MGIC Investment Corp (MTG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation first-quarter results call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at the time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mike Zimmerman, Senior Vice President, Investor Relations.

Thanks, Patty. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation.

Joining me on the call today to discuss the first-quarter 2010 -- the results of first quarter 2010 are Chairman and CEO Curt Culver, Executive Vice President and CFO Mike Lauer, and Executive Vice President of Risk Management Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website which is located at MTG.MGIC.com under investor information, includes additional information about the Company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures. As we have indicated in this morning's press release, we have posted on our website supplemental information containing characteristics of our primary risk in-force and flow new insurance written as well as other information we think you will find valuable.

During the course of this call we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release.

If the Company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further now interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the press release.

Finally, before Curt begins his prepared remarks, I want to note for participants that due to legal restrictions that apply in the context of the securities offering we will not address any questions regarding the offerings we announced this morning. And we ask that all participants limit their questions to the activity that occurred during the first quarter.

With that let me turn the call over to Curt.

Thank you, Mike, and good morning. In the first quarter we reported a net loss of $150.1 million with a diluted loss per share of $1.20. New insurance written for the quarter totaled $1.8 billion with market share approximately 20% through February as March data is not yet available. The lower volumes were driven by the continued high share of FHA, the loss of business from a major lender as a result of our rescission practices, and the lower overall origination market.

Persistency improved modestly to 85.6% from 84.7% last quarter. As a result of the cancellations outpacing new insurance written in the quarter, insurance in force declined to $207 billion from $212 billion last quarter and $224 billion a year ago.

For the quarter total revenues were $371 million, below the $435 million reported in the first quarter of last year. Net premiums earned of $272 million were below the $356 million reported in the same period last year.

The average earned premium yield was 51.9 basis points, down from the 57 basis points reported last quarter. The reduction is principally due to the increase in the estimate for premium refunds on expected future rescissions as well as a decrease in the average insurance in force. Without this the accrual on the premium yield would have remained relatively flat.

Investment income for the first quarter was $67 million compared to $77 million reported in the first quarter of 2009. This decrease was primarily the result of lower investment yield on our portfolio. Net realized investment gains were $26.9 million in the period compared to a net realized investment loss of $17.3 million in the same period last year.

Within the $26.9 million of net realized investment gains for the period were $6.1 million of other than temporary impairments. Underwriting expenses totaled $59.9 million versus $56.2 million last quarter and $62.5 million in the first quarter of last year. Cash and investments totaled $8.3 billion as of March 31 including cash and short-term investments at the holding company of approximately $85 million.

Losses incurred were $455 million versus $881 million last quarter and $758 million in the first quarter of last year with loss reserves now totaling $6.6 billion. The decrease in losses incurred was attributable to a decrease of 9,196 or a 3.7% decline in the number of primary delinquent loans. This was the first decline in the primary delinquent inventory since the first quarter of 2007.

The quarter-over-quarter decline in delinquent inventory was broad-based across our books of business, so loan bulk and vintage and geography, with flow down 4,900 units, bulk down 4,200 units, the 2007 vintage down 2,100 units, the 2006 vintage down 3,300 units, the 2005 vintage down 1,300 units, and our two largest states of writings, California down 1,100 units and Florida down 1,300 units.

New notice activity was down 12.6 in the quarter continuing a downward path that began to emerge last year and may be the first signs of credit burn out. We will be watching the new notice developments over the next several months to see if this quarter was an aberration or not.

Cures increased 48% from last quarter and 4% from last year. This increase was primarily attributable to an improved cure rate on the more recent or newer notices and an increase in loan modifications where we had 12,200 mods in the first quarter versus 4,800 last quarter.

Net paid claims in the quarter were $519 million versus $515 million last quarter and $356 million in the first quarter of last year. The average premium paid claim was $53,070, up slightly from $52,606 last quarter and down from $53,585 one year ago. We would expect claim payments to be at this level or higher through the end of the year as most foreclosure delays have been either removed or have been incorporated into the servicer's processing time. The levels of loan modifications and their performance remain the wildcard.

Total primary and pooled loss mitigation savings for the quarter was $759 million with $373 million of that in rescission and denials, up from last quarter of $506 million where we had $366 million in rescissions and third quarter of $513 million where we had $390 million in rescissions. We would expect rescission activity to remain at approximately this level until we work through the 2006 -- through the first half of 2008 books of business.

The primary reason for the increased loss mitigation savings was a result of an increased loan modifications in the quarter. Loan mods including HAMP totaled $367 million versus $120 million in the fourth quarter of 2009 and $105 million in the third quarter of 2009. HAMP modifications totaled $281 million versus $63 million in the fourth quarter of 2009 and $13 million in the third quarter of 2009.

Since April 2009 a total of 54,100 of our delinquent loans were reported to us as beginning the HAMP trial period of which 11,600 have cured or approximately 9,000 (technical difficulty) the first quarter 2010 or 18% of all cures reported. Approximately 43,100 of the primary delinquent inventory were reported to us as being in the HAMP trial process as of March 31, 2010.

It's still too early to analyze redefault rates on these loan modifications since a substantial majority of these cures have occurred over the last four months.

In January we thought the origination market might approximate $1.5 trillion in 2010. Since then, however, consensus forecast has drifted down to approximately $1.1 trillion to $1.3 trillion. This coupled with loss share from the large customer as I mentioned previously and the continued large share that FHA is taking has lowered our expectation for the full-year new insurance written to somewhere between $10 billion and $15 billion.

In conclusion, clearly we are not out of the woods yet and as evidenced by our financial results, which continue to be impacted by the high level of delinquencies and low level of cures that occurred over the last two years and the current level of new insurance written.

However, as I mentioned last quarter, we believe that there is a role for private capital to provide credit protection and believe that view is shared by many policy makers. And for the first time in a long time we are beginning to see a few signs of encouragement, namely a higher level of cures, fewer new notices, and increased modifications.

With that, operator, let's take questions.

(Operator Instructions) Jordan Hymowitz, Philadelphia Financial.

Thanks for taking my call. Question, I guess I am a little confused on your incurred number. You guys always provision on net new delinquencies and net new delinquencies were basically flat this quarter. So I guess I am confused as to why you would continue to build reserves if ending delinquent inventory count is actually down in the quarter.

It's Mike Lauer. A couple things; first of all, as Larry mentioned, the new notices have dropped off. One of the things that is happening in the higher cure rates obviously is the newer notices are curing faster. So you have an aging process that notices continuing to get longer, if you will, aged more, therefore higher propensity of going to claim. Severity is pretty much up just slightly.

So it really is a combination of a number of things. One is the aging of the delinquencies that you might expect because the cures are coming from the newer delinquencies. Second, the higher propensity to go to claim as well as adjustments for rescission assumptions. All of those would be in that.

So the reserve did come down approximately $90-some million dollars but obviously not as much as you anticipated.

Did a higher propensity to go to claim as part of that -- there is actually less of a propensity to go to claim now aren't there because of rescissions?

No, no. What I am saying is that the aging process of a given notice as you -- if you think about the decrease in delinquencies it can be coming from newer delinquencies that come in more recent and age less and cure faster. So relative to the decrease, while we saw it across a number of markets and factors it's also the aging process that is a factor.

So the aging of the delinquencies -- the delinquencies we have on hand are older by another quarter, if you will. A higher percentage are older so the claim rate assumptions gradually go up as the delinquency is there longer. And also we have some adjustments with respect to rescission assumptions, but I think not much on severity. A slight increase on severity.

Okay. Can I ask one more or should I get back in queue?

Jordan, this is Mike Zimmerman. We got a number of people in line. If you could jump back in queue, we would really appreciate it.

Sure. Thank you.

[Chris Owens], (inaudible).

Good morning, gentlemen. My question is on the HAMP modifications. I think you said that there were 11,600 totaled permanent mods through March 31 and that there was a $280 million reserve benefit from that. Are those numbers correct?

Chris, this is Mike Zimmerman. That is correct but keep in mind the $280 million we are still embedding a 50% redefault rate when we give you that number of $280 million. And that is the risk.

Okay. Was that disclosed in the --?

Yes, if you look at the risk factor you will see that the gross amount of the risk that got affected.

So in other words, if -- well, if I can put words into your mouth but if you said there was a 0% redefault rate on these HAMPs then you guys would have made money this quarter, right?

I am not going to let you put words in my mouth.

But if there is $280 million potential loss on a 50% redefault rate that is --?

No, that is just when we are -- again, this is Mike Zimmerman. When you we are telling you the number $280 million that is not how it's run through the financials. We are just telling you that we are still assuming a 50% redefault rate even though we don't know what these redefault rates will be on these HAMP modifications. That is the long-term historic.

Okay. What flows through to the income statement on that? What is the loss reserve on the quarter? How does that 50% redefault rate impact the income statement?

Well, if it actually came out inventory then there would be a straight reduction of reserve for that particular delinquency. So if it cured out, and there was a -- obviously there would have been a reserve for the previous month. It comes out in the next month's calculation.

Okay, so there is a full reserve -- I don't get the discrepancy. How is there a full reserve released on the income statement but you are only saying we are taking a benefit for half of it? How do I --?

Chris, this is Mike Zimmerman. We have talked about this in the past with you but the $280 million is what we are just telling you is our assumption. If 50% redefaulted that is what the risk would be benefited by or the cures would benefit by.

We took whatever reserves were associated with all the cures, came out of reserves. We have not disclosed and wouldn't disclose the percentage of -- if it would have been 100% reserved or 50% reserved. That we have not disclosed and would not disclose.

Okay, all right, great. That is a great clarification. Then the other thing is it looks like roughly 18% of your delinquent inventory is now in HAMP and you guys billed the average reserve per loan during the quarter. Are you guys going to, at some point, calculate a forward benefit for HAMP cures or is that going to be just as it happens?

As they cure. The effect of calculation will be as they actually cure they will come out. We won't bake in future assumptions on that.

So it won't be something like the rescissions where you guys do calculate a future benefit for it?

Correct, correct.

Okay. Thank you very much.

Donna Halverstadt, Goldman Sachs.

Good morning and very excited for you, congratulations. Two quick questions. Are you prepared to give 2010 guidance on either paid claims or reserve additions?

Well, I think what we would say with respect to paids -- there were 519 in the first quarter and 518 in the fourth quarter. We would certainly see that they would run at this level or slightly higher through the balance of the year. We anticipate that they will increase in each of the quarters.

We paid almost $1.7 billion, $1.8 billion last year and anticipate that the number would be at this level current month run rate and higher. But no particular guidance other than we anticipate it, and you can tell from the delinquency level, increase year-to-year -- that we will anticipate some increase in paids throughout the year.

Okay. And I missed what you said the average earned premium yield was.

51.9.

51.9, okay. And then just one general question. All the various -- well, your first quarter release came out a few minutes before the release about the offering. All of the specific comments you make in your risk factor questions do they assume the offering or do they not bake that in?

Donna, this is Mike Lauer. Are you talking about in the earnings release risk factors?

Yes.

They reflect just the quarterly earnings so pre-announcement.

Okay. So when you -- pre-announcement you say risk to cap over the next few years could materially exceed 25 to 1. Does that statement change with the capital raise?

Again, we can't talk to the offering but I would suggest you look at that factor.

Okay, all right. And then the very last question, I firmly understand and believe in the arguments for keeping private capital in the residential mortgage food chain. Particularly if the industry can raise capital I think that is very helpful.

But just to play devil's advocate, to the extent the GSE resolution results in demand for private MI being reduced or going away is there a plan B?

So if the world ends what will you do?

Exactly.

Thanks for calling in, Donna.

Yes, you are welcome.

Well, I do put a lot of faith in policymakers. I have to tell you the reality of the situation -- and I do spend some time in Washington; it's not pleasant time but I do -- is that there is a real feeling that we need to have more skin in the game relative to dealing with quality.

And while the combination of the GSEs and FHA have owned the market for the past two years because I think of a lack of capital within the private sector, I think that will change. Policymakers really do want to see people taking risk and getting the government out of providing the whole solution here.

So I feel fairly strongly that what will happen will be one whereby mortgage insurance will be an essential part of the mortgage system. Fannie Mae and Freddie Mac may not look the same but I think there will be a calling for private capital to be a very important part of the solution. So while it may change, as you suggest, I think we will be an integral part of the solution moving forward.

The reality is as you look at FHA that is not sustainable. They are at 53 basis points of surplus below their mandate of 200. Their market share is 90% relative to 10% for our industry. They are going to incur large losses and there needs to be more of a sharing within that space and I think we will be there to share that business with them.

Great, thank you. It's very helpful to hear your thoughts on that. Good luck.

[Brian Hutchins], [Modelo Partners].

Can you address how you are going to underwrite going forward to sort of what you just talked about to mitigate some of the risk?

I will let Larry give some of the things we have done. As you track our books of business, however, since our underwriting changes they are doing quite well even with the economic climate we are in. But Larry can talk more to the specifics as far as what we do.

First off, the home prices and employment picture seem to be stabilizing. We have made a number of underwriting guidelines changes since 2007. In particular we addressed the segments that have been causing a lot of the problems, the higher risk segments such as bulk, reduced documentation, A-. We no longer do those segments.

And if you look at our 2007 book of business and you boil it down to full documentation loans to borrowers with decent credit and decent affordability or monthly payments in terms of debt to income ratios, you will see that that business originated in 2007. Even though the employment picture went from 5% to 10% unemployment and home prices fell nationally by whatever they did, that full documentation prime credit with decent debt to income ratios performed reasonably well.

So that gives us faith that our current guidelines, even should the economy go through another dip, should perform well given the guideline changes and the pricing changes that we have made.

And we are also implementing, I think May 1, risk-based pricing whereby we are lowering our pricing somewhat on the 720-plus credit scores and raising it on the below 680 credit scores. And as a result of that both -- the advantage obviously is that we will get more of the better and less of the higher credit or lower credit score business, but it also makes us very competitive against FHA. As they adjust their pricing to deal with their surplus issues it will really help us compete.

The reality of FHA, last year $100 billion of what they insured was in 720-plus credit scores. This is business our industry and our company should be insuring. And I think as we move forward with our pricing and FHA needs to address their pricing and underwriting it will make our company very, very competitive.

Okay, thank you.

Beth Malone, Wunderlich Securities.

Thank you. Good morning. Is there other programs out there or legislative issues that you are hearing that could add to the improvement in this overall environment, the HIMP and the HAMP program? Are they looking at more things that could benefit the condition in the mortgage insurance marketplace right now?

As I talked about, clearly FHA is looking at -- Dave Stephens, the commissioner, and Bob Ryan and others at FHA are looking with dealing with their surplus. They are very interested in restoring the health of FHA and again I think our industry will be the beneficiary of that as they deal with some of the situations they have on surplus.

On the loss side of the business there are some lenders that are putting in principal forgiveness plans on modifications. I know the government is also looking at that.

I can't quantify how that will benefit our company. I think it will. The reality is when those plans happen we continue -- we don't incur a loss on the principle that is forgiven. Only if would go to claim we would then insure the total amount that the loan started with. But to the sense any of those loans cure those are obviously wins because we would have paid a loss at the full amount as it was without it.

So I think those programs will help us. There is the moral suasion issue that will it derive -- push people into going delinquent that wouldn't have been otherwise. But I think on the overall basis it's a win for our industry and those in mortgage finance and home buyers.

Any sense of the timing? Is this ongoing?

I think there is pilot programs but who knows on a more significant basis when these would be implemented. That I don't know.

Okay, thank you very much.

Steve Trusa, Deutsche Bank.

Good morning. Quick question on the 9% convertible securities. I know the Company has deferred payment for a while now. What were the plans to make that current?

We have no plans at this time and we will announce that as we go forward.

Okay, thank you.

Steve Stelmach, FBR Capital Markets.

Congratulations on a decent quarter. Can you just give us your thoughts -- back to the HAMP question a little bit. Chris mentioned 18% delinquency inventories now in HAMP. Towards the back end of the quarter principal forgiveness was introduced into the program or at least became a higher priority. Where do you think we are in that process? Are we largely through the benefit or is there still a lot more to come you think?

If you look to the month-to-month trends it looks like the program continues to get traction. It still seems to us anyhow through the numbers they report to us that the trial cases are still ramping up. About a third of some of the earlier trial cases have cured to this point so hopefully that trend continues to the newer cases and maybe improves.

They have made some changes to the process. Instead of putting people in the trial period and doing the paperwork afterwards, they are trying to do that upfront. So I would guess that we would probably see a drop-off in trial periods in the short term, but because the paperwork is being done beforehand once they get into the trial period you would think more would come out.

So it seems to be gaining traction. They are trying to improve the process so hopefully it continues to build and benefit us and others.

Steve, this is Mike Zimmerman. I think the best way to keep track of that in the future is, as you know, the Treasury Department monthly puts out about their statistics. And that is what we are all watching because we don't control that activity with the borrowers, the servicers do. So we watch that as closely as you do.

Yes, and I appreciate that. We check that out pretty closely. I guess the question was do you get an additional benefit now that principal forgiveness is given a better priority or do current trends sort of stick to where they are?

Keep in mind the principal forgiveness is a voluntary program and it's not required.

Okay, great. Thanks, Mike.

Wayne Cooperman, Cobalt Capital.

I guess the first question was sort of what you were just talking about, if you were seeing any movement on these principal forgiveness programs. And the second question is slightly related to the offering.

Just curious what your plans were post offering as far as risk to capital. If you planned on staying at the lower level or you planned on deploying the capital and moving back higher up than where you would be post offering?

Wayne, this is Mike Zimmerman. I don't think we are going to be in a position to address that question today other than what we have listed in the risk factors which was that in the earnings release we said we think we would be above the 25 to 1.

No, I know but I was wondering what your -- after the offering what your plans were.

No, I understand that and that is what we are not going to be able to address at this time on this call.

Okay.

Sorry about that.

And then just on the principal forgiveness programs are you seeing -- has that picked up any steam? Are you seeing that (inaudible) or is it too early?

Way too early to call.

All right, great. Maybe we will do a call later on the offering.

Okay.

(Operator Instructions) Tim Ryan, Oppenheimer Funds.

Good morning, thank you. I know that the reserve amount that is attached to any specific loan changes as the amount of or the time in delinquency increases. But if I think about it sort of differently, from a vintage standpoint do you, all else equal, have higher reserves on sort of 2006 and 2007 versus other years because that is when there was a peak in home prices?

No, really it's a function of the underlying exposure on a given loan. If it was deep cover on a 2007 it would have more of a higher reserve factor than a 2006 with lesser cover. So it not only depends on the age but also the underlying (technical difficulty) loan.

Totally understood. I am just trying to get a sense of on average for those vintages is there just so much heterogeneity across vintages that what I am asking just doesn't make sense? I would have thought that year to year the biggest changes would have been maybe some changes in underwriting standards and the amount of what is insured as prices changed. Is that wrong?

I think -- ask the question a different way if you can.

Okay. I guess the first question that was asked, the very first question on the call was around the change in reserves or, sorry, the change in delinquent inventory and why there wasn't as much of a corresponding change in reserves. And you folks said that basically the reason for that was because the loans that were curing were earlier in the delinquency pipeline, if you will, than the loans that were staying around and so they just had less reserves attached to them.

If I look at page seven of the presentation on your website, it shows that cures were up meaningfully in the first quarter in the 2006 and 2007 vintages. And I just would have thought, all else equal, that the 2006 and 2007 vintages would have had more reserves attached to them.

They would have had with respect to claim rate assumptions. But again if in fact a given delinquency came in on 2006 or 2007 book and it just came in last month, it cured out this month. That is one of the factors we are talking about.

What I am [thinking] or alluding to is the average across all the delinquencies and the average aging obviously has gotten older, as you might imagine. Because if you recall, all last year we were talking about the buildup in delinquencies was a function of not only the claims or the loans going to defaulting but also the fact that it took much longer to get through the claims paying process in foreclosure.

So each of the subsequent quarters the aging of the delinquencies have gotten older and older and older. So what we are seeing is the older ones are getting older and newer ones are rolling through faster, especially in the last two quarters.

The other factor obviously was some rate changes and severity changes, but the predominant factor I believe was the mix change on the aging.

Okay, thank you very much. Appreciate it.

[Sean Perot], Deutsche Bank.

Just wanted a quick question on short sales. I am not sure if any of the lenders are really pursuing this aggressively, but we have heard some different comments from them. How do you guys view subrogation rights on a short sale? Do you guys have any issues with the lenders that you guys have been discussing where you guys have been pushing for continued subrogation rights despite them trying to push for short sales to try and reduce any delinquent risk that they have?

Sean, this is Mike Zimmerman. Short sales for us are a pretty small amount of our loss mitigation activities, the claim payment activities along the way. We are at 100% severity, so these short sales that are occurring are some pretty distressed marketplaces.

But you guys aren't having any issues with the lenders pursuing short sales and then you guys not having any say in whether or not they continue to pursue those? I know Citi had talked about trying to --.

We have a say in that process. We work with what is best for everyone in that equation. So while I can't say we don't have issues, it hasn't come on my radar screen. So I don't think we have significant issues at all. We will work to do what is best.

Remember, our coverage is the loan amount times roughly 25% on average. And given the price declines, we are pretty much paying out the maximum 25% coverage. So prices have kind of gone past that point. So whether it is a short sale or not, it really doesn't impact our severity because we have already attained pretty much the maximum severity we paid for the policy.

Right, but I guess if the lenders are pursuing a short sale in lieu of a modification or something else, clearly you guys would be paying a claim on a short sale versus clearly not paying a claim on a modification. So I just wasn't sure if the lenders wanted to pursue short sale versus a mod, you guys would have --.

This is Mike Zimmerman. Fannie and Freddie loans, which is the majority of our delinquencies, require if they pass that [MTB] test that they have to offer the modification. So that is the governor, if you will. So the ones that don't pass the test, then yes, the next course of action would be to try to pursue a short sale or some other -- or deed in lieu or what have you.

Okay, okay. That is helpful. Thanks, guys.

[Robert Davidow], private investor.

Gentlemen, are you seeing any pushback from your sources of production due to the rescission activity? In other words, are some of the lenders that would normally recommend your coverage going elsewhere because of rescission activity?

Well, we have documented that Bank of America has made that decision. As far as on other -- it's not really a big -- I mean obviously the rescission activity is hard for everyone in the system just as buying back loans where Fannie and Freddie may buy back the loans is very difficult for lenders. So these have all led to issues within the industry.

So, yes, you get some pushback. But the reality is that -- again on the case of our company, and rescission activity for the industry has been quite high, but in the case of our company we try and work out a fair solution. And as a result of that I think it has mitigated many of the disagreements we may have had relative to rescission discussions.

And the sources of production aren't phased -- there is a new entrant in the market. They aren't necessarily favoring that company because it's not involved in rescission activity?

I don't know if they are actively writing business yet, so it's too early to comment on that.

Thank you very much.

Bruce Harting, Barclays Capital.

Curt, the return to growth per se with the new capital, you said last year your share was 26% or so. Do you expect the whole industry to resume some level of growth or will you -- you will be in an advantaged position and will see that market share ramp up even more?

And then can you repeat what you said about pricing relative to the FHA, I didn't follow all the specific numbers? And then finally, if I may, kind of a road map back to profitability. I know you are not going to give specific guidance, but in terms of reserve release is it simply the delinquency numbers dropping that would allow -- you have been consistently building reserves here for the last few years. As delinquency patterns improve and other factors, do we see that reverse as we have in this quarter?

Bruce, this is Mike. Let me take that last question and then I will turn it back to Curt. Obviously the primary driver on the incurreds it has been, as you mentioned, the build up of delinquencies as well as paid rescissions, etc. As I look out, and notwithstanding what the trends have been, the incurred level will be significantly impacted by not only the paids and rescissions but also the level of delinquencies.

If we continue to see some improvement in the level of delinquencies, albeit a falloff, that would be positive but we wouldn't forecast that. As you know, traditionally we see a favorable cycle in the first and second quarter, kind of a seasonal adjustment which we haven't seen for three years. But in the past there was a normal cycle in the first and second quarter and then some increase in the third and fourth quarter.

So I think we still don't have enough visibility. It was a good development here in the first quarter and we will have to keep monitoring it quarter to quarter and reporting out. We have given you more information on that, by the way, as far as the role of delinquencies, new notices, and cures, etc., so we will all monitor that, I guess, collectively quarter to quarter. As we see further development, we will know more.

Bruce, relative to the growth of new insurance written, the reality is the origination market has fallen pretty dramatically. So as I think as we get through this year with the unemployment stabilizing and home prices stabilizing you will see a return and growth in the origination market which will be very helpful for us.

Also, I think as our industry stabilizes from the aspect of our underwriting standards and capital and things of that sort we will be able to take more risk, prudent risk, but allow us to expand in some of the markets that we haven't been able to over the past 2.5 years which has allowed or had the FHA share rising from somewhere in the area of 35% to probably 90% at the end of this first quarter.

So we have a lot of opportunity to regain that business relative to the FHA. I documented their issues on the surplus and that they are trying to address that. As I say they have got a responsible group there in charge. They are looking at how they can restore that surplus which has led them to increase the upfront premium and then also looking at reducing that later but then increasing the monthly, which clearly makes our execution, the conventionally insured loan delivered to Fannie and Freddie, a better execution.

And so hopefully those changes will get through because they are the right thing to do. We will be in a good position to serve that market, particularly with our risk-based pricing whereby we are participating or going after the very high credit score business.

So I think we have a wonderful map to restore the growth in new insurance written as the market recovers. And we can move forward, not to the levels that we saw maybe 10 years ago but to much higher levels of writing.

Okay, thank you.

[David Haas], [Lubell].

Just a quick question. I know we alluded to be 25 to 1 sort of cap before and just sort of going through the quick math on the adjusted risk in force using your 20.2 ratio this quarter. Just thinking about $1.7 billion, $1.75 billion of [stacked] capital it looks like you can put on another $3 billion, $3.5 billion or so of business before you get up to that 25 to 1 if my math is right.

I am just thinking is the commentary around the 25 to 1, exceedingly 25 to 1 more focused on losses or is it more focused on potential for new capital and growth opportunities going forward?

This is Mike again -- Lauer. Really it's a focus -- if you have been following us for the last two years, what we have been indicating is that we have always had a concern for risk to capital requirements because the writing company, Mortgage Guaranty Insurance, is booking significant losses and eroding surplus. So we knew over time if the losses continued we would have an issue with risk to capital meeting certain requirements, regulatory retirements.

So that is part of the process that we started the drop-down of capital to the new company, MIC, as well as getting waivers from insurance commissioners with respect to continue writing business. So we are forecasting losses in the mortgage guaranty insurance over the next two years obviously.

If you looked at the reserves we have got $6.6 billion of reserves. That is a pretty good indication of the type of paid claims we are going to have going forward and the statutory ratios we anticipated would reach the 25 to 1. So the combination of the losses in the writing company combined with mix and the waivers provided us an opportunity to continue writing business.

Notwithstanding that we wanted to further strengthen our balance sheet and provide additional capital to do a couple things. One is to take care of the near-term liquidity issues at the holding company and most importantly to provide capital.

Great. Okay, thank you.

Jordan Hymowitz, Philadelphia Financial.

Two quick questions. One is a follow-up, you guys always provided on delinquencies. It would seem that as delinquencies slow your incur rate should slow as well. Would that be a fair process?

Yes, except for other mitigating circumstances. Obviously, if rescission assumptions change going forward, Larry talked about rescissions made declining etc., that could be a mitigating factor and mix. But you are correct, the level of delinquencies is a big contributor to that.

And unlike almost all other financial companies the noticed of delinquent inventory triggers a reserve on the MIs much more upfront than other companies, correct? So wouldn't it be supercharged, for lack of a more technical term, on the notice of delinquency numbers?

What do you mean by supercharged?

To Jordan, I think what you are thinking about is we add to reserves -- I mean each month that the loan ages it increases the probability of loss and the reserve builds. So a newly reported notice has got a lower probability than a notice that is 12 months old so it would just build.

So the supercharging comment I think that you were referring to really, I don't think, applies there.

And my other question is your reserve to loans in default is much higher than your peers. So even if delinquencies are continuing to occur might there be a chance that that gap will narrow?

I can't really comment on the difference between ours and the competitors. It's a fact but I can't articulate why they are where they are.

Okay, thank you.

(Operator Instructions) [David Haas], [Lubell].

It is not David, it's [Will McClanahan]. Maybe I could go with this reserving thing one other way. If you look at the reserve release this quarter, my understanding is it's impacted by or driven by the change in delinquencies what was lower. You have talked about the roll rate on the remaining delinquent inventory. Is the roll rate now better than previously expected or still sort of in line with what you expected?

What do you mean by roll rate? One of the comments I had was that the average age of the delinquencies is getting older each quarter so --

Yes, but that has been -- I guess it's the inverse of the cure rate. Effectively what has been happening is that delinquent inventory hasn't cured, it has stayed in longer, and then it has gone to claim in higher frequency or severity.

When you break those pieces down, if we begin to see a turn in the environment obviously the roll rates will improve. You mentioned that severity is sort of as expected. Is frequency, meaning -- I am calling frequency the trend of a delinquent loan going to claim. Is that beginning to stabilize?

If I take a step back, my understanding is the way you reserve is you look at the change in delinquencies and then you look at the expected losses on the remaining delinquent inventory.

Yes, there hasn't been as significant a change in claim rates this quarter as there would have been in 2008 and 2009, correct. The quarter-to-quarter change in claim rates is moderated compared to where it was a year ago.

Okay. So is the release -- it was very modest but the reserve release this quarter was more a function then of the seasonal decline into delinquent inventory?

Yes.

Thanks.

This does conclude our Q&A session. Would you like to continue with any further remarks?

No, operator, we have a busy day ahead of us so thank you all for your interest in our company and have a great day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference call. You may all disconnect.