Welcome to the Fourth Quarter 2019 Earnings Conference Call. At this time, all phone lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given to you at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. I'll now turn the conference over to Emily Riley, Senior Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to Radian's Fourth Quarter and Year-End 2019 Conference Call. Our press release, which contains Radian's financial results for the quarter was issued last evening 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, including adjusted pretax operating income, adjusted diluted net operating income per share, adjusted net operating return on equity and Services adjusted EBITDA. 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 website. In addition, we have also presented a related non-GAAP measure, Services adjusted EBITDA margin, which we calculate by dividing Services adjusted EBITDA by GAAP total revenue for the Services segment. This morning, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Frank Hall, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, Senior Executive Vice President of Mortgage Insurance and Risk Services. 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 2018 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I would like to turn the call over to Rick.

Thank you, Emily, and good morning. Thank you all for joining us today and for your interest in Radian. I am pleased to report another outstanding quarter and year for our company. 2019 was our first full year of operating under our One Radian brand, reflecting the combined strength of our unified company. Our team not only performed at a very high level, we also continued the strategic transformation of our MI business model, capital structure and our services businesses. I am pleased to share some of the highlights from 2019 with you this morning. Before we begin, I'd like to recognize our team across our mortgage and real estate businesses, and to thank our customers, investors, business partners and board for their support in helping us deliver these excellent results. Now let me review the highlights from an exceptional year. We earned net income for the full year 2019 of $672 million or $3.20 per share. Adjusted pretax operating income for the year was $855 million, and adjusted diluted net operating income per share was $3.21. Return on equity was 17.8%, and adjusted net operating return on equity was 17.9% for 2019. We wrote $20 billion of NIW in the fourth quarter, which is a 57% increase over the fourth quarter of 2018 and the second highest quarterly volume of flow NIW in our history. This contributed to our record-breaking volume of new flow business written in 2019 of $71.3 billion, and marked our fourth consecutive year of record annual volume. We grew our primary insurance in-force by 9% year-over-year to $241 billion. Our mortgage insurance portfolio, which is one of the largest in our industry, is the primary driver of future earnings for our company. We believe the projected future earnings and economic value of this portfolio provides…

Thank you, Rick, and good morning, everyone. To recap our financial results issued yesterday evening, we reported GAAP net income of $161.2 million or $0.79 per diluted share for the fourth quarter of 2019 as compared to $0.83 per diluted share in the third quarter of 2019 and $0.64 per diluted share in the fourth quarter of 2018. As previously announced, the fourth quarter of 2019 includes a pretax impairment charge of $18.5 million for goodwill and other acquired intangible assets related to the sale of Clayton Services. Adjusted diluted net operating income was $0.86 per share in the fourth quarter of 2019, an increase of 6% from the third quarter of 2019 and an increase of 23% over the same quarter last year. I will now focus on some of the drivers of our results for the quarter. I will start with the key drivers of our revenue. As Rick mentioned earlier, our new insurance written was $20 billion during the quarter compared to $22 billion last quarter and $12.7 billion in the fourth quarter of 2018. For the full year 2019, we wrote $71.3 billion of new insurance written, a 26% increase over full year 2018. Direct monthly and other recurring premium policies were 82% of our new insurance written this quarter, a decrease from 85% for the third quarter of 2019 and 83% for the fourth quarter a year ago. In total, borrower-paid policies were 97% of our new business for the fourth quarter. Borrower-paid single premium policies were 16% of our total new insurance written this quarter, a significant increase from two years ago when they accounted for less than 4% of total new insurance written. In contrast, lender-paid singles were less than 2% of our new insurance written this quarter, a dramatic decline from 20%…

Thank you, Frank. Before we open the call to your question, let me remind you that net income for 2019 was $672 million or $3.20 per share. Adjusted pretax operating income for the year was $855 million and adjusted diluted net operating income per share was $3.21. Book value per share increased 23% year-over-year to $20.13. Return on equity was 80%. Our $241 billion mortgage insurance portfolio grew 9% year-over-year and is the primary driver of future earnings for Radian. Our Services segment revenues grew 9% from a year ago to $170 million, and we made progress against our capital strategy in 2019, returning $375 million in capital to Radian Group, repurchasing 13.5 million shares, reducing our total debt outstanding and improving our debt maturity profile. As you’ve heard me say many times, this is a great time to be in the mortgage insurance business. The business fundamentals are very strong. Our mortgage insurance industry is governed by clear, consistent and transparent risk-based capital requirements. And both the credit quality of our existing book of business as well as the credit environment we operate in today are excellent. Now, operator, we would like to take questions.

Thank you, sir. [Operator Instructions] And our first question comes from Jack Micenko with SIG. Please go ahead.

Hi, good morning. I wanted to kind of walk through the Services map a little bit. So you grew that business, I guess, about 8% top line year-over-year, which is good. And then the $175 million. So we just, I guess, take that $50 million out of the run rate, I’m assuming? And then that 10% to 15% adjusted margin that you’ve targeted, should we assume that, that improves in 2020? How should we think about modeling that forward?

Sure, Jack. This is Frank. What I laid out in the prepared remarks was really just the recap of 2019, right? So we did give previous guidance that was reflective of the Services segment as it existed during 2019, which was at that $175 million to $200 million run rate annualized expenses. The $50 million represented what the 2019 revenue was. We will provide further clarity after we go through our evaluation of the businesses that will align to the segments as they’ll be presented during 2020. So – but just trying to give you some approximation of what the sold business is represented from a revenue standpoint in a historical context.

Okay. But it sounds like someone will talk more about next – in the next quarter call?

That’s correct.

Okay. And then looking at the – couldn’t help to notice on the ILN that you just completed that the spread, execution seemed much, much better than the 2019. I know there’s a couple of different buckets. But is that in your mind, a function of greater market acceptance for the asset class? Or was there a material difference in your attach, detach or anything else structurally that really drove some of that improvement?

Sure. This is Frank. So there were certainly – I would say, there certainly continues to be greater market acceptance for the product and greater investor demand there. There were some credit attributes that did have continued to evolve. The weighted average FICO, for instance, has improved on that. There were some structural differences there. But I would just say it’s reflective both of just higher credit quality of what was being covered and also just a very strong investor demand for the product itself.

Okay. If I could just sneak one more in. Operating expenses. I think you’ve taken a couple of million out from Clayton that weren’t reflected in the Services. How should we think about growth in 2020 over 2019? I know you have some investments and that sort of things still going on?

Sure. So what I described in the prepared remarks was a sort of a base level of operating expenses on a go-forward basis. And I think, as you know, having followed us for a while, there are occasional adjustments to that as there were this quarter related to compensation accruals, things of that nature. But we would expect to see that same base rate adjusted by about $2 million, which were attributable to the sold businesses. So moving from $72 million per quarter down to $70 million would be our expectation. And again, to the extent there are any material deviations from that expected level, we’ll be sure to call those out.

All right. Thanks for taking my questions.

Thank you very much. [Operator Instructions] And our next question comes from Mark DeVries with Barclays. Please go ahead.

Yes, thanks. You obviously generated a lot of incremental liquidity for the holding company this quarter, but you didn’t use a lot of it, buybacks were relatively light. Could you just talk about updated thoughts around deployment of that cash for the holding company? Around capital? And also how M&A may fit with your plans going forward? Thanks.

Sure. Mark, this is Frank. As it relates to the holding company liquidity, I think if you look at our track record, really since December of 2018, I would describe our actions as positioning the capital for optimal optionality. And so we have contributed about $1 billion from our subsidiaries into Group since 2018. This past year, we repurchased about $300 million worth of our shares. Got $141 million of that authorization remaining. So I think as we think about holding company liquidity, our PMIERs cushion and our statutory surplus, which are our three guardrails around our capital planning that I discussed at Investor Day, our binding constraint right now is really the statutory surplus number. So our holding company liquidity number is, I think, well positioned to provide us that range of optionality that we spoke about. And as is our practice, to the extent there are updates as it relates to capital actions, we’ll inform the public as those occur. But again, right now, we still have $141 million authorization outstanding on our current $200 million share repurchase authorization.

And Mark, this is Rick. Thank you for the question. I think, as Frank said, we have a pretty strong track record over the last couple of years of really managing our capital in a very thoughtful way, thinking about shareholder value. And I think when you think about the debt restructure that we did, think about the risk distribution across three ILNs or QSR, we’re really evolving our model from a buy-and-hold model to an aggregate, manage and distribute model, changing the profile of this company materially. Looking at value-based buybacks, where, as Frank mentioned, we bought 300 million shares – $300 million worth of shares back last year. And this Radian Reinsurance restructure where we moved capital around to reposition and optimize the use of our capital across our insurance subsidiaries and holdco, I think, really put us in a strong position. And it’s all consistent with the capital plan we’ve been working through as a team over the past year or two. It’s not a perfect science. We always require flexibility. I think Frank said at Investor Day, it’s always about capital planning versus the capital plan. And – but 100% of laser-focused on how we enhance shareholder value. And I think when you really look at where our capital situation sits after the Radian Reinsurance kind of transaction that we did, we’re in a very, very strong capital position, both in terms of strong PMIERs position, at rating guarantee surplus but also holdco liquidity. So I think we have significant strategic financial flexibility. And you will see us continue to execute as we see in the best interest of shareholders.

Okay. But is M&A even on the radar here, as you think about deploying some of that optionality you build?

So I think when you think about capital and uses of capital, you think about return to shareholders. As you think about M&A, you think about even things like just what we think of in terms of somewhat like a war chest, if you will, for opportunities. I think the good news about where we sit today is, we have the luxury and the optionality to think about all opportunities. From a M&A perspective, I’ve got a whole office full of opportunities, none of which – and if you look back at 2018, none of which that we pursue – or I’m sorry, 2019. So we always see opportunities. I think we’re very disciplined about looking for value as opposed to just doing M&A. And I think it’s safe to say, we haven’t really seen things that create value. But like any good stewards of capital, we’re always looking for ways to optimize our use of capital for our shareholders and think about things, both from a strategic point of view. But it’s not something that we feel like we have to do to achieve our strategy.

Okay. That’s helpful. And then I was just hoping to give a strategic update on how you’re thinking about the Services business going forward? What it was about Clayton that didn’t seem to fit anymore? And kind of how you’re looking to grow that?

Yes. No, thanks. So I think, look, when I got here in 2017, we took a hard look at what we were doing there. It didn’t really feel like we were optimizing or executing on a way that could be successful. I think we started that strategic repositioning, and sale Clayton Services. And by the way, our team there that has done phenomenal work. I know they’ll continue to do phenomenal work for the Covius team. But as I – as you might recall, at our Investor Day, I mentioned, really our focus on data and analytics and technology, where we believe we can create businesses that disrupt existing business models, leveraging data and analytics and technology and really driving digital models. And we – and I mentioned that the high-growth opportunities we see for our business really fall into the real estate space, including title. So as we continue to work through how best to drive value in those businesses and we have a very clear strategy. We believe the assets that remain from a company name Green River Capital, Red Bell, Five Bridges, Radian Settlement Services and Radian Title Insurance, but more importantly, the four products, title valuation, asset management and realtor services. And in those businesses are really the high-value, high-growth opportunities that we’re focused on building. I think they’re somewhat startup like because they’re small in scale, especially relative to our MI business. But we’re extremely excited about the assets we own, the team we have on the field, how our customers are receiving our One Radian message. And as I mentioned at Investor Day, and it’s still true today, we see today value in the data and the customer relationships that we’re developing, deepening. And in the future, we see earnings and intrinsic value building. So these are – we’re very excited to be able to focus on executing our strategy, and see – we continue to see great opportunity, and our customers are confirming that.

Okay, got it. Thank you.

Thank you.

Thank you. And our next question in queue, that will come from Bose George with KBW. Please go ahead.

Hey, good morning.

Good morning.

I just had a question on Clayton. I mean, you guys noted, it doesn’t have any earnings impact. But does – the sale price, does that contribute to more liquidity at the holding company.

Bose, this is Frank. Thank you for the question. It does, ultimately, that’s where it plays through. We shared with you sort of what the net effect was on the intangibles, and that intangible adjustment happens sort of at the beginning of the process there. But yes, ultimately, the cash proceeds will be in the holding company liquidity number.

Okay, great. Thanks. And then you noted in response to an earlier question that by the binding constraint being statutory surplus. But just to be clear, the – I mean, the liquidity at the holding company is kind of fully available for capital return, right?

That’s correct.

Yes. And I think just to kind of pick up on Frank’s comment, we feel like today within Radian Guaranty, the surplus number, PMIERs capital, I mean, we feel like we have really strengthened and use the word, build the moat around kind of Radian Guaranty from a capital structure. At the same time, we’ve freed capital up to holdco. So I think our strategy has been really through risk distribution and capital strength, protect the insurance company through the cycle, if you will. And build holdco liquidity and capital from a strategic financial flexibility. So I think we have made significant progress to accomplish both those goals.

And Bose, this is Frank. I would just add one more clarifier there. Even though the holdco cash is unrestricted technically, as we described in our Investor Day, we do have risk buffers and tolerances around what that holding company liquidity number would be managed to internal.

Okay. That make sense. Internal?

That’s right.

Okay, absolutely. Actually, just one small accounting question. The dilutive effect of stock-based comp. That number was smaller this quarter than usual. Just what was driving that?

I’m sorry. Bose…

Yes, it’s usually the dilutive impact of stock-based comp, that’s usually like 5 million shares or so. And it was – looked like it was like 1.5 million this quarter.

Hold on just a moment, let me get that. I think that’s – yes, that is correct. And that should be our new run rate.

So okay, that’s the run rate going forward?

Yes.

Okay, great. Thanks.

Thank you. Our next question in queue, that will come from Douglas Harter with Credit Suisse. Please go ahead.

Thanks. Can you just talk about how you would think about the proposed changes on the QM Patch? And whether kind of moving away from kind of a hard and fast DTI. What impact that might have on credit quality or underwriting quality of loans, broadly speaking in the market?

Yes. Thank you, Doug. It’s – this is Rick. So I think as we went through some of our prepared remarks, there are things that are happening kind of around the GSEs and CFPB and FHFA. And the QM Patch, particularly, I think, the CFPB has kind of hinted and stated that they’re leaning towards a non-DTI kind of metric, more of a pricing-related metric. And we, as an industry, we as a company, as we’ve looked at all the different iterations of proposals, including USMI’s proposal to kind of maintain a DTI component plus compensating a risk – kind of underwriting factors, if you will. I think the way we look at it is that there's CFPB and FHFA as well but not really looking to disrupt the housing market for qualified borrowers. And I think as the proposal comes out and the comment period occurs, and they'll extend the QM Patch for some part of next year. Beyond that, we don't really – we don't expect there to be much of an impact in terms of the – kind of from a market or from a qualified borrower perspective. So we're – I think probably more of the certainty of just knowing what the rule is so people can prepare and work towards it. So from a risk point of view, the second part of your question is, I think, ultimately, we're in a great position given what Derek and the team have done from a risk-based pricing. And how our – and to really make sure that we're only ensuring the risk that we're comfortable with, and working with customers that produce quality and service, default management the quality way. So I really think that the change really more just let it occur. We don't expect a great deal of impact. We feel we are in a great position to manage the risks that we ensure. And given the quality that's in the market, it's not top of our list of things we are concerned about there. We're watching it very carefully and very active in the discussion, but it's not – I think we feel like it's going to be a minimal impact, if any.

Great, thank you.

Thank you.

Thanks. And our next question in queue, that will come from Mihir Bhatia with Bank of America. Please go ahead.

Hi, thank you for taking my question. First, I just wanted to start with Clayton, just going back to that for a second. I understand the $50 million revenue impact, but I may have missed it, but did you give a – it sounds like there's not much earnings impact. So is there a change to your EBITDA margin targets? I think you talked about 10%, 15% previously. How does that affect it?

Sure. This is Frank. Thanks for the question. I think the way to think about it, what we said is that we don't expect there to be a net earnings impact or material net earnings impact as a result of the sale. So as we reconstitute and reevaluate the businesses that are in the Services segment on a go-forward basis, we'll be sure to provide updated guidance around the businesses that will remain in the Services segment and margin expectations around that. But you were correct in the $50 million worth of revenue, $2 million worth of other operating expenses and the remainder of that being cost of services for the most part.

Yes. And I would just add to Frank's comment. As you know, this past year, the Services segment contributed profitably on an EBITDA basis for the year. And we would expect, going forward, these businesses to continue to contribute profitably from an EBITDA basis. So we feel very strongly about the assets we have, and the way we're positioned in the market and the growth opportunity. And as Frank said, as we kind of work post-sale of Clayton Services, we'll give more information and guidance after – in the first quarter.

Great. And then just switching a little bit maybe to the – on the MI side. Can you talk about just what you're seeing in terms of just competitive intensity? I understand it's always a competitive market. But are you seeing any changes? Now you've had black box pricing out there, you and your competitors for almost a year now. So are you guys seeing any changes in terms of just how people are dealing with that? Are you seeing more – like just from a tactical point of view, more price changes coming through more often? Or something people being more selective in what they choose? Just trying to understand pricing trends? And just how competition is evolving within the industry?

This is Derek. So in terms of competition in the industry, I think it's been fairly stable. I would say, we haven't seen any recent significant changes. I think different companies are picking their spots in terms of where they want to play from a credit perspective. I think we're very happy with the portfolio we're putting together as the business we're adding, finding value and kind of finding those spots. So I would say, we haven't seen any significant changes. Same thing on the credit side, credit continues to be tight. We don't feel lot of kind of credit competition around the edges either. So I would say pretty steady.

Got it. Thank you. And then just one last quick one. The latest ILN, what is the exchangeable note feature was in there? Is that – what is the significance of that? What drove that innovation, I guess, into that product or into that offering?

Sure. This is Derek. So that's an offering you see at other products. I think the GSEs offer that as well. It essentially gives an investor an ability that kind of carve off the tranches into kind of their preferred kind of tranches from a cash flow perspective. So it just gives optionality to the investor, I think, and just kind of broadens the base.

And I think, too, Derek. It was based on feedback we got from our investor community, right. As to things we can do to enhance the structure that – so we not only look at how we're – what risk we're putting in and how that transacts, but we're also working very closely with the investor community to make sure that structures work for them as well.

Got it. Thank you.

Thank you very much. [Operator Instructions] And next question comes from Chris Gamaitoni with Compass Point. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

I wanted to follow back up on the capital, the capital situation. Could you remind me what the limitation is with stat capital? I know you have a negative unassigned surplus. So until contingency reserve releases and that rebuilds, you won't get ordinary dividends. But is there something that precludes you from asking for additional specials if you desire so in the future?

Sure, Chris. This is Frank. Thanks for the question. The statutory surplus number is one that we manage to a certain threshold and a certain level that we have communicated with our state regulators. There's not a hard and fast number. I guess, technically, we could go lower than what we're managing to. But just from a prudent standpoint, from a risk management standpoint, from an overall comfort standpoint, we're choosing a level that is right around the $500 million level. And so what we would expect to see over the near-term is there are, I would say, there's modest organic growth that occurs there prior to the release of the contingency reserves, which begin to happen in 2023 and more materially in 2024. And so as we think about the forward view on statutory capital, we are just – we're being cautious around that particular metric ahead of that contingency reserve release. So theoretically, you are correct. But from an overall comfort and prudent standpoint, we're operating at the level that we've chosen here.

Sure. Maybe this one's for, I don't know, if this is Frank or Derek, but if we assume that there wasn't a stat or the surplus issue and all capital was equivalent, and there was no friction between capital up and down. What's your current thought on the right level of PMIERs excess that you need in the business now that the business is more kind of, I don't know, it's self-reliant, but consistently executing ILNs? What's that level look like taking into a little account various stress scenarios where they might not be able to be issued, et cetera? I'm just trying to kind of think about where real kind of capital can go above what maybe your comfort level is?

Sure. This is Frank. I'll start, and Derek can add in. We intentionally don't give a PMIERs target. And there are a few reasons for that. One is, as we continue down the path of risk distribution, we expect that number to grow well beyond the level that we would consider to be necessary. And that is because of what was previously noted on the statutory surplus. So the capital will continue to build within Radian Guaranty as risk distribution continues. And so as we think about an optimal level, we'll be operating well above an optimal level. But we also take a look at it from the vantage point of what we've, I think, historically referred to as a gross and a net basis. And because we do have the benefit of risk distribution through ILNs, most notably, there is a little bit of a disconnect in the PMIERs capital relative to where you get the benefit from the ILN when a loan becomes delinquent. So you'll start requiring more PMIERs capital during a delinquency period without any benefit from the ILN. So we're careful to monitor that to make sure that even in those situations, where we do have ILN coverage, we're still well buffered from a PMIER standpoint. So again, I wouldn't give you a target on PMIERs, but we would expect to see it grow really beyond what we think is probably necessary. Derek, I don't know…

I would just add with respect to that. I mean, when we're looking at the cushion, we're doing on a scenario basis, right. So where we have that cushion is going to be impacted by the portfolio we're putting on or that we're adding as well as the risk distribution structures where they attach and also our economic projections. Frank alluded to the fact that the other thing we're looking at is, I would call, the amount of hard capital relative to the credit we get from the risk distribution structures. So as we become effectively more leverage by risk distribution structures, that might affect how big a hard capital cushion we hold. And the other thing we're factoring in, and we're looking at in addition to PMIERs capital is our own views of economic capital to support the book of business as well. So kind of all of those factors when you combine them, it makes it somewhat difficult to come with a singular, I would say, number or percentage, I think it can shift through time.

Okay. And then one more for Rick. Just – you said you had an office full of things that you look at. Don't need any detail, but are you looking at primarily businesses that we might consider more Services like? Or are there opportunities for – and that they are more capital intensive on an ongoing basis?

Yes. And by the way, the office full of pitches are just that we get round robins of investment bankers in here with a host of ideas, right. So I think we certainly are open to listening, again, thinking of value creation for shareholders. And they do come on both sides of the fence, where there are businesses that are more capital-like businesses and then there are services businesses. And I think, again, we – two things. One, we're quick to kill. If we don't feel that there's – we don't see value or strategic fit. And then secondly, we have a pretty high bar from a disciplined point of view of what we have to believe. And I learned that from many years working with my private equity friends, just a simple concept. What you got to believe? And how do you test it? So I think we probably like many others, we see lots of ideas, lots of pitches, and we're pretty disciplined about filtering through them pretty quick.

Okay. Thank you so much.

Thank you.

Thank you. At this time, I'll turn the conference back over to Rick Thornberry for closing comments.

Thank you. And before we conclude our call, I want to pass out a very special thank you to my friend Emily. Emily for her many years of excellent leadership as Head of our Investor Relations team, along with Corporate Communication. No one represents Radian to the outside world better than Emily. And I'm happy to let you know that Emily is now our Chief Marketing and Communications Officer for Radian. She's going to continue to work for me, which is either a good thing or a bad thing, well, I'll let her decide that. But she'll be responsible for spreading the One Radian brand to customers, business partners, employees and, of course, continuing to spread that to our investors. So she'll be working alongside myself and Brian and Derek and Eric and others, the rest of the team to really grow this business. And so I'm really excited about that. And she's not going away. Her focus is just evolving. So I want to thank her for an excellent job over the many years. And many of you all have developed a very good relationship with her, and she's not going away. So we appreciate that. She's going to transition the Investor Relations function to John Damian, who will be our Senior Vice President of Investor Relations and Corporate Development, and you'll all be meeting John soon. But I just want to take a moment to thank Emily and make sure that you all also have a chance to talk to her and congratulate her on this new role. We're excited for her. Thank you, Emily.

Thank you, Rick.

So beyond that, thank you all for your interest in Radian. We truly appreciate it. We're happy to talk to you any time. And – but do truly sincerely appreciate your interest in Radian. And look forward to seeing each of you soon. Take care.

Thank you very much. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.