MGIC Investment Corp (MTG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC fourth-quarter earnings conference 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 that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, you may proceed.

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 results for the fourth quarter of 2010 are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; and Executive Vice President of Risk Management, Larry Pierzchalski.

I wanted to remind all participants that our earnings release of this morning, which may be accessed on our 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've indicated in this morning's press release, we have posted on our website the supplemental information containing characteristics of our primary risk in force and flow of new insurance written and other information which 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 up those statements in the future in light of subsequent developments.

Further, no interested party 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.

With that, let me turn the call over to Curt.

Thanks, Mike. Good morning. In the fourth quarter, we reported a net loss of $186.7 million versus a $280.1 million loss in the fourth quarter of 2009. The loss reflects the continued impact of the weak credit and economic environment. I will spend some time discussing this in more detail in just a few minutes but first let me cover some of the particulars of the quarter.

New insurance written for the quarter increased to $4.2 billion, up from $3 billion from the same period last year and $1.8 billion in the first quarter. This is the first quarter of year-over-year growth in new insurance written since 2007 and is the third straight quarter of growth. In addition, new insurance written does not include $1.1 billion of HARP refinance transactions completed during the quarter on loans we already insured as we treat such volume as modifications.

Year to date, we have completed $3.2 billion of HARP refinance transactions. These transactions are good for MGIC in that they continue to allow current borrowers that are already insured to improve their credit profile through lower monthly payments by refinancing at today's lower rates.

Absolute levels of new insurance written volume remains muted due to the lower home sales, the continued strong but diminishing presence of FHA and the add-on fees the GSEs impose on borrowers. However, the private mortgage insurance industry market share continues to rebound from the low of 3.6% in the fourth quarter of 2009 and is currently estimated at 4.6%. Within our industry, our share held steady at approximately 22.5% in the fourth quarter.

In 2011, we expect that our industry will continue to regain share against the FHA albeit slowly as borrowers, originators, and realtors recognize the financial and operational benefits of conventional financing. And importantly, MGIC should get a disproportionate amount of business from higher credit score borrowers reflecting our credit tiered pricing advantage versus the FHA premium changes made last October.

So for 2011, we would expect new insurance written to increase modestly over the 2010 volumes. Persistency in the quarter was 84.4%, which was down modestly from last quarter's level of 85.7%. Cancellation including claims continue to outpace new insurance written in the quarter and as a result, insurance in force declined to $191 billion from $197 billion last quarter and $212 billion a year ago.

The average earned premium yield was 60 basis points, flat to last quarter's rate of 59.7 basis points. Underwriting and other expenses totaled $53.5 million versus $56.6 million last quarter and $56.2 million in the fourth quarter of last year.

Cash and investments totaled $8.8 billion as of December 31. In the fourth quarter, we realized gains of $13.4 million as we continued to rebalance the portfolio. During the quarter, there was a material decrease in the amount of unrealized gains contained in the investment portfolio associated with municipal bonds. Per GAAP requirements, we recorded an associated tax benefit to equity and recorded a tax charge on the income statement that offset that amount.

Finally, risk to capital was 19.8 to 1, up from 17.7 to 1. Both completed a new trial HAMP modifications were relatively stable during the quarter. As of December 31, 16,800 of the primary delinquent inventory were reported to us as being active in the HAMP trial process, which is down from approximately 19,800 last quarter. In the quarter, there were approximately 3500 new HAMP trials reported.

The number of loans modified under HAMP in the quarter totaled approximately 3200 loans as compared to 5800 loans in the third quarter and totaled 27,900 for all of 2010. HAMP continues to be replaced with alternative modifications programs whose cures totaled 6500 in the quarter compared to 6900 last quarter, 5300 in quarter two, and 3300 in quarter one of this year.

The level of non-modified or natural cures continues to increase as modifications fell to approximately 22% of all primary cures reported, which is down from 28% last quarter. Currently the HAMP modifications continue to perform better than our historical re-default rate of 50%.

The level of loan modifications benefited us in the quarter and for the full year, but the ultimate performance again remains a wild card. Going forward, unless the HAMP program changes, we believe that the majority of the benefit associated with HAMP modifications has been realized, although we will continue to receive some residual value from the program in 2011.

Losses incurred are still clearly being materially impacted by the level and development of the delinquency inventory. On a positive note, the level of new primary delinquent notices continues to trend lower, presumably a function of a modestly stronger regional economic growth. However, the number of loans resulted in cures has remained effectively flat the last two quarters, due primarily to seasonality and a lower level of modifications.

Losses incurred increased during the quarter to $448 million versus $385 million last quarter but were down significantly from $881 million in the fourth quarter of last year with loss reserves now totaling $5.9 billion.

This quarter we broke out reserves between primary and pool in the press release. Historically we have included in our loss reserve estimate not only the estimated claim amount but also an estimate for the amount of premium that was advanced to us but ultimately will be returned to a servicer when a claim was paid. Servicers typically advance premiums to us while the loan is delinquent.

Given the increased level of claim payments and associated premium refunds, we are now including these reserves in other liabilities and the premium deficiency reserve.

We continue to see a decline in the number of primary delinquent loans which fell by 8649 units primarily due to the increased number of paids. So while fewer borrowers are going delinquent, the existing inventory is remaining delinquent longer and is going to claim at a higher rate than our historic averages. While it is highly dependent upon the strength of the economic recovery, we expect that the level of new delinquent notices will continue to moderate in 2011.

We also expect that the long-term cure rates will eventually recover from the current levels of 65% to 70% to their historic average of 90%, but we see that taking another few years to play out.

Med paid claims in the quarter were $631 million versus $588 million last quarter and $515 million in the fourth quarter of last year. The average paid claim was 48,800, flat to last quarter. Looking at 2011, we would expect the dollar amount of claim payments to be at the fourth-quarter run rate or higher given the large number of loans that are 12 months or more past due and the approximately 20,000 claims that have been received but not yet paid.

Total estimated primary and pool loss mitigation savings for the quarter was $617 million with $288 million of that in rescission and denials which was down from last quarter's savings of $686 million where we had $262 million in rescissions.

As I have previously stated, we believe that the percentage of claims resolved through rescission has peaked and that it will continue to decline over the next several quarters, although the rate of decline is difficult to estimate.

Now let me take a moment to address some of the more macro factors relative to our company and industry and in particular the implementation of the Dodd-Frank Bill, GSE reform, and most recently foreclosures.

As many of you are aware, the definition of a qualified residential mortgage or QRM that would exempt originators and/or investors from risk retention requirements is currently being discussed by regulators. Our industry has been meeting with Treasury, various regulatory agencies, and congressional staffs about the valuable role mortgage insurance plays in reducing the effect that defaults have on lenders and investors. We would suspect that the regulars will issue this proposed QRM definition for comment in February, shortly after Treasury releases its proposal on GSE reform.

What we have been hearing is that the proposed GSE reforms and the proposed QRM definition should be looked at in totality and that they have an ultimate goal of reducing taxpayers' exposure and increasing skin in the game to the private sector. That within the GSE reforms there will also be reforms suggested for FHA regarding premium rates, underwriting criteria, loan limits, capital requirements, and other things to shore up FHA's financial and business practices.

So while we have heard that the QRM definition could possibly require a larger down payment with MI versus FHA, when looked at in conjunction with FHA recommendations as part of GSE reform, in total it may turn out beneficial for our industry if the reform legislation is passed.

Finally, let me discuss how we see the recent issues surrounding foreclosure issues impacting MGIC. A number of large servicers have temporarily suspended foreclosure actions as a result of concerns about how the paperwork has been developed. In addition, all 50 Attorney Generals have initiated a joint investigation and Congress has held hearings. In fact, loan servicing and in particular foreclosure servicing issues is one of the reasons we believe the regulators have not had issued the risk retention definition.

As a result of the suspended foreclosure actions, we have seen the face of claims filed with MGIC slowing over the last several weeks. However long this slowdown will last is still uncertain and we don't think it can be reasonably estimated at this time. So as I mentioned earlier, we expect claims to be at or higher than the fourth-quarter run rate in 2011. This foreclosure issue could cause that outlook to be more volatile on a quarter-to-quarter basis, however.

As a reminder, the impact on our loss reserves of foreclosures delays due to these events is minimal as our policy requires a servicer to begin foreclosure within four months of the delinquency and diligently pursue those proceedings. To the extent that there is an undue delay or expense, the claim will be paid but the amount curtailed. So all in all based on what we have seen so far, the impact to us should be more of a timing delay and not an event that would cause either increased or material decreased exposure to MGIC.

Operator, that concludes my remarks. Let's take questions.

(Operator Instructions) Mike Grondahl, Northland Capital.

Yes, a quick question on the cost structure, Curt. NIW is kind of coming back nicely but slowly. Is there anything you can do with the cost structure? And when do you have to kind of take a permanent look at that depending on what NIW is?

Well, I think where we would take the more permanent look, Mike, is when we see how the regulations bear out relative to QRM and the GSE reforms so -- and FHA. The changes that we've heard that may be happening as part of the GSE reforms obviously would be positive relative to FHA. So I think all those looked at in totality helps make a difference relative to how we look at the expense structure of the company.

Okay, then in terms of the net new notices, could you describe in a little bit more detail kind of where your expectations were and how new notices kind of came in against those expectations?

The new notices I would say pretty much in line with recent forecasts. Keep in mind we are in that seasonal unfriendly part of the year. I would say aside from the new notice activity, the big operator is the cure rate. The cure rate kind of bottomed in the middle of 2009 and has been slowly improving. We had hoped maybe for a stronger recovery, but given the fact that the economy and in particular the housing market is bouncing along bottom, the recovery has kind of been slow. But we hope that picks up here in the near future.

Okay, then just last question. What was the rescission dollar amount in the quarter? It was $262 million in the third quarter but what was the fourth-quarter number?

Yes, it was a little higher than that. $288 million.

Okay, thank you.

Nat Otis, Keefe, Bruyette & Woods.

Good morning. Just following up on that, a rescission and denial question. It looked like December was actually a pretty good month. Is there anything there from a seasonal standpoint or any reason why December from a rescission and denial standpoint looked a lot better than maybe a couple of the prior months?

This is Mike Zimmerman. I would say it's just processing really more than anything else. Again look at that kind of quarterly average and flush it through.

Working days.

Working days, things of that nature.

Okay, nothing like a seasonal catch up to try to do before the year-end or anything like that?

No.

And then there's been talk about minimum servicer standards out of Washington. Any way you could kind of talk about a little bit what the impact to you guys would be if Washington stepped in there from that standpoint?

Not really until we see what they really are proposing. So it would be pure speculation other than that.

Okay, but in theory to get all the servicers on the same page, in theory would be a positive for you guys, assuming that it was logical things that were proposed in Washington.

Yes, I mean, to the extent that you have uniformity in any of the business processes, everyone is more efficient. So yes, it would be more positive on an expense side clearly.

Okay and just lastly on that FHA, on the FHA pricing, I know you said it's going to be a very gradual process there. Is it something that you are seeing already on a kind of monthly and quarterly standpoint, a little bit of pickup in market share away from FHA, or is that something that is just it is still going to be even into 2011 before you see something measurable?

Well, no, I mean the fact that I think we did $4.2 billion in the quarter, that the fourth quarter being the highest quarter for us, that's something new and that reflects the fact that the FHA changes, pricing changes are taking place. The fact that the market share relative to FHA has increased indicates that. But we think that will continue to increase in 2011. So very positive for our company and our industry.

Just to quantify, if you look at the share, if you will, between beginning of the year of '10, FHA of the insurable market, FHA was maybe doing 90%, private 10%, today, that's about 75/25. So throughout the year, we have seen a gradual shift over within that. Besides the overall market obviously influences the total writings, but we've seen that recapture take place throughout the year.

Okay, fair enough. Thank you.

Mike Grasher, Piper Jaffray.

Good morning, everyone. A couple of follow-ups here just in terms of I guess around the expense and the sales area. On the salesforce, have you sort of changed your approach with the originators in any way yet? I think you had spoken about it in the past and I just wanted to get an update on that.

No, I mean we have a national account group that deals with that group. We have long-term relationships with our people and those customers. So we continue to operate on that mode with the national group handling the large customers and our account executives all over the country dealing with the community banks and smaller mortgage bankers.

But in terms of their approach to pointing out the new sort of differences between EMIs and FHA with the new pricing structure for FHA, anything there?

Well, there we've done a lot relative to I think Web training for all our customers and those have been very well attended. I think they max out relative to attendance and so that's included in what all our people do relative to the FHA changes. That's not just MGIC. I think every company in our industry is doing that, so we all benefit from it.

So that was a major program relative to our salesforce not only with the national accounts but the community banks and others that were so strong with was pointing out the cost advantages to MGIC and given our credit tiered pricing, MGIC comes through that even better than our other competitors.

Okay, and then on the other side with the acceleration in paids, do you have the staff in place to execute? I think we jumped from 29,000, almost 30,000 in 2009 up over 43,000 this year with expectations that maybe that number is accelerated even more so in 2011, will you need to add staff there?

No, I think we are pretty -- unfortunately that has been the growth area of employment within our company and we are fairly well staffed there to handle that volume. We have a great group that works on those and I think we're fully staffed to handle that volume.

Okay, thanks very much.

Chris Owens, Trafelet.

Good morning. I was wondering if we could get a little bit more color on the incurred loss line this quarter. So last quarter delinquencies declined by 5,000 number and this quarter they declined by 8,600. And last quarter you lost $0.26; this quarter you lost $0.88. What was the dynamic that changed there that caused the increase in incurred losses despite the bigger drop in delinquencies?

When you look at the incurreds quarter-to-quarter, you're also looking at the change in the previous quarter from the previous quarter. So there were -- there was a reduction albeit smaller in the second to third quarter. And then in this particular quarter, although the increase in decline was greater by number, there was mix difference. The paids were higher significantly higher in this quarter. We didn't change much of the reserve other than a slight increase in claim rate on overall claims, our overall notices, rather. So the combination really of -- as Curt pointed out, we did not receive as many cures as we anticipated in the fourth quarter. They were flat to the third quarter and effectively down from the first and second quarters. So cures in the second half of the year were down from the first half significantly and flat quarter-to-quarter.

So the impact was an increase in paids, an increase in claim rate. Overall the average reserve is approximately the same, so it's fundamentally the change in paids and an increase in claim rate. And Curt pointed out a little earlier that our estimate on rescissions for the next year and out is less, so factoring in that reduction in rescission rates is a function of increasing the claim rate.

Okay. So you reduced -- okay. Because you also said that the cure rate is going up and I would think that that would help the claim rate.

Well, the cure rate hasn't gone up. That's the point. The numbers of cures have been flat quarter-to-quarter and down from the first half of the year. We anticipated a little bit better, if you will, improvement in cure rate in the fourth quarter, didn't see it. It was about flat and Larry mentioned earlier, that's really what's driving the notice activity, the improvement, if you will, in incurreds would come from improving the cure rate.

Notices are coming down because we're paying claims but ultimately reestablishing reserves for existing notices, etc. The cure rate must improve as we move forward into '11.

Okay, my understanding is that in the early part of the year, the cures are typically higher. Do you think that would have the effect of reimbursing some of this or --?

You're right, seasonally we generally see a higher cure rate in the first part of the year, the first half in particular, and we saw that again last year in '10 and normally you would anticipate seeing that. We will report out obviously on a monthly basis and you will see it in the numbers if that trend continues. But you are correct, seasonally we do see more cures in the first half of the year.

Okay, thank you. My second question pertains to the Countrywide settlement, Countrywide Bank of America settlement with the GSEs surrounding deficient loans. I would imagine that there's mortgage insurance on some of those loans and I was wondering how you would capture the benefit from that settlement or if there is any benefit?

Chris, this is Mike Zimmerman. Right, there probably is, we don't know, that's an agreement between Bank of America, Countrywide and the GSEs on repurchases. But remember if you will some of the process for repurchases relative to mortgage insurance, they typically come after a claim has been rescinded and put back and then their GSE would ask for the repurchase there.

So whether there's any incremental benefit or not, I don't know. But that's the process that happens when we put it back, rescind a loan, typically it gets put back, but we don't have any composition, the GSE is (inaudible) it and I think America has not shared that with us.

In theory, Bank of America or the GSEs can't get paid twice by either Bank of America or you?

Generally speaking, right. They are not entitled to -- I don't what know the correct legal term is, unjust rewards from insurance. They can't make money on an insurance claim. That's not the point of insurance. They're looking to be made whole, not to make money.

Okay, thank you.

Matthew Howlett, Macquarie.

Thanks for taking my question. Curt, could you just elaborate on your earlier comments regarding the MIA industry coming out better post the QRM ruling, GSE reform, and FHA reform?

Well, it could possibly come out better. We don't know the finality of what's going to happen. The point was that Treasury in the next probably two weeks will be releasing its study on GSE reform and we are hearing as part of that there will also be FHA reform with a goal in total of reducing taxpayer exposure and creating more skin in the game through the private sector.

And so the point was that as we look at whatever may happen on QRM, you have to look at it on totality with what also is being proposed with GSE reform and FHA reform and if those reforms that we have heard may happen with FHA come to be, that could possibly benefit our industry.

What type of reform -- so the FHA, would this relate to decreasing their down payment requirement, which I think is 3.5% right now, or something else?

It is 3.5%. I think the point was that if you did have a differential on the mortgage insurance down payment required versus FHA, that would only be a factor. You would have to also look at whatever they're going to do to increase the pricing on FHA as well as the underwriting guidelines, as well as loan limit changes and other things that even if they had an underwriting down payment differential, the business still may go to the private sector, the private mortgage insurance industry, because totality relative to pricing versus the risk retention, it would be a better transaction for the lender and the consumer.

Got you, okay. We will wait for that. And then just on that topic, the FHA short refinancing program, it appears to be expanding to agency loans or there's talk of it. That I believe requires a 10%, at least a 10% forgiveness of principal by a lender to I think a 97% LTV. Have you had any discussions on what an MI loan if it's performing and it's agency, how that would turn out in one of these programs, or do you think it will have an impact at all?

It's Mike Zimmerman again. I tell you, short sales in general we would look at and say will it mitigate a loss for us? So --

(multiple speakers) This is the short refinancing program.

I know, but it doesn't matter what the form of the short sale takes place. That's a new loan replacing it and the lender is going to take a loss. If we were going to incur a loss anyway and a short sale would mitigate that loss, we would probably entertain reviewing it. But if it doesn't mitigate our loss or it causes an additional loss to us, we would probably be inclined not to accept the short sale of that type.

Right, but if the loan is performing, which I think this program strictly relates to, it's current, you still would (multiple speakers)

We would have to look at that --

I mean you would think overall if it is expanded to the agency programs, it would be beneficial to our industry. As is working -- the question would be will it be expanded and how big an expansion would that be?

Okay, but not saying -- okay, it will be beneficial, got you. The last question on -- for modeling purposes, we look at cures and delinquencies. Next year, 2011, the false -- I know these were down 21% year-over-year 2010 from 2009 and cures were up 25% from 2010 to 2009. Just off those, can we -- if the book continues to shrink and the default cures from '05 to '07 continue to come down, can we use that -- could those numbers sort of fall in line in 2011?

The best thing we can tell you is that we are giving you monthly information on exactly what is happening. I think it would not be wise for us to give you a relative forecast of what could happen. Overall, obviously the book is running down and that's positive and we're not getting any new notices off the later books here. That's positive, so the trends are positive. And what the best we can do is give you a monthly activity of what actually is happening.

Great. Thanks, guys.

Donna Halverstadt, Goldman Sachs.

Good morning, everybody. I had two questions for you. The first one is on rescissions and for quite some time now you've been talking about how the benefit from rescissions will trail off over time. So nothing new there. But I was wondering if you could expand on something in your release. You say that you estimated that rescissions mitigated your incurreds by about $200 million in 2010, but in the third quarter that number was $500 million. So it looks like you actually lost ground. Can you talk about what drove that as well as how we should think about that going forward?

That's a lower, if you will, a lower benefit. As I mentioned before with respect to claim rate, you continually adjust on an outgoing basis the percentage impact of rescissions. And as Curt said, on an overall basis, first of all, we have seen the trends continue to decline all year long on a percent of rescissions. That's part of the information you have received.

The dollar amount was down slightly year to year this year and we anticipate it to go down again next year. So that's the impact if you will on the incurreds for the quarter, that less benefit, if you will.

Okay, so there weren't any rescissions that actually got undone, so to speak?

No, no, Donna, I'm sorry. Maybe it didn't explain it --

No, no, you did explain it. I just wanted to make sure there wasn't something like that embedded in there.

It's just a change in the rate going forward, a modest change in the rate going forward.

Okay, great. The other thing I wanted to ask about is when you look at the list of the risk factors, the risk factor related to the volume -- if the volume of low down payment, home mortgage originations declines, it could reduce your revenues. That risk factor was moved up a lot in terms of the order in which it appears and I was curious if that signals kind of real practical increased business concern on your part over QRM and GSE resolution or if it was more handing the pen to the lawyers and say just protect us even more.

The latter.

Okay, that was it. Thank you.

Shawn Faurot, Deutsche Bank.

Thanks for taking the question. Just one quick one, what was holding company -- what was the holding company cash balance at the end of the quarter?

$891 million.

Okay, that's it. Everything else was answered. Thanks, guys.

Steve Stelmach, FBR Capital.

Hi, guys. Just a finer point on the QRM thing, is your view of the current state of debate on QRM simply a matter of what the down payment requirement could be or should be? Or is there broader issues that you guys are still kind of hashing out on Capitol Hill that we should be aware? Aside from the FHA repricing and GSE reform [models] which are very big issues, but specific to QRM.

Relative to QRM, our point in all our meetings and in fact I know some of those meetings are going on today with our industry and congressional staff is relative to the definition. And the fact that mortgage insurance plays a significant role in reducing default risk and as a result of that should be one of the attributes utilized in determining that definition.

Okay, and then just quickly on the cure rate discussion you had earlier, it sounds like you said you were expecting a bit of an improvement from the cure rate perspective. It's --

Over time.

Yes, it's more stable than improving. Where should we see that improvement in terms of the stage of delinquency? Is that improving in the earlier stage delinquency or sort of were you expecting improvement in the later stage?

The cure rate I was referring to is having to do with new notices coming in the door that they -- the newer -- the notice we received for instance last quarter we expect to have a higher lifetime cure rate than notices from a year ago and a year and a half ago and we can see that trend continuing. The loans that are at various stages of delinquency, some of those delinquencies that were seasoned six, eight, 10 months, they benefited last year from the HAMP programs. We are seeing the HAMP trail off because they dealt with a lot of the loans that they addressed and so we are getting -- losing a little ground there. But the natural cure rate is improving due to the slowly improving economy and home prices.

Understood. So the cure rate, the improving cure rate was associated with notices that have yet to come in, not --? (multiple speakers) newer inventory, understood. Got it. Thank you, guys.

Douglas Harter, Credit Suisse.

Thanks, I was wondering if you could talk about the impact of the GSE loan level pricing? Does that mitigate -- does that take away some of the advantage of the FHA pricing increase?

A little bit. I think we were competitive on 680 and above on 90s -- FICO scores -- and 720 and above on 95s prior to the GSE price increase and we continue to be. It's just that the advantage is not quite as large as it was. So it didn't really impact us relative to the sales that we were competitive in just on a dollar basis, it reduced that advantage somewhat.

What it does too is absolutely it reduces the borrowers' ability -- if they -- from a down payment, it costs the borrower more money as well too.

Right. And then also thanks for the additional disclosure on the pool reserves. I was just wondering if you could try to give us a little bit more comfort that those reserves aren't going to be continuing to trend higher?

Well, again, the trend with respect to higher will depend on loss development as well as delinquency development. It's -- the trend has been increasing. We will monitor that as we go through on a quarterly basis. I would anticipate that all things being equal, there may -- because these are attachments as you get later into the life of the books, there may be some increasing reserves -- the level of which we will just report out on a quarterly basis. I don't see it as significant obviously as primary reserves.

Great. Thank you.

[Bhavind Kumar], Sutherland Global.

Can you provide us with some additional commentary on risk to capital position for the (inaudible) 19.8? Do you have any target ratio in mind? Should we expect some capital downstream at your operating subsidy level for the improving capital position?

As you know, we are required to be 25 to 1 and to the extent that we would be close to that 25 to 1 in 2011 or 2012, then we have capital at the holding company that we would dividend down. We did $200 million in 2010. At this point in time, I am not sure we need to dividend anything in 2011 but that will be a result obviously of operating performance. So we have capital at the holding company that we can dividend downstream.

Okay, thanks. The holding company liquidity, did you guys say 891 million?

$891 million, yes.

Thank you very much.

Chris Owens, Trafelet.

Hi. Just wanted to follow up on a couple things. First off, is the national cure rate is increasing, does that mean that over time the average reserve per loan should start going down?

Yes, because effectively what happens is your cure rate reduces -- improving cure rate reduces the claim rate and severity as you have seen has not been significantly increasing. It's been decreasing, so that's all positive. So overall, that would be the result you would expect.

Okay, and then secondly, what was the dollar impact of the lower rescission estimate that you guys had for the quarter?

Well, on the incurred side, about $300 million I think we said and someone else asked about that earlier. About $300 million in the quarter.

Chris, the change at the $500 million year-to-date through the end of the third quarter, it's about $200 million for the full year, that gives you your delta for the quarter.

So just want make sure I understand it. In the absence of bringing down the rescission estimate, the incurred loss number would have been $300 million less for the quarter?

Except for natural cures, yes.

So if you had not lowered your rescission estimate, this would've been an operating -- this quarter would have been an operating profit?

All things being equal if nothing else happens, yes, but obviously there's other adjustments. That's the general trend. We have continued to break out the impact on incurreds as well as paids on rescissions.

Okay. So going --

Remember, it's the change, too, for the quarter relative to those assumptions. If you follow that. The impact in the given quarter is the change in assumptions and the change in actual pace of rescissions. So there's two things happening. There's the actual rescission of claims, that's a benefit, and there's also a change in the assumption on future rescissions that hit incurreds. Correct? That was your point.

Just simplifying this to the income statement, in the absence of that change, the incurred loss line would have gone from $440 million to $140 million.

It wouldn't be that direct, Chris, but just like we got the benefit of reduced losses when we were running up increasing the rescission rates, it does work the opposite way when you are decreasing it.

Okay, maybe I will follow up later. I don't want to spend too long on that. Just could you not forecast but sort of ballpark what you need to see in terms of delinquencies to have an operating profit on a quarterly basis?

Chris, we don't -- we are not going to do that and we typically don't do that because there's too many other variables that come into it. So it's just difficult to do with any type of ballparking even.

And we don't do ballparks.

I think you can make your own assumptions with that with the information that we've provided relative to you relative to the average reserve for delinquent loans and that type of information.

Okay, it just wasn't evident on the press release that there was a $300 million one-time charge on the incurred line.

No, but was about your second question when you asked about the change in delinquent inventory, but you see that with the factors as well.

Okay, all right. Thank you, gentlemen.

Tamara Kravec, MWQ Investment Management.

Thank you, good morning. Just a follow-up on the rescission activity. Are you seeing anything notable across certain states, moving into more troublesome states like Florida or areas where things are different than what you would have expected given that you changed your assumption of future rescissions?

No, it's just the overall trends. The percentage of rescissions has been declining for the last four quarters. It's just a function of that.

I would just remind everybody to just look at the information was disclosed over the quarter in the supplement of 8/15, you can see that percentage has been declining. It peaked back in the third -- early part -- middle part of '09 and has been declining as a percentage every time since then. We would expect that to continue as we've shifted in the types of delinquencies that are coming in.

Okay, so there's been no change in mods or rescission activity that's noticeable in any particular areas geographically?

No, just slowly drifting lower as the -- some of the '06, '07 troublesome books kind of get past peak and we move into books of business with lower misrepresentation and fraud.

Okay, thank you.

Steve Stelmach, FBR Capital.

Yes, I just want to circle back on that $300 million rescission issue. Is it fair to characterize that as just a one-time true up of your current reserving methodology or is that sort of ongoing?

No, it's an adjustment monthly of the estimates of claim rate and implied in that is an assumption on rescission. So it happens every month and certainly every quarter.

Right, so maybe I can characterize it this way. If your assumption has -- or rescission activity has declined, do we expect sort of further assumptions to continue to decline? We're trying to get an idea of whether this $300 million is a recurring issue. I know you adjust every quarter or every month, rather, but do you feel like you are accurately reflecting future rescission activities today or do you think that that is --?

Yes, that's our best estimate of future rescission activities. That would be a good way to say it.

Okay, so we should expect something -- all else equal, we should not expect something similar next quarter. Is that a fair assumption?

Unless there was a significant change in the activity and something to change our estimate for the future. But at current levels, I would say no, based on what we know today and what we anticipate for next year, there's not that big of a change in the rescission assumptions for next year.

Right, and based on your assumption that rescissions are going down it's just the pace of how quickly they were going down, is that sort of what that $300 million encapsulates?

Yes.

Okay, thank you.

Mike Grondahl, Northland Capital.

Sorry, guys, but just one more on this $300 million to make sure I understand it. This is an adjustment that you do monthly and because of the pace of future rescissions were falling, you basically had a catch-up during the current quarter whereby your incurred losses were $448 million and you believe about $300 million was due to this rescission catch-up or adjustment?

Well, it's a combination of cure activity as well as claim rate and rescission activity, so it's a combination of all three of those. But albeit, a significant part was the rescission adjustment, yes.

Okay. Thank you.

I am not showing any further questions at this time.

Okay, operator, let's wrap it up then. I thank everyone for their participation and attendance on our call. Have a wonderful day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you and have a great day.