Emily Riley – EVP, Corporate Communications and IR Sanford Ibrahim – CEO Robert Quint – EVP and CFO Joseph D’Urso – President, Clayton Teresa Bazemore – President, Radian Guaranty Inc. Derek Brummer – EVP and Chief Risk Officer David Beidler – President, Radian Asset Assurance Inc..

Eric Beardsley – Goldman Sachs Mark DeVries – Barclays Jack Micenko – SIG Bose George – KBW Douglas Harter – Credit Suisse Chris Gamaitoni – Autonomous Geoffrey Dunn – Dowling & Partners Sean Dargan – Macquarie Steve Stimac – FBR Capital Markets.

Ladies and gentlemen, thank you for standing by and welcome to Radian’s Third Quarter 2014 Conference Call. At this time, all participants are in listen-only mode. Later we will conduct question-and-answer session and the instructions will be given at that time. (Operator Instructions). As a reminder, today’s conference is being recorded.

And I would now like to turn the conference over to our host Emily, Director of Investor Relations..

Thank you, and welcome to Radian’s third quarter 2014 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 contains a non-GAAP measures that will be discuss during today’s call.

The complete description of this measures and the reconciliation to GAAP, may be found in press release Exhibit E and on the Investors section of our website. During the call, you will hear from S.A. Ibrahim, Radian’s, Radian’s Chief Executive Officer; and Bob Quint, Chief Financial Officer.

Also on hand for the Q&A portion of the call are Teresa Bryce Bazemore, President of Radian Guaranty; David Beidler, President of Radian Asset Assurance; and Derek Brummer, Executive Vice President and Chief Risk Officer of Radian Group and Joseph D’Urso, President of Clayton.

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 2013 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 today and for your interest in Radian. Our third quarter financial results were outstanding and I’m delighted to share the highlights with you today.

The primary drivers of our results were the strong credit performance of both our legacy mortgage insurance and financial guarantee books and growing positive impact of our large and profitable MI book of business written after 2008.

Our strong quarter included Clayton’s excellent results, illustrating the important benefit of our diversification strategy. Following my comments today, Bob will cover the details of our financial position and then we’ll open the call to your questions.

In the third quarter, Radian increased its profits with net income of $154 million or $0.67 per diluted share. This compares favorably to a net loss for the third quarter of last year of $13 million or $0.07 per diluted share. Book value per share at September 30, 2014 was $9.08.

Adjusted pretax operating income was $147 million for the third quarter of 2014 compared to an operating loss for the third quarter of last year of $12 million. Now, I’d like to review several highlights from the quarter.

First, we continued to grow and improve a high quality and industry leading mortgage insurance enforce, which is a primary driver of future earnings. We wrote more than $11 billion of new MI business in the third quarter, an increase of 20% from last year.

While overall, the national mortgage origination volume has declined from the same period last year, we have seen business shift during that period from the FHA and purchase volume has outplayed refinance volume, which is positive for our business since purchase transactions are more likely to use mortgage insurance than refis.

At the recent Mortgage Bankers’ Association Annual Convention, we received positive feedback from our customers on how they value the new ideas and initiatives we bring to the table.

For example, we launched a new community program earlier this month, called Ready Set Own to increase home ownership into sum, the program which is supported by the Mayor of Tucson as well as housing, lending and credit counseling groups in the area received local and national attention for its unique approach to home buyer education and credit counseling.

Our sales team both in the field as well as enhanced sales located in our offices continues to succeed in attracting new business. We signed 39 new customers in the third quarter alone who have already begun submitting business, and we signed a total of 151 new customers year-to-date.

As we mentioned over the past several years, we have had tremendous success at Radian in strengthening our mortgage insurance franchise by adding new customers. In fact, more than one-third of INIW in the third quarter gain from customers new to Radian since 2011.

It’s also important to note that, we believe approximately 20% of mortgage originated to-date are not yet Radian customers, including a few in the top 20. This is a good thing because it creates opportunities for future growth that we are actively pursuing.

Turning to product mix, while I mentioned that, home purchase volume has outplayed refinance volume recently, mortgage rates have also begun coming down and industry experts believes this may encourage the refinancing activity.

Regardless of the type of mortgage business being written, purchase or refi, Radian is a ready to support our customers with the products they need in any lending environment. We continue to pursue a proven, balanced and diversified product mix of single versus monthly premium business.

This strategy has been successful for us in several ways for recapturing business from the FHA, for minimizing interest rate volatility with product diversification and with regards to credit performance and delivering acceptable returns in our business.

While the percentage of singles we wrote in the third quarter increased slightly, we expect to return to our target of approximately one quarter of our business coming from singles overtime. While new business volume remains a top priority, our ability to grow our mortgage insurance in force is paramount to Radian’s success and earnings power.

Our persistency which is the amount of business that remains on our books over a 12 month period, reached 83.5% in the third quarter compared to 80.5% in the third quarter of 2013.

Our insurance enforce grew 7% from the third quarter of last year and we once again led our industry as the largest mortgage insurance company with $169 billion of insurance enforce. Second, our continued success in writing new business improves the credit profile of our portfolio.

As you can see on slide 11 of our webcast presentation, the high quality books of mortgage insurance business written after 2008 including loans completing half refinance represented the overwhelming majority of our primary mortgage insurance portfolio 78% as of September 30, 2014. This again is one of the key drivers of our future financial results.

As our legacy portfolio shrinks and improves, an important indicator of its resiliency is the fact that approximately 70% of our performing loans from 2005 and 2008 have never been in default. Our total number of primary delinquent loans dropped by 28% year-over-year as you can see on slide 23.

Our primary default count increased to 46,843 loans and our primary default rate, which has been declining steadily since its 2009 peak felt to 5.4%. In addition, the MI incurred lost was 22.5% in the quarter representing another positive trend. This compares to a loss ratio of 74.8% in the third quarter of 2013.

While we are pleased with the outstanding credit trends this quarter, we do expect fourth quarter to show more typical signs of seasonality expected in our business where new defaults tend to increase later in the year.

Third, slide 12 shows that for the nine months ended September 30, 2014, the earned premiums less incurred losses from our 2009 and later MI vintages were $352 million, which was higher for the first nine months of this year than the $337 million for all of last year. This illustrates the steadily increasing positive impact of our business mix.

It’s also noteworthy to mention that, the 2008 and prior vintages are positive year-to-date by $111 million. Fourth, we continued to make progress in reducing our legacy mortgage insurance exposure, further minimizing the risk of future losses for Radian.

We entered into a settlement agreement with Bank of America Countrywide in September, which is another important step in managing our legacy MI exposure and in creating even greater certainty around the reserves held against our legacy loans.

When implemented, this agreement will resolve any future claims and disputes regarding recessions, denials and curtailments on our Bank of America legacy loans. This agreement remains subject to GSE approval.

Fifth, our financial results this quarter include our recent acquisition of Clayton, a leading provider of outsource mortgage and real estate solutions. Clayton adds a diversified source of fee-based revenue for Radian and also broadens our participation in the residential mortgage market value chain, with services that complement our MI business.

Clayton had an excellent third quarter, which Bob will discuss in more details.

Importantly, our Clayton and Radian teams are making valuable introductions to new potential customers and we are taking our first steps down the road that we believe provides a competitive advantage and another way to differentiate Radian from our mortgage insurance peers.

Also as we reported in our press release this morning, I am pleased to announce that Joe D’Urso will assume leadership of Clayton. Joe has been Chief Operating Officer of Clayton, managing all underlying business units. As president, reporting directly to me Joe will be responsible for the overall strategic direction of the company.

Previously Jo was president and Chief Operating Officer of Green River Capital, a Clayton subsidiary. He has an impressive background and outstanding reputation with 23 years in the financial services industry, primarily in the mortgage and real estate capital market sectors.

I am confident that, Joe will continue to strengthen Clayton’s position in the market and will be a valuable member of the Radian executive team. Sixth, our success in reducing the exposure in our Financial Guaranty business continues, with the reduction now at 83% since 2008 including in many of the riskier segments of the portfolio.

Adjusted pre-tax operating income for the Financial Guaranty segment was $9.3 million for the quarter and as we’ve said before, we believe Radian Asset is a solid over-capitalized company with strong economic value.

We’re actively working on a number of alternatives to monetize or to otherwise utilize Radian Assets in a way that will maximize its value consistent with PMIERs. And finally, Radian submitted its letter during the public comment period last month to the FHFA on the draft PMIERs.

Other private MI, the state insurance departments, the mortgage and real estate community and various housing and consumer groups also provided comment letters with many consistent themes.

What’s most important to remember is we expect to have the ability to fully comply with PMIERs within the applicable transition period without a need to raise external capital. Now, I would like to turn the call over to Bob for details of our financial position..

Thank you, S.A. I will be covering our P&L activity and trends for the third quarter of 2014, some updated expectations regarding the balance of 2014 into 2015.

Our financial results this quarter were excellent, led by continued strong credit performance in both Mortgage Insurance and Financial Guaranty, top-line growth in MI driven by growth in insurance enforced which is up 2.6% for the quarter and 5% year-to-date and expenses that were in line with expectations.

As we utilize our deferred tax asset, our effective tax rate remains negligible. There were a few favorable non-recurring items this quarter that impacted both premiums earned and incurred losses that I will describe in detail later.

In addition to our Mortgage Insurance and Financial Guaranty segments, our P&L this quarter includes the third business segment Mortgage & Real Estate Services, which represents the results of Clayton.

Our EPS calculation for the third quarter includes both the dilutive impact of our 2019 convertible debt, which adds 37.7 million shares to our share count and adds back $5.5 million of interest expense to income for EPS calculation purposes and additional EPS dilution relating to our 2017 convertible debt of approximately 6.3 million shares.

A table of our fully diluted share count is presented in Exhibit B. The MI provision for losses was $49 million this quarter, compared to $65 million last quarter and $150 million a year ago.

Lower incurred losses have become a trend and continue to reflect improving default experience as new primary default totals were 20% better than third quarter of last year and cure rates have gone up. As S.A.

mentioned, we entered into a settlement with Bank of America in September, which is expected to provide resolution on a substantial portion of our legacy loss mitigation activity and exposure.

There are various items that were impacted by the terms of the settlement including a significant reduction in our IBNR reserve due to lower expected re-instatements of prior rescissions and denials which was offset by an increase in case reserves to reflect lower future rescission and denial rates on BOA settlement loan.

The net impact of this and our quarterly updates to our growth in net roll rates and severity rates was immaterial to loss reserve. In our loss reserve estimate, we are now focusing more on early stage versus foreclosure stage defaults as a default to claim or role rate predictor.

Regardless of age an early stage default is one fourth of foreclosure sale has not been scheduled or held. Of note, the estimated role rate we now use on a new delinquent loan is approximately 17%, down from our previous estimate of 20%.

The current estimated role rate for foreclosure stage default for which a foreclosure sale has been scheduled or held is approximately 81%. We have made some changes to our breakdown of defaults on slide 17 to present what we think are the most important drivers of ultimate claims on our defaulted population.

There was a current period benefit of approximately $15 million in the quarter for loss mitigation credit we expect to receive within the BOA settlement for loans that are currently performing.

Because of this non-recurring benefit and the typical fourth quarter seasonal factors in which defaults are typically higher, we expect an increased MI loss provision in the fourth quarter compared to this quarter.

While claims paid up trended down as anticipated, we expect them to rise in the fourth quarter and possibly into the first quarter of 2015 due to the loan reinstatements and associated claim payments resulting from our recent settlement with Bank of America.

We still expect full year 2014 claims paid to be between $900 million and $1 billion and we expect claims paid in 2015 to be down materially from this year. We will be providing further guidance on our expectations for 2015 claims paid next quarter.

In addition to insurance enforced growth, MI premiums during the quarter were aided by two non-recurring items related to the BOA settlement that had an aggregate impact of approximately $10 million. First, there is an expected return of Radian’s premiums refunded to BOA on previously rescinded loans that we expect to reinstate and pay.

Second, there was a related reduction of accrual for future expected premium refund. Losses in the Financial Guaranty segment continue to be modest as the book runs down.

A negative incurred loss for the quarter related primarily to a direct public finance exposure that was resolved more favorably than we had anticipated, further demonstrating our successful loss mitigation track record.

Expectations regarding potential credit losses on our Puerto Rico credits, and the second-to-pay CLO exposure that we have been talking about remained essentially unchanged from June 30, 2014 levels.

Clayton results for the quarter were strong, led by due diligence revenues which included a large single project and component services revenues from a strong market for single-family rental securitization. The broad product offerings from Clayton allowed us to take advantage of opportunities in almost any mortgage or real estate market.

For example, while the origination market and non-GSE RMBS market is lower than expected this year, opportunities have risen in the compliance and single-family rental securitization areas.

We are allocating all of the interest associated with our recent $300 million debt issuance to the Clayton segment, therefore any adjusted pre-tax operating income and that was $5.3 million this quarter, represents earnings generated by Clayton in excess of fully allocated cost.

The primary differences between our operating metric for Clayton adjusted pretax operating income and EBITDA is that, we include interest expense and normal depreciation of tangible assets in our measure. We’re expecting to upstream approximately $5 million of cash from Clayton to Radian Group during the fourth quarter.

Keep in mind that, certain revenues of Clayton can be lumpy because they are transaction driven and we are not expecting quite a strong of fourth quarter due to the anticipated timing for certain projects.

We are excited about the 2015 prospects for Clayton, during which we expect to begin to realize certain synergies with the MI business that are currently being carefully planned before they are executed. Slide 12, detects our current balance sheet fair value position along with expected net credit losses or recoveries on fair-valued exposures.

Based on our projections, we expect to add a $141 million or $0.74 per share to pre-tax book value from these positions over time as the exposures mature or are otherwise eliminated. That number is derived by taking the net balance sheet liability of $82 million and adding the present value of the expected credit loss recoveries of $59 million.

The valuation allowance against our deferred tax asset was $834 million this quarter or approximately $4.37 per share and has been reduced each quarter this year based on our pre-tax income. As we make money, we utilize our DTA and reduce the valuation allowance.

We still expect to recover our valuation allowance by sometime in 2015, although we are carefully assessing the increasing possibility of a recovery at year end 2014.

With regard to PMIERs, our first priority is to actively evaluate opportunities to transform the economy value of Radian Asset, our Financial Guaranty Company in a manner that’s consistent with the PMIERs framework and we are also exploring various mortgage insurance, reinsurance possibilities.

We expect more clarity with regard to our future plans for Financial Guaranty in a relatively near future which will enable us to provide more specific PMIERs capital plans. I’d now like to turn the call back over to S.A..

Thanks, Bob. Once again, we are pleased to share with you our outstanding financial performance in the third quarter.

We believe that, there is continued growth and opportunity ahead for Radian through continued success in our mortgage insurance business, further leveraging our risk management expertise, and through Clayton’s industry-leading mortgage and real estate services.

Together, we have a strong foundation that should drive Radian’s success to the next space in the evolution of the U.S. housing finance markets.

In closing, I would like to once again remind you that, as we face the opportunities and challenges that lie ahead with we do so with the benefit of the growing positive impact from our large profitable post-downturn MI book, continued credit improvement in our legacy MI book, a strongly capitalized Financial Guaranty business and greater strategic opportunities from the Clayton acquisition.

Now operator, we’d like to open the call to questions..

Of course. (Operator Instructions) Our first question today comes from the line of Eric Beardsley with Goldman Sachs. Please go ahead..

Hi. Thank you.

Just wonder if you could update us any progress you’ve made on strategic alternatives for the Financial Guaranty business and if you were to seek reinsurance on that, would that hypothetically free-up capital that you regulate upstream?.

Yes. First again, as we said we believe Radian Asset is solid over to capitalize company with strong economic value and as we’ve said before we are working with an advisor to monetize or otherwise utilize Radian Asset in a way that will maximize its value consistent with PMIERs.

So in addition to a potential sale of the business, we’re considering a variety of other options, including continuing to take dividends and combining that with the reinsurance or surplus notes and I’ll ask Bob will comment on your reinsurance part of the question in a minute.

All I can say in addition to that is that, we’re pleased with the progress in exploring all the alternatives with the help of our advisor..

Yes. So Eric with regard to reinsurance, it is a possibility so it’s one of the alternatives we are exploring. I think that, it would need to be a substantial of all of the book reinsurance in order to be able to take substantial dividends in the near future..

Got it.

Is there any possibility that you could dividend up the entire amount of capital if you reinsure the whole business?.

I think it’s conceivable with the reinsurer have creditability and the stability. It’s still something, we would need to get approval from New York from, but it’s a possibility certainly..

Okay.

And then just on the updated claim rate expectation just wondering if you could walk us through I guess how that can progress from here and what drove you to do it in this quarter?.

Claim rate expectations?.

Yeah.

The changes in estimates that we make, we always look at historical experience, we try to do things that are consistent with trends, and the change in estimate this quarter related impart to using this early-stage, late-stage as a significant roadway predictor and that’s something we’ve been looking at for quite some time and we think it is a very valid roadway predictor.

You saw the change in the brand new delinquencies to 17% that’s something that Derek has mentioned previously has been something we’ve been observing and we made that change and then some of the later stage where foreclosure sale has been scheduled or held, there were also changes in those buckets.

So, we always update based on historical experience we said in the past and we really like to see trends we don’t like to do things immediately. We like to see things develop overtime and it was time to make these changes and we think there are better estimates with regard to roadways..

Okay, great. Thank you..

And we do have a question from the line of Mark DeVries with Barclays. Please go ahead..

Yeah. First I have just a follow up question on the reserves. I was just trying to figure out whether there is actually an impact on the provision in the quarter, while the reserve for delinquent loan actually went up if you actually included it went down affirm out in the quarter.

I assume it’s related to the changes you’re just discussing, the factors, but is there any kind of one-time impact that flow through the provision?.

Mark, the one thing that I mentioned with the $15 million which was current period benefit with regard to the BOA settlement and it pertained to performing loan. So the intrinsic can requires if you take that as a current period benefit. So, that would be the one thing to highlight as a non-recurring item.

The other thing I think, you’re right had offsetting impacts and were immaterial to the overall..

Okay. And then just to make sure I’ve got it right.

In addition to that $15 million, you also said there are $10 million non-recurring benefits of premiums as well from that BOA settlement?.

That’s right. Yes, that we mentioned and that is related to refunds of premium. As recession rates go up then we get refunded in premiums so it has opposite effect. If future recession rates go down then we refund less premium, so yes that was an impact from the settlement and it was non-recurring..

Okay, and are those the only two non-recurring items you was calling out in the quarter?.

Yes. Those were the ones that we mentioned, yes..

Okay, great.

And then just one other question is there any color you can provide on the synergies between EMI and Clayton that you’re planning?.

Sure, Mark. That’s a very good question. When we made the Clayton acquisition, we did so for the following reasons.

First on the standalone basis, we believe Clayton is a very strong company, which as you saw continues to perform profitability and in addition to profitability, gives us an opportunity to take advantage of the private label securitization market whenever it comes back strongly.

Second on top of that, we believe that with the large customer footprint that Radian MI now had in dealing with 80% of all the lenders have been including any independent mid-size and small lenders, they have the opportunity to use Clayton services as well as some of the large lenders in terms of contract underwriting, some of the other kinds of operational services they need particularly in a highly important compliance environment where they need to be on top of the loans they originate and the servicing of those loans.

Third, we believe there is opportunities that Bob talked about as we thoughtfully look at to take some of the services we utilize from other third-party vendors and transfer that business in a systematic manner equate on an absolute basis and we’ve just received the approval from our insurance department in terms of master services agreements to do that.

And fourth, beyond that, there is opportunities to look at how to optimize our operation’s platform more efficiently, utilize technology more efficiently across the broader operating footprint in multiple locations that Clayton and Radian have.

And fifth finally, there is an opportunity to launch new products and services directed at our customers and deal with the quite opportunities in the changing housing finance environment that leverage Radian’s risk management and insurance taking capabilities with Clayton’s operational and due diligence capabilities.

I hope that addresses your questions..

Yeah, absolutely.

Are you in a position to give us a sense of what you think the revenue opportunity is here and kind what the incremental margins there is might be?.

Look. All I can say is we are excited about those opportunities, but as you can imagine some of these will take time to execute, which is great..

Okay. Fair enough. And then just one last question, it sounds like there is some lumpiness to the earnings that I think Bob have referenced, there was kind of big project this quarter.

Is there any kind of seasonality to that and maybe you can help us to think through as we try and model those earnings?.

Yes. Hi this is Joseph D’Urso, President of Clayton. There is definitely some seasonality when it comes to the REO portion of the business. With rest of the business, there not so much seasonality as much there is activity in the marketplace for loans and securitizations.

So there is definitely lumpiness, we’ve had that throughout our history and it is based on the levels of activity that you see in the asset markets..

Okay.

And for the REO portion how does the seasonality were?.

So, we will slow down as we come into the fourth quarter marginally as fewer people go out and buy homes and that starts to pick up slowly throughout the first quarter and then into the spring in the second quarter where it really starts to pick up significantly..

Great. Thank you..

And we do have a question from the line of Jack Micenko with SIG. Please go ahead..

Hey, good morning. Looking at the role the claim assumptions, I think your old slide 15 is now gone with the new slide deck. The Bob you talked about the 17 on the early stage 81 on the late, I’m just trying to reconcile because I got 53 net full claim rate on this book.

Last quarter it was 47, so did the middle buckets go up on the assumptions and what are those numbers, they were 43 and 50 last quarter for the full ‘11 and ‘12, just trying to reconcile the sequential change..

Yeah. I think Jack what you’ve seen is that, we’ve made changes in a variety of buckets. The early one going down some of the later one is going up and overall I did go up, I think offset to that is severity where we have been seeing for quite some time the severity has been less than we have previously estimated.

So, that was kind of an offsetting factor, but I mean in terms of just those rats, overall they went up but in the early stage they went down and this foreclosure stage which is really driver of all rates went up..

Okay.

And then one of things we’ve been seeing from the banking industry for probably the better part of the year plus is actually negative reserving and when I look at the 78%, 79% HARP plus post ‘08 these changes being made, severity coming down, I mean is it foreseeable at some point that we actually see a negative loss incurred numbers is that possible and will that require a regulatory power that will play out if is it all possible?.

Yeah. I mean what you would have to have, so we break up our incurred loss into two components, one into new defaults. So, there going be new defaults in any given quarter and there is going be an incurred loss associated with that new default. That’s going be a positive incurred loss.

Any negative would be in the second line which is the existing default. So full over reserved on the existing defaults and there is a reason to make an adjustment than that could go the other way.

Now, you’ve seen to the first three quarters of 2014 that incurred loss has been negative now it hasn’t been negative enough to drive an overall negative number, it would have to negative to be that way conceivable, but that’s the way you will get there.

Prior to this year, we had upward adjustments in that existing defaults because estimating reserves is very difficult and as you’ve seen we always try to use the information to get it right. So, that’s what it would take in an improving environment you’re more likely to see those negative adjustments.

But, we think every quarter the reserve that we have is the best estimate and ideally if that’s the case you would have a zero in that line next quarter..

Okay, great. And then just sort of bigger picture. I mean how much your business historically in a normal, I guess defining normal is sort of a 2000, 2003 kind a window is 95 plus with the talk about coming back to doing more 97 out at state authorities.

How should we think about that as a future opportunity?.

So this is Teresa and it about 50% of the business. When you back to that time frame it would been in that category. So, obviously the other thing I would just add is that up until last November, we saw some activity in that 95% to 97% plus LTB but get pullback from that. And so, we saw that decline and is very negligible at this point.

So, we are looking forward to seeing the GSPs come back with 97 product..

Alright, great. Thank you..

And we do have a question from the line of Bose George with KBW. Please go ahead..

Yeah. Thanks guys, good morning. Just a follow up on the Jack’s question on the 97s. Just with PMIERs the way it’s written, it looks to more challenging in terms of the capital requirement of the 97s.

So, if the 97s are rolled that, does it have to be in conjunction with some adjustment to PMIERs?.

This is Derek. It obviously would be intensive from a capitalization perspective looking at the current grid. But in terms of its exact impact, we’ll have to wait and see what the final PMIERs grids will look like..

Okay. Fair enough. Actually just switching to the Financial Guaranty piece, you noted the benefit from that on the losses incurred, but if the expenses were lower as well.

Is there anything one-time there or it just start of expenses coming down?.

No. This is Dave. We obviously have a continued close scrutiny on our expenses and our operating expenses have been trending lower..

Okay, great. And then actually just going back to the question about the $15 million benefit from the BSE settlement.

Is that going through the reserve release for this quarter I just I didn’t fully understand that?.

It ran through incurred losses, so it doesn’t impact incurred losses this quarter. So, yes..

So, that $70 million number just would have been $15 million higher?.

Yeah. We had not recognized that. We essentially deferred it, because remember we haven’t reserved for loans that are performing. So some of these performing loans will delinquent in the future and we will reserve against them and we will have already taken the rescission denial benefit related to those loans..

Okay. Okay. That makes sense.

And then just in terms of the timing on doing anything on Radian and Financial Guaranty, will that be only after you get the final PMIERs or could you take some actions before that?.

Bose, we are continuing to evaluate our alternatives and I can’t answer whether we would do something before or after clearly the more inside to get into PMIERs the better of there, but there are actions possible that would give us the PMIERs benefit in any scenario..

Okay. That’s great. Thank you..

And our next question comes from the line of Douglas Harter with Credit Suisse. Please go ahead..

Thanks.

You mentioned that you’re upstreaming some cash from Clayton in the fourth quarter, is that something that you expect to be regular and is that $5 million in expected size?.

We’ll size it each quarter, but yes the expectation is that if Clayton continues to earn money and generate positive cash flow. We would regularly upstream to the holding company..

Got it.

Is there any cash or capital needs that Clayton or it’s pretty much all sort of cash generation be available to sort of to bring up to the parent?.

Generally it’s a very low capital intensive business. However, there could be capital expenditures, there could be other needs for the cash at Clayton. So, I wouldn’t say always, but generally the positive cash flow generated can be used by the Holding Company..

Alright.

And then just to clarify on Bose’s question, the $15 million benefit, is that coming on the new default line or kind of the prior period adjustment line?.

It’s on the second. It’s on the existing default line. It’s not on the new default line because new default are just new defaults during the quarter..

Got it. So out of $24 million, $15 million of that was from the settlement..

That’s correct..

Great. Thank you..

And we do have a question from the line of Chris Gamaitoni with Autonomous. Please go ahead..

Good morning. Thanks for taking my call.

There was pretty good improvement in the operating cost for the MI side, was there anything one-time in that or how should we think about the go forward cost structure for MI business?.

Yeah. We tried in the press release and you can see we tried to reconcile because there are some moving pieces there. I think you’ll see that if you normalized that it was essentially down just a little bit and in line with expectation. So, this quarter we had the Clayton operating expenses which drew some of the number.

The long-term comp is always something we use to disclose because it has gone up and down with the start price. So if you normalize it, I would say the MI expenses are down just slight little from last quarter..

Okay, perfect. And then I’m just trying to reconcile the existing defaults. They had a benefit of $25 million off which you disclosed $15 million that was huge settlement.

So, the $7 million benefit how does that kind of jive with the increase in later stage claim rates?.

It’s going to be in there, so the increase in later stage it’s going to be a positive number in EBITDA, other things in there. That’s where we put loans that are aging and IBNR changes.

So, there are lots of things that are going through that line and all-in-all the net impact other than the $15 million was still a little bit negative but there were some positive items in there as well such as the claim rates that you are talking about..

Okay.

And then are there any thoughts around the news that the housing asking MI to do more DA loans and what kind of the opportunity structure would look like market size, how you kind of price that second loan charge would be?.

We’re are having conversations about this and really the conversation is more with DA and the idea is really for us to potentially come in and ensure the lender beyond 25% that is DA in short.

And so, we’re taking a look at that really trying to understand what the vendors are interested in and how much of a market there is for that so that we can then figure out what the right structure would be on a go forward basis..

Okay, perfect.

And what are the kind of thoughts around the opportunity for 97s assuming the PIMERs don’t change, just the 97 seem to be most penalizing bucket from the available asset ratio size?.

Yeah, and Derek can add to that, obviously depending on where the PIMERs are will depend on sort of what amount of 97s will willing to have overall portfolio as well as kind of what the pricing would need to be on a go forward basis to have an appropriate return. So we would be evaluating that.

The other critical piece of them for connection we need is what the parameters are going to be that the GSE establish and they are still working through what those going to be..

Okay, perfect. Thank you so much..

Sure..

And we do have a question from the line of Geoffrey Dunn with Dowling & Partners. Please go ahead..

Thanks. Teresa, I’ll actually follow up on that question.

There’s a lot of redirect about expanding the mortgage market talking 97s, talking MI participating in VA, but at the same time you have to consider the lender side of it and there has also been a lot of articles talking about the lenders not necessarily buying into this because there is still lot of lenders law risk out there.

What’s the risk at all? Just talk about expanding the market and potentially the private MI world ends up just being that, but as just talking you can’t reach in appropriate product at the appropriate pricing?.

Yes.

So I mean that’s a great question and on the 97s I think a lot of that also connected to the changes in sort of how the GSPs are going to approach lender warranty and I think as you know from the reporting out there and the comments from Director Rob at the MBA, there’s a lot of focus MBA has been very involved and working through sort of tightening up lender warranty so that lenders still feel comfortable with the risk that they have on an ongoing basis.

But I’d say, that’s going to be critical to how they view their willingness to do 97s. Having said that, they will willing to do them at least at a small percentage until Fannie stop buying them last year, so that was state indeed there is going appetite to that on a go forward basis.

With respect to the VAPs, that’s a little bit more difficult because I think when it first came out, it was sort of characterized more something that, the government will be buying, but it’s really something more that they’re saying there might be interest in lenders getting the coverage.

And so, I think that’s a tougher one to answer, because I think it really depends on how the lenders are sort of reserving for that and sort of whether there’s an opportunity to help them kind of in terms of the risk that they feel like they have currently, and that’s something that’s going to take a little bit of time to get it on to them..

Okay. And then probably for Bob, do you have piece of reinsurance you can [recall] back as of the December 31st who knows that PMIERs will be finalized by then.

How are you approaching that? Do you have an option that you can wait for PMIERs till January, February or do you have to make a decision before year end?.

We would likely make a decision before year end Jeff, at this point I’m inclined to potentially claw some or all what we’re allowed to but we’ll make that decision prior to year end..

Okay, great. Thank you..

And we do have a question from the line of Sean Dargan with Macquarie. Please go ahead..

Yes. Thank you. Bob, you mentioned that there is a possibility that be NOL evaluation allowance might be reverse in the fourth quarter.

Can you just remind us using the expenditure count with the impact of book value per share would be?.

Today it’s $4.37 per share, the valuation allowance per share and that was changed based on the fourth quarter..

Right, okay.

That’s a determination that your auditors have come to?.

It’s our determination based on analysis that obviously we’ve already started and we would get buying from the orders they would do it alongside but it’s our decision..

Okay, great and at that point your GAAP results would show you paying the statutory tax rate?.

At the point in time when we get the valuation allowance reversed and the DTA comes back on the book then we’d be booking taxes as per normal..

Okay great.

And then just as we model out Clayton, you’ve given us some historical gross profit on services, which before I though was going to be the operating earnings metric, but should we think that the interest expense and operating expenses that you reported this quarter will more or less be steady state going forward?.

Yeah. I think certainly interest expense is $300 million so that’s not going to change. But in terms of operating expenses I think it’s going to be less sort of directly variable with revenues but it’s if the business grows a lot you might see that grow and but I would say generally in a range..

Great, thank you..

Sure..

And our last question comes from the line of Bose George with KBW. Please go ahead..

Yeah.

Just one follow-up on that the BSE settlement so you can just remind us what did you say about the impact next quarter around the loss provisions?.

There wouldn’t be any impact next quarter..

Surely, just what happened this quarter and that’s the impact is over?.

Yeah, we called out it. A lot of it was done prior over this quarter and there wouldn’t be any impact unless we see some sort of change in anything or it’s still subject to approval and things like that..

Okay. Perfect. Thank you..

Sure..

And I guess our last question then is from the line of Steve Stimac with FBR. Please go ahead..

Hey Bob, just to clarify the tax issue oppose to NOL recovery. You talked about tax is going back to normal.

It’s been a while since we’ve seen normal so what’s a good normal is it sort of high 20s or low 30s for tax rate?.

Yeah. I mean it’s close to 35%. At this point our portfolio is taxable and in the past, way back when the earnings were very consistent, we had a big unique portfolio so that changes down the road that could impact our effective rate but right off of that pretty much the statutory rate..

Great. Thanks guys..

Sure..

And at this time, there are no further questions. So, I’d like to turn the conference call back to S.A. Ibrahim. Please go ahead..

Thank you operator. Thank you all for participating in our third quarter earnings call. I look forward to seeing you again for our full year year-end operating call next quarter..

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