.

Hi. Thank you. I just want to follow-up on the reserve development in existing default, so if I heard correctly we should expect to see favorable development in that line if you reset your assumptions around default to claim rate and seasonally the third quarter tends to be unfavorable, is that the way to think about it?

It is unfavorable, so what you have to look at is really factoring in the seasonal impact versus I would say the more secular and really try to disaggregate those and make a determination as to where it’s going from a secular perspective.

Okay. And can you just remind us what your secular perspective is?

Meaning that, really looking at it I am kind of factoring off the seasonality impact. So again what you are going to see when you go from second quarter into third quarter and third quarter to fourth quarter is you are going to see some natural deterioration and the question you always have to analyze is how much of that’s purely driven by seasonal factors versus I would say just the general trajectory of the book of business. And so what we said with respect to third quarter is looking at that we took a pause in terms of actually reducing that rate again we look at that each quarter.

Okay, thanks. And just shifting gears, what are the TRID issues or potential issues with TRID with risk based person?

So when you think about using a lot of different scenarios pricing scenarios which is what you would see in kind of a black box situation. Under TRID when you disclose at the beginning of the loan there are a lot more requirements around re-disclosure and the timing around disclosures. And so one of the questions is whether or not you could have something relatively small occur that changes one of the parameters of the loan which takes you to a different price and triggers re-disclosure. So part of the question is how as lenders are just getting their arms around TRID and we don’t even yet know kind of what this is going to look like as they have started close loan. Is that something that enough lenders have in appetite for from a process and operations and customer impact point of view to use or whether or not it’s better to have what sort of the more transparent pricing that we currently have in the market, but potentially giving more granularity there.

That’s right. If you go back while there was one lender who has been offering black box pricing for many years, they come out with a parallel more transparent pricing and not all customers prefer black box pricing. So you have got different customers who have different levels of preference. To that end, we are in a position to adopt black box pricing if we think it can be uphold relatively fast.

Thank you.

And our next question comes from the line of Chris Gamaitoni with Autonomous Research. Please go ahead. Chris Gamaitoni, your line is open. We do have a follow-up question from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks. I had a couple of follow-ups. First what percent of the NIW market comes from the large national lenders that won’t take risk-based pricing and need the rate cards?

I don’t think we’ve looked at that number Geoff.

And Geoff what makes it difficult is the large lenders numbers also in food loans they aggregate from the smaller lenders. So, if you are looking at a pure number, it could be difficult to gap…

Yes. And again, I mean I think we’re using risk-based pricing, so I think what you’re asking is sort of who uses the black box and who doesn’t use the black box and a lot of that depends on whether lender uses an allocation model, it depends on whether or not they let the loan officer, sort of select the pricing. So it’s very difficult to say kind of that. I think as a general proposition, what we see is the largest of lenders tend to not use the black box, they tend to use more of a sort of rate card approach, but I couldn’t give you a percentage.

Okay, and then Derek I think you mentioned, historically cross subsidization on a way booking your business mix, but if you ray is the lower end FICO, you are probably losing a bit more to FHA. So, I wanted to ask the question again in today’s marketplace if the cross subsidization goes away, can you maintain your targeted returns, by definition your ROE on the mix business today will go down?

Again, I think that’s going to depend upon where our competitors ultimately pricing, and I think right now its, we’re in a state of blocks. I think we’ve seen again parties out there with the black box, parties putting forward certain rate cards, so its difficult to say quite honestly at this point in time, where it kind of shakes out.

I would just add what we are hearing in the marketplace than what you are seeing there is actually concerns that a lot of lenders have, particularly the large lenders not just changed. With respect to moving away from FHA and there is a lot of concern about, what they feel like they can’t control in terms of their risk, particularly actions by the DOJ with respect to trouble damages. And so, what – the encouraging thing from an MI point of view is that, we’re starting to see lenders look at how they can increase the amount of conventional financing that they are doing, and potentially reduce what they are doing from an FHA perspective. And I think the larger the lender, the more you hear that.

Okay. And then my last follow-up, Frank the allocated expenses, at the end of the day they are just expenses that belong to the company. And I would think beside of the MI book, we would probably want to see the expense ratio in MI come down towards 20%. So, are there any initiatives underway to try to trim that number down and get an expense ratio that might be more fitting up the size of your book?

Yes certainly, we’re always looking at ways to be more efficient etcetera. We’ve got a monetization project underway that is intended to do just that, I think what’s sometimes a little misleading about that is – as we transition from one system to another there is the potential to in essence have some duplication and certain costs. But no, we’re certainly mindful of what that expense ratio should be needs to be and are continually working on ways to get there.

Okay. And in terms of just how we should think about that number going forward, 12 to 14 kind of level the where it should stick?

I’m sorry 12 to 14?

In the MI allocation?

Yes, I think that’s, I guess I indicated I think what we have right now, you should expect to see on an ongoing basis. There is some positives and negatives in the quarter that are some of one time in nature. But I think on the net basis that’s that would be a reasonable expectation.

But Geoff to your point, we have undertaken a major initiative which is called modernization which is well underway and maybe halfway through the purpose of the initiative is, one to substitute technology for labor cost and make not only improve, reduce the cost, but make, increase the amount of customer service and turnaround time and the customer flexibility we provide. And the projected outcome of that is to give us a benefit in terms of our expense ratio. Also keep in mind that the ratio alone can move significantly based on the level of reinsurance that we use or not.

Okay thanks.

And the final question comes from the line of Chris Gamaitoni with Autonomous Research. Please go ahead.

Hi, can you hear me this time?

Yes.

Hi yes, thanks. I wanted to follow up on the later stage delinquencies it looks like the reserve per delinquency in the 12 month and the pending buckets was up in the quarter, I was just wondering what’s driving that and this is that something we’re going to see moving forward or was there it is was a one-time in nature?

Yes, I think one of the things you’re saying with respect the impact is on severity. So one of the things we’re saying is, when we look at kind of our pending inventory, terms of default inventory those had have been in default for a longer period of time tend to have a higher severity. And one other things we’ve looked at is basically allocating our severity where those that have been in default for a shorter period of time, have a lower severity those that have been default for a longer period of time have a relatively high severity. What’s really driving that is the longer a loan is been in default you’re racking up more fees in terms of taxes and ancillary fees. And so I think that’s maybe what you saying in that of.

And I guess the follow up is, is that a trend we’re going to see continue in the future and is there any – any way to limit that increasing severity from services not having their foreclosure timelines?

Well I think what you’re going to see over time as compared to recent development, I think our expectation is claims will be resolved and paid faster. Again, looking back over the last several year you’ve certainly had a large number of defaults in the pipeline. So, I think what we’re going to expect to see going forward is those to kind of clear out faster. So, I think over time you will see that kind of wash out.

Okay, thank you.

Okay.

I would now like to turn the call back into the hands of Chief Executive Officer, S.A. Ibrahim. Please go ahead.

Thank you, operator. Thank you all for joining us today. For those who are interested in learning more about Radian and spending time with us figuring out why we are so excited about Radian and our opportunities. You will have, we would like to invite you to our Investor Day on Tuesday November 17th in New York City. So we look forward to seeing you there. And please visit our website for more information. So with that, I would like to end the call and I hope to see most of you in New York City on November 17th. Thank you.