MGIC Investment Corp (MTG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment first-quarter earnings call. At this time all participants are in a listen-only mode, but later we will conduct a question-and-answer session. I would now like to turn the conference over your host, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Thanks, Terry. 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 first quarter of 2013, our Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; Executive Vice President of Risk Management, Larry Pierzchalski; and Senior Vice President and Controller, Tim Mattke.

I would like 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 includes 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, new insurance written and a summary of other statistics that I would 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 press release of this morning and Form 8-K that was filed earlier this morning as well.

If the Company makes any forward-looking statements we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no 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. Now with that let me turn the call over to Curt.

Thanks, Mike, good morning. The net loss for the first quarter was $72.9 million or $0.31 a share compared to $0.10 a share lost last year. The increase in the loss from last year resulted primarily from the material higher realized gains in the first quarter of 2012 versus the realized gains this quarter. Adjusting for this fact the first quarter of 2013 was an improvement over the first quarter of last year.

We are continuing to see steady improvement, what some may call credit burnout, on the legacy books of 2005 through 2008. The speed at which new notices decline from this point and how fast the cure rate on existing notices improves will be primarily influenced by future national and regional economic activity and as the most important variable regarding our return to profitability. Unfortunately it's also the most difficult to predict. Importantly, these older books should be under 50% of our total risk in force by the end of this year.

We are pleased with the performance of the business written beginning in 2009 which now accounts for 36% of our flow risk in force and comprises 32% of our total risk in force. Our new business is of high quality and is expected to have returns of approximately 20% over its life.

These books have generated just 2% of new delinquencies received in the quarter and reinforce our belief that we are in a golden era of credit quality. And an improving housing market coupled with the outstanding credit quality of our new business and our industry's growing share of business from the FHA offers us an opportunity that we are dedicated to capitalize on.

As a result of the successful capital raised in March and the subsequent contribution of capital to MGIC, the risk to capital ratio of MGIC at the end of the quarter was 20.4, this means that MGIC meets the current capital requirements of all jurisdictions and has no need to operate with waivers or with MIC. The capital raise has also taken off the table any customer concern of our risk to capital and that will be a positive for us as we seek to regain marketshare.

To help MGIC maintain regulatory capital ratios in compliance with state standards I am pleased to announce that we entered into an external reinsurance transaction with a panel of financially strong reinsurers led by PartnerRe. The transaction is a 30% quota share that is partially offset by both a ceding commission and a profit commission in favor of MGIC. The treaty will cover business written between April 1, 2013 and the end of 2015 and has a scheduled termination date of year-end 2018. We view that adding reinsurance with strong partners in a cost effective manner provides us increased flexibility to deal with capital standards.

In the first quarter new insurance written was $6.5 billion, up 55% from the same period last year; an additional $3 billion of HARP refinance transactions were completed during the quarter bringing the total to $21 billion since the inception of the program. All in approximately 12% of our primary risk in force has benefited from HARP or similar refinance programs and more than 98% of them are current.

The 2007 book of business has been the largest beneficiary with 21% of that book having benefited from the lower payments available through HARP. Additionally, approximately 12% of the risk in force has been modified through HAMP or other loan modification programs.

Our industry continues to regain marketshare from the FHA. We estimate the private MI industry's marketshare at 10% in the first quarter. Within our industry MGIC's marketshare is estimated at 17% for the first quarter.

It is important to point out that we also estimate that 75% of the private mortgage insurance market is comprised of the much more profitable monthly premium plans and within that segment we estimate our marketshare to be 22%. And as I mentioned earlier, we believe that our strengthened financial condition puts us in a position to regain marketshare within our industry.

Losses incurred in the fourth quarter(sic -- see press release "first quarter") were $266 million, down 21% from last year and down 17% from last quarter after adjusting for rescission settlements and Freddie Mac-related charges that were recorded in the fourth quarter. The lower level of incurred losses resulted primarily from the number of new delinquent notices received which were lower than the fourth quarter.

The delinquent inventory at the end of the quarter was 126,610, down 21% year over year and 9.5% in the quarter. We expect that there will be a continued decline in the delinquent inventory throughout the year; however, not necessarily at the rate we saw this quarter as there is a strong seasonal influence on notice activity in the first quarter.

Paid claims in the first quarter were $469 million, down 30% from last year and down 11% from last quarter adjusting for the $100 million payment to Freddie Mac. The claims received on unpaid inventory continue to decline and we expect that the current claim filing patterns we are experiencing will continue and will result in both claims received and claim payments trending modestly lower throughout the balance of 2013.

Recently we executed settlement agreements with Countrywide regarding the rescission dispute between our firms on GSE and non-GSE loans. The agreements cover all Countrywide-related loans whether they are current or delinquent. The agreements include past rescissions and denials, rescissions suspended since November 1, 2011 and a protocol for payment of future claims.

There was no additional charge taken in the first quarter as a result of executing these agreements as the financial impact was in line with our original expectations. As you will recall, in the fourth quarter of last year we recorded a charge of $100 million associated with this settlement and a settlement with another lender we think is probable.

We have submitted the GSE-related agreement to the GSEs for their approval. Once that agreement is approved the related litigation will be dismissed bringing closure to a very significant contingency. The same result will occur once the non-GSE agreements are approved by the appropriate parties and implemented.

The process of receiving approvals and implementing agreements will take some time and therefore the operational impact of this agreement should not show up in our monthly or quarterly statistics until sometime in the fourth quarter. The good news is that we have reached an agreement with Countrywide and believe that it is probable that the GSEs will approve it as well.

Cash and investments totaled $6.2 billion at the end of the quarter including cash and investments at the holding company of $670 million. The increase from last quarter is a direct result of the March capital raise. Our next scheduled debt maturity is approximately $100 million due in November 2015 and we have sufficient cash to cover the holding company's liquidity needs for the next four years.

Let me now take a couple minutes to address emerging housing policy or regulatory actions that could impact our business. First, earlier this year the QM rule was issued. As a reminder, it appears to line up fairly well with the type of lending that is taking place today in the marketplace and the type of business we want to ensure. And we believe that most lenders will be reluctant to make loans that do not meet these parameters.

We estimate that 99% of our new risk written in the last several quarters would have met the QM definition. We are still waiting -- still awaiting the issuance of the QRM or the risk retention rule. And while we won't know until it is published exactly what it will contain, it appears less likely it will restrict our ability to ensure quality low down payment loans.

Next the FHFA and the GSEs are separately developing mortgage insure eligibility standards including new capital requirements that would replace the use of external credit ratings. These revised eligibility requirements and capital standards are expected to be released in 2013; however, the timing of their implementation is unknown.

Also the Wisconsin insurance regulator is leading an NAIC effort that is developing new capital standards and, while it is separate from the FHFA effort, we believe they are consulting with one another. There is no timeframe established for the NAIC effort at this time.

Finally, there has been a lot of discussion recently on capital issues that the FHA is having given their capital ratio is a negative 1.4% versus the mandated positive 2%. To help address this, the FHA recently implemented its third premium increase within the last year.

The ability to cancel FHA coverage was also eliminated beginning in June of 2013 which means the cost to the consumer for an FHA loan will be significantly higher than that for a loan with private mortgage insurance and hence we expect our industry will continue to regain share from FHA.

So in summary, we feel our Company is in an excellent position to participate in the improving housing market as our financial position has significantly improved as a result of the capital raise. And unlike new entrants to our business, we are an established company with a national sales and underwriting organization in place that averages 18 years with our Company and a management team that has done part of the business for an even longer time.

Returns on the new business are very strong and should continue to be so given the outstanding credit quality of the business today and, more importantly, expected in the future due to the implications of Dodd-Frank and the qualified mortgage definition. And, as I discussed, we have significant growth opportunities both in expanding the amount of business insured by our industry, or expanding the pie, as well as growing our marketshare within that expanding market.

So all in all I love the operating trends that played out in the first quarter and feel our Company is in an excellent position to take advantage of the housing recovery. With that, operator, let's take questions.

(Operator Instructions). Mark DeVries.

Sorry if you covered this, but could you talk about what caused the average premium to decline on a quarter-over-quarter basis?

This is Mike Lauer. It is still -- the book is still running off. The new business is less than the run off of the older books, number one. So you've got a declining book of business. Secondly, we still have a negative impact on rescissions which is contra to that amount. And then the second -- the last part would be just mix of business.

And then, Mark, too don't forget in the fourth quarter it was probably a little bit higher on trend as we made adjustments as we put that charge in relative to rescission settlements, that would affect things going forward too.

Okay, that is helpful. And on the new business you are writing, are you seeing any mix shift at all towards slightly higher LTV that might lift the average premiums on new or is that going to continue to be kind of a headwind (multiple speakers)?

I think it is pretty constant, Mark.

Okay, got it. And then, Curt, would you mind elaborating on kind of your thoughts of where you think -- if you have got enough clarity yet, where you think some of these new capital requirements may end up being set?

You know, Mark, we have heard all kinds of things relative to both the FHFA effort and the NAIC effort. But our own input -- I mean as an industry we also gave input. We would love to see the capital standards risk-adjusted and premium adjusted and taking into effect the high quality of business that we have.

I mean it makes no sense that the same capital is required, if you will, for a 95% loan versus an 80% loan, there are clearly different claim statistics involved within that and capital should reflect that. And so, we hope that those standards take the risk and the premium rates into effect when they are introduced.

I think the only thing we probably have heard for sure is that they plan -- the FHFA plans on introducing to the market not for implementation but for comment late this summer what the standards might be. And as far as an implementation, we have no idea.

Okay, got it. And then finally, can you talk about what you are observed in your roll rates with the delinquent loans in the quarter? Was it at all surprising that it looked like almost all of the decline in your claims paid came from the 12-month plus bucket with the claims and kind of your cure 11-month bucket being more or less unchanged on a quarter-over-quarter basis?

This is Mike Lauer again. One thing I would point out is with respect to the delinquencies, the older buckets of more than 12 months is a higher percentage than it has been the last couple of months. Now it is a lower number -- almost 76,000 down from 82,000, but the percentage is still increasing.

So that gives light a little bit to the average increase because if you think about it, the shorter-term notices went out faster and what is left is a higher percentage of the older books with higher claim rates and higher severity assumptions. So that is probably the major reason for the overall average in the increase. But relative to the trends I would turn that back to Larry to talk a little bit about what has happened with respect to claim rates and cure rates.

Yes, one trend we are definitely seeing has to do with the claims received coming in the door from the judicial states; that average time is probably from delinquency to time of claim receipt, that average time period is up five, six months from where it was a year ago. So there is -- they are taking a long time for the judicial states to go through that process and result in a claim received from us whereas on the non-judicial states that time line has been pretty flat.

Okay, that is helpful. Thanks.

Bose George.

Just a follow-up on that last question. Given that increase, has the dollar amount that you have reserved per loan for new notices changed much over the last couple of quarters? And do you expect that to change much going forward?

Well, the dollar amount changes with respect to the mix. And for the most part the claim rate went down overall. We had some adjustments for, as I mentioned, the newer notices that cured out, but a slight increase on severity. So the average is up because of the mix, but underneath that what is happening is claim rates have flattened which is positive and we've made some adjustments for severity that deals primarily with the aging.

Okay, and so just to be clear, the outlook for the dollar amount per loan is really going to be driven by mix than by other factors?

That is correct. I think what we are seeing now, we'll probably see continuing, as a Larry talked about, some of these older delinquencies will stay on longer, so the average may go up because of what is left, not necessarily because of any deterioration.

As a matter of fact, the severity, as you have noted, over the past -- really the past four, five, six quarters hasn't changed much. So, and in fact claim rates have stabilized. So the mix will change that average and I think it will be driven primarily because of the aging and the mix of those older books and older delinquencies.

Thanks. And then you guys noted that -- I mean most of the incurreds was driven by the new notices. Do you have a dollar amount of the incurreds that was driven despite changes in the delinquent inventory?

We don't have that tabulated here. But we do have a new disclosure in the supplemental information that we have broken out for you that gives you the new delinquencies by book. I think it is on page 13 of the delinquency data by books of business. And we have broken out the delinquencies received in the quarter by book for you, which is a new disclosure.

And, Bose, in the Q, where we will publish the development (inaudible), but as Mike said, it is almost all driven by new notices coming in in the quarter here.

Okay, great. And then actually switching to a question on the GSEs, their new streamlined modification program that will require reduced financial documentation, do you think that gives an increase to cure activity once that is up and running?

It should help; how much materializes we will have to wait and see.

Yes, it will help.

Okay, great. Thanks a lot.

Jack Micenko.

Looking at the persistency rate, a little lower than we had modeled, and we are hearing some of the 2009 and 2010 books are refinancing maybe a bit earlier. Is it possible to think about a floor to persistency as the 2012 and 2013 volumes are sort of added in? Or is there a way to talk about average interest rate on the -- by book on the insurance in force?

Jack, this is Mike. We certainly provide that, but I think you just take the average for the year, basically do Freddie/Fannie [formally]. But in the supplement what you are able to do is piece together -- we give you the percentage remaining of each book here. While it's not a cumulative total you will be able to look at the trends relative to those prepayment speeds and the cancellation rates on the books on a quarter-to-quarter basis.

And you are right -- we are experiencing what the general market is, those are a little bit higher coupons and certainly the 3.5 market that we are in and those that are eligible for current guidelines are taking advantage of the refinance market that is out there.

Okay. And then curtailments ticked up year over year. It wasn't a big number increase but on a percentage basis. Is it fair to think about curtailments as maybe the next evolution of I guess the rescission activity around -- you get through, you get the claim and then you look at the servicing process? Or is that more of a concurrent process in the way to think about sort of the next stage of things?

Well, I'm not sure -- this is Mike again, (inaudible) stage, but there has been a consistent approach taken when we are looking at curtailment activity where -- and primarily it is interest payments and additional expenses that occur outside of normalized guidelines for a given state.

So, for example, Florida is running at close to 36 months between the original delinquency being reported to us and the claim being filed. The average for that state is significantly less than that. We'll certainly take into account loss mitigation efforts and things that are trying to mitigate loss.

So I think the uptick maybe you are seeing there on percentage is really a result of the aging claims that are coming in, not so much an evolution or a next step or a next phase as you would describe it. I think it is just more a function of the older claims coming in.

Okay, great. And then on the FHFA requirements, kind of hearing 18 to 20 know it is anybody's guess you said earlier. But do you have a general sense on where you think that sort of shakes out? And with the successful capital raising you just had, is there anything that would maybe preclude you from thinking about another raise, potentially more growth capital or something reactionary to some sort of guidelines that could come out later this year?

When they come out and when they are implemented are two different dates. So the implementation is the significant date, there will be comments on them. So we will see how that plays out. There is nothing to preclude raising more capital if that is necessary.

The reinsurance transaction I think is very helpful for us as we move forward also in helping us deal with them. And also I mean it establishes relationships that we could use on back books of business I think also to help if those -- whatever the standards may come out at relative to capital. We have $670 million also at the holding company, so we have got some money there we could downstream.

So what we are trying to do is create an environment of flexibility to deal with whatever may come out and put us in a good position to compete going forward relative to our industry. Because the opportunity is so significant when you look at the quality of the business that is being written.

And, as I said, I think that will be somewhat mandated because of Dodd-Frank and QM and the share that we are recapturing as an industry from FHA, which is very, very positive. And then you look at the macro housing factors and they certainly are coupled with the other things I mentioned about our operating trends are very positive. So we are about maximum flexibility here to deal with whatever may come down.

Okay, great. Thank you.

Sean Dargan, Macquarie.

I think I heard that the average direct reserve per default may increase over the course of the year as you see the time to claim in judicial states increase. Do you have any sense of magnitude where we could see that go?

No, but my only comment was that if in theory the newer notices continue to come in and out faster and obviously have less claim rate and what is left would be older, that may be a higher average. In other words, the inventories coming down faster overall, that kind of trend would drive that, if you follow my math there.

Yes, yes.

So what we are saying is the newer notices clearly are coming in and going out faster so lower claim rates for those, what is left is much older, as Larry talked about, and higher severity, higher claims rate and on an average basis. So that would be the combination of seeing trend lines where the notices are dropping at a steady rate but not the older notices and the ones that you would have more on, so to speak, so the average would be higher.

Okay, got you. And given the increase in cash and invested assets in the quarter, I would have thought that investment income might have been a tad higher. I know you have shortened your duration in the portfolio, but --.

Yes, I would like to think that too, but you are in the same market we are in. It's pretty tough looking at high-quality investments and trying to get any kind of yield. So it's all driven by what is available for us and trying to put it to work.

And can you just remind us what you are buying?

Well, right now we are buying A or quality securities. Right now the average yield on the portfolio is about 1.3. And we are buying not munis now as much as we had, but higher quality securities, governments. The shorter-term portfolio at the holding company is more or less laddered out to what our maturities are and the money that we drop down to MGIC, $800 million, is on the longer-term basis.

It's short-term US treasuries and agencies and corporates. But putting that money to work on a -- has obviously taken some time. But I mean obviously the market is not helping us. So the yield is going to be low for some time.

And, Sean, which I know you know, but just to remind you, it was really closed two weeks in the quarter for the same response (multiple speakers). So you didn't have a whole lot of time to earn on it.

Right. Okay, thank you.

Douglas Harter.

I was hoping you could walk through your thought process as to why to do the reinsurance contracts now and then also sort of how you are thinking -- sort of how you think about doing those of versus using some of the cash that you still have at the holding company to keep all the business yourself?

On the reinsurance, one, it's a very attractive transaction for us when you look at the ceding commission and profit sharing that we have on it, the cost of capital is very favorable relative to what we would like to do.

It gives us the flexibility, it is not being done for risk reasons, it is being done for capital management in the future. And also I think the establishment of relationships, as I mentioned earlier, that may be beneficial and reassuring other parts of our business if we need to relative to capital standards.

We do have parent money at the holding company that we mentioned that we can downstream also. So if you look at the combination of a very cost effective reinsurance transaction that creates flexibility for us along with the capital that we have, it just presents a good situation whatever may come out of the FHFA and NAIC relative to new capital standards. So it was all about capital flexibility.

This is Mike Lauer. Also remember that we are not only looking at an unknown with respect to what new requirements will be, but maybe a given that we have increasing volume potential. So the combination of the FHA opportunity that Curt covered earlier, possible share increases, so the opportunity to write more (multiple speakers).

And industry share increases.

And industry share. So there are some other things to factor in.

Great, thank you.

Geoffrey Dunn.

Curt, can you go into a little bit more detail on the reinsurance tail? I think you said it is effective April 1 and runs through 2015?

Right. I will let Larry --.

Yes, the business cover starts with business written April 1 of this year with -- through the end of 2015. And on that chunk of business from April of 2013 through December of 2015 the reinsurance agreement is in place, so the sharing of premium and losses occurs through the end of 2018.

Does that mean there is a cap on the duration of shared claims?

Well, they share in the premium earned and the losses incurred from inception through 2018 on the business of April 13 business through 2015 business. So at the end of 2018 they will not participate in any more premium earned beyond that date, nor will they participate in any losses incurred beyond that date.

Okay, and can you disclose the ceding commission and is there any kind of cancelability included in the contracts?

There are some options on either side subject to certain events.

And the ceding commission is 20% to the written premium.

Okay, shifting gears. For the consolidated operation, if that goes above 25 to 1 is MIC established structurally as a legitimate reinsurance option so the greater than 90% LTV business or would you have to look at putting capital into some of the reinsurance entities?

Jeff, this is Mike. You are asking about MIC -- could we use MIC again if the risk to capital got (multiple speakers)?

I'm specifically asking about for the internal reinsurance for the above 90 policies if the consolidated goes above 25 to 1, meaning that the reinsurance entities are above 25% to 1?

Yes, the one thing -- it's Tim speaking, consolidated ceding to MIC wouldn't help us on a consolidated basis because that would come into the calculation. If you are talking about standalone basis ceding to MIC would have helped that, that is obvious is something we would look at, but it is a matter of whether you are looking at the consolidated or the standalone risk to capital.

Okay, and the last question, can you spell out the details in terms of what -- when these Countrywide BofA settlements are effective in 4Q, what are the financial impacts, income statement, balance sheet and delinquency counts? What should we be watching for in terms of that impact when it does occur.

Sure, Jeff, this is Mike Lauer. First from the financial impact you have already seen that and that was in the fourth quarter. So operationally what will happen is it is going to take let's say sometime in the fourth quarter we are going to continue to build those held rescissions and that sometime in the fourth quarter we will begin to reverse certain rescissions and pay. And then on these held rescissions, we will pay those at a reduced rate.

So you will see -- operationally what you will see is the delinquent inventory will decline, the number of paids will increase and you should see -- and this is going to be broken out so that you will be able to follow it as far as the number impact.

But it will all be -- the income statement and balance sheet has already been impacted, so it is really just the operational statistics, the inventory, the delinquency rate, the unit counts relative to paids, number of rescissions, et cetera. And we will break that out accordingly so you can follow it from -- if you will this settlement versus the normal activity of that given month.

Okay, but effectively we will see a deceleration of R&D temporarily followed by a pickup in claim activity?

Well, we've already been -- we have already suspended, so relative to Countrywide, no, you won't see any change in behavior relative to the last several quarters because we have been suspending those and you can see in the statistics we are processing 94% or 95% of the claims getting resolved within six months and less than a 5% rescission rate. So, yes, overall you will continue to see the decline but we are already at fairly low levels of rescission activity.

Great, thank you.

Craig Perry.

Thanks for taking my question and congratulations on the quarter and the capital raise. Just a couple of quick questions. The first is just what has your dialog been with the rating agencies post the capital raise? Obviously they have you I think on triple hooks. Just curious what the process is there going forward?

And my second question relates to -- can you just help us understand the sensitivity associated with if we are in -- obviously the Case-Shiller data came out this morning, in a rising home price environment how, if at all, we may be able to think about improvements impacting your ability to lower claims paid? I wouldn't think it would be high, but potentially there's sensitivity at different parts of the capital stack. So those are kind of my two questions. Thanks, guys.

This is Tim, I will handle the first question on the rating agency. Obviously we have been engaged in dialogue with Moody's and S&P who rate us. I think it is safe to say that they viewed it as favorable as with everybody else. They are looking at what continues to happen with the current operating environment and sort of loss patterns.

And we continue to talk to them about that and they are obviously interested in what will happen with any capital standards as well as what our volume is. So I think they are sort of in a little bit of a holding pattern to see how everything develops, but generally it was viewed favorably from the rating agency perspective.

And Craig, I know -- this is Mike to start. One of the reasons we gave you in the new disclosure in the supplement you will start to see that units -- new delinquencies are coming from these legacy books, so primarily the 2007 book let's say is an example and those have had pretty significant price depreciation peak to trough.

So while we're certainly seeing a recovery, you are moving from maybe a market down 50% peak to trough and it is up from its lows but it is still significantly below underwater relative to our coverage rates. So while it will help the overall economy in that marketplace relative to economic health, the specific borrower who gets into trouble who spent more underwater in this employment market is still going to see a slower return to cure rates -- of the newer ones though.

Right. Although I would presume on business written 2009 and onwards that new delinquencies, your ability to cure those would be better in a rising highest price environment because anybody who has (multiple speakers).

(multiple speakers). No question. And it also helps on the older books. I mean at the margin there are people slugging it out relative to dealing with the employment situation in this country and holding on and as they see the values increasing it just helps them hold on longer. So at the margin it's certainly going to help us on the claims relative to the old books too.

Right, okay. I'm sorry, and then -- actually I apologize; there was one question I forgot to ask which is just related to the [MGIC9s]. Is there any reason when they were issued that those were not registered? Those are kind of a weird security and whatever -- I think that there is a pretty deep -- there would be a pretty deep retail market for those bonds.

But unfortunately, because they are 144A issued it is not really something that private wealth guys can sell their clients. So I am just curious, is there any plan to -- now that you are now current on those to register those securities? Thanks so much.

No plans on that. And the unique part about that was (inaudible) that the way they were structured we got rating agency credit for those, which didn't last long, but that was one of the reasons it was structured the way it was and at that time we actually got credit for it in the rating agency's credit analysis. But, no, we don't have any intention doing that.

And the reason for that being just the costs associated with the registration or --?

I think it's a -- first of all it is a very complicated security and we -- if you notice we -- it has the deferability feature and we have used that a couple times and we like that aspect of it. And to go back and open that up and renegotiate those terms I think would have to be I think 100% and that might not be (multiple speakers).

Oh, I'm sorry. Why would you have to renegotiate those terms just to register securities? There may be something I am not familiar with. I am aware of the deferability feature, but just registering them so that a retail person could buy a cumulative preferred, that wouldn't seemingly require a renegotiation of a debt. That is literally --.

This is Mike, maybe more to the point is that I mean they are freely tradable, we understand private placement versus registration may change some of the liquidity and some of the friction in there. But it is our view that they're freely tradable in the marketplace.

Okay, well, I would just encourage you guys to revisit whether or not you would like to open it up to a wider range of investors. Because I think that it certainly has the potential to be something similar to sort of the AIG hybrid, which was a big coupon bond that went from 100 to 140 and obviously you want to have the lowest cost of capital you can. So anyway just (multiple speakers).

We will look at it. Thank you.

Thanks, guys.

Conor Ryan.

I just had a couple questions. We saw a 10% increase year over year in the reserve for delinquent. And then we saw another 5% -- that was as of year-end 2012 and we saw another 5% increase in the first quarter. You noted that you intend to potentially increase that reserve throughout the rest of the year. I mean, what scale of an increase could we see in the reserve for delinquent through 2013?

Yes, Mike again. First of all I didn't say we intend to increase it, I just said it could happen based on what we saw in the quarter. And by that again I mean as the delinquencies continue to decline and the mix if it were to continue to stay as it is or stay on the same trends and that is all that would be left would be the higher, then the average case per case may be higher, not the reserve itself higher. I don't know -- you are talking about the average case, are you not, the reserve per case?

Yes, that is right. So like on an average basis throughout 2013 it sounds like there may be scope for further increases. Is that correct?

It could happen. It could happen if the trends would continue that what was happening is at the newer delinquencies were coming in and going out faster and obviously using less claim rate and severity. But what was left would be the older delinquencies and they would have higher averages. And so the mix is changing.

As I pointed out at the end of this quarter that 12 months or more almost 76,000 or 60% of the delinquencies, it hadn't been that high over time. So it has 58%, 59%, 56%, it is 60% now. So the mix is changing and that was what drove that this quarter. If those trends would continue you might see that continuing.

Okay. And then can you just give me a quick breakdown of on the incurred losses number what percentage was associated with existing, and what percentage was associated with new? Because given the jump that we saw in reserve per existing it looks like the incurred number is relatively modest.

This is Mike Zimmerman. Almost all of it is associated with new delinquencies, less than 10%. I mean I think you will see probably positive development on the older book but it is minor. So it is almost all if you took the incurreds is almost all related to new notices.

So even though you increased the average reserve per --.

And that is the algebra Mike was kind of getting to was on the mix when you buy -- with the newer notices going out at slightly higher, cure rates are lesser claims frequency, the older notices still have the higher claim rates associated with them and since they are older notices they have that higher probability. So as that mix shifts within the delinquent inventory the headline answer, if you will, will change but not necessarily due to worsening conditions of those portfolios.

Yes. No, absolutely. So I think what would be helpful is that's sort of what I thought you were doing. And what was the cure assumption associated with new defaults this quarter? Have you talked about that?

In the past we have said it is about one in four, it has improved from there. But -- so it is a little bit better than one in four.

And that is the claim rate, so cure rate being the inverse of that.

Yes, sorry.

So one in four defaults have been new defaults?

This is where it has been at and it has improved from there.

It's improved from that.

Yes.

Okay. And then just on (multiple speakers).

From one and five.

One and five, okay. And then just on that front, what percentage of new defaults are re-defaults?

Actually in the table in the supplement we gave, I think net overall it is about 75%. But we give it to you by book year in the back in pages 12 and 13 of the supplement.

Okay.

But like from the 2007 book below 75% of those were repeat delinquencies.

Okay, and then just one thing on sort of future profitability. Assuming NIW stays relatively constant at current run rates, what's sort of a reasonable persistency assumption going forward given that we have seen a decline in persistency?

80% I would think would be a good -- in the short-term. Did you hear that?

Okay, yes, no, I heard that. I appreciate it.

And average there you are going to see the weighting of the 2009 and 2010 books as these newer books come in, but the 80 is like an exception.

Yes, overall it is good.

Yes, okay. Because it is just as you go from sort of low 80% to high 70% the math on insurance in force starts to change. So, I appreciate it. Thank you, guys.

Chris Gamaitoni.

Could you give us a little bit more detail on the impact of the premium income from the deal with Countrywide? I just wanted to get some more details on around the decline quarter over quarter and you said there was some noise last quarter because of that adjustment.

Tim speaking. The noise related to that is the expectation change related to those that we'd no longer be rescinding. In that case we are refunding all of the premium associated with those loans if we are rescinding. The case where we are set paying them we are only refunding a portion of the premium. So that is really the change that would have occurred in the fourth quarter relating to the premium.

And what was the relative impact? I'm just trying to figure out the difference between kind of the new yield going on lower verse that change and kind of what a core future rate is going to be.

From a core -- it is Mike -- you want to look around 60 basis points as kind where the new business is being booked. Clearly it's the 2007, but these older books, because of a higher mix of LTV and the different pricing is higher.

But the new business being put on as high credit scores, we have got the credit tiers pricing. So I think it is hard to match -- how do you weigh in the older books running down and where the new books take over. But new books for the last few years right around 60 -- 59, 60 basis points.

Sure. And I guess that goes to another question on profitability. How do I think about kind of the reserve book -- reserve bill that you will have on these higher credit quality relative to lower? It is kind of we think about the provision ratio historically over time and try to blend that in. But it seems like it would be maybe significantly lower than say the 2002-2003 time period.

This is Mike Lauer again. Sure, yes, if you look -- but even if you look at the exhibits primary new notices you will see that there is a significantly difference between the pre-2007 books and the newer books there is no delinquencies at all. So obviously the incurreds on the newer books are insignificant. It is still the runoff, if you will, of the 2007 and back books.

And so, as we continue to reduce those notices and have very little to incur on the newer books, that is the positive trend. Even this quarter the incurreds were 266; we haven't been at that level since 2007. So that is a significant development in itself. So it is all a reflection of the overall trends. Everything is trending positive, the question is, to your point, when does it turn?

And it is going to be a function of increasing first of all the point you made before about NIW growing the book positive because it is still in a runoff. And then secondly, the runoff of these older delinquencies and the less need for incurreds on those and then the minor amount that we are incurring on the newer books because of the quality.

And then I guess my last question is, can you clarify how the accounting will work with the quota share? Do you book the gross total insurance in force or just your portion?

For the accrual insurance in force and we will get the cede off the 30% related to that (multiple speakers).

So it won't be included in the income or the denominator?

It won't -- we will get -- as far as the actual -- you're talking about the capital impact as well?

I am really just trying to figure out revenue, whether like there will be a decline in the revenue yield because the insurance is grossed up relative to -- or if you just take 80% of what you wrote and you get 80% of the premium that you wrote and it is in net neutral to that ratio.

Well, we will cede off the premium 30% on these books of business. But we will get back a profit commission which I think likely will actually offset the ceded premium amounts that are going out. And then a ceding commission will come through along with our expenses, so -- a reduction to our expenses because of the ceding commission.

Okay, thank you.

Thank you. And that was our last question in queue.

Okay, I thank you all for your interest in our Company and have a wonderful day. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.