Radian Group Inc (RDN) 2011 Q4 法說會逐字稿

Operator Ladies and gentlemen thank you for standing by and welcome to Radian's fourth-quarter 2011 earnings call. At this time phonelines are in a listen only mode. Later on we will have an opportunity for a question and answer session with instructions given at that time. (Operator Instructions). As a reminder today's conference is being recorded.

At this time, I would like to turn the conference over to Emily Riley, Vice President of Financial Communications. Please go ahead.

Thank you and welcome to Radian's fourth-quarter 2011 conference call. Our press release, which contains Radian's financial results for the quarter and full year, was issued earlier today and is posted to the Investor section of our website at www.Radian.biz.

During today's call, you will hear from S.A. Ibrahim, Radian's Chief Executive Officer; and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce Bazemore, President of Radian Guaranty; David Beidler, President of Radian Asset Assurance; and Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty.

Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2010 Form 10-K and our third-quarter 2011 Form 10-Q. These are also available on our website.

Now I would like to turn the call over to S.A.

Thank you Emily, and thank you all for joining us. 2011 has been an important year for Radian as we position the Company for growth and future profitability. The past few years have been impacted in many respects by the macro environment, but we are now beginning to see some improvements in the economy and are capturing opportunities for profitable new business for Radian.

We are pleased with the progress we have made and look forward to differentiating ourselves in the market as a leader in new business. The enhancements we have made in our capital position in operations are built upon the key priorities that we have highlighted throughout 2011 and which remain our core focus.

During the call today I will first provide a high-level overview of our fourth-quarter results and then an update on capital and the liquidity and report on progress on our key business priorities. Bob will then provide details on our financial position before I offer a few summary remarks and we open the call to your questions.

Earlier today, we reported a net loss for the fourth quarter of 2011 of $122 million or $0.92 per diluted share. This includes the impact of fair value gains of $102 million and an income tax provision of $65 million.

For the full year 2011, we reported net income of $302 million or $2.26 per diluted share, which includes a fair value gain of $822 million. At December 31, our book value per share was $8.88.

Our financial results were once again impacted by the challenges of our legacy portfolio and the macroeconomic environment. At the same time the credit environment is stabilizing and we are encouraged by the steady improvement in our delinquency portfolio and our ability to write more high-quality business in the fourth quarter.

The amount of NIW written in the fourth quarter of 2011 could generate nearly $50 million in after-tax income over its life. And as the market leader in new business, we have positioned ourselves well to capitalize on the opportunity afforded by the improving environment.

Now let's turn to our capital and liquidity positions and the progress we have made to strengthen our Company. First, our risk-to-capital ratio, which is a key measure of Radian Guaranty's financial strength for our stockholders, regulators and customers was 21.5 to 1 as of December 31, 2011. Our risks to capital ratio in the fourth quarter includes a $100 million contribution from Radian Group, but importantly does not include the impact of the recently announced Assured's transaction or any potential benefit from the termination of 14 corporate CDO transactions in the first quarter of 2012 due to counterparties exercising their walk-away rights.

Next, Radian Group maintains $480 million of available liquidity today. We have $250 million of debt that matures in February 2013. Earlier today we launched a tender offer to opportunistically reduce that amount -- to reduce the amount of that debt outstanding.

Finally, we have received waivers to write business in certain states that impose a risk-based capital requirement. And we are in the process of finalizing agreements with both Fannie Mae and Freddie Mac for RMAI, a licensed subsidiary of Radian Guaranty to be approved as an eligible mortgage insurer to write new business. We expect to announce the details of these agreements in the near future.

With our risk of capital ratio and holding company liquidity we are confident that Radian is competitively well-positioned to continue our momentum in driving new high-quality mortgage insurance business.

Now let's turn to our key business priorities and the progress we've made to improve the financial strength and operating performance of our Company.

We will begin with mortgage insurance. Priority number one, to write as much profitable new business as possible. In the fourth quarter, we led the private mortgage insurance industry in driving business with 31% share of the market. We wrote $6.5 billion of new insurance in the fourth quarter compared to only $4.1 billion in the third quarter and $3.8 billion a year ago. This business is extremely high-quality, consisting of prime business with 94% having FICO scores of 700 or better. And we are off to a strong start in 2012, writing $2 billion in new business in January.

Importantly, as a testament to our success in growing and diversifying our customer base, half of our business came from 22 customers in 2011 compared to only four customers in 2009. This customer diversification also positioned us to benefit from a larger share of the midsize regional and community bank lender segments that grew their share of the mortgage industry volume disproportionately in 2011.

While our NIW is impacted by our share of the private mortgage insurance market, it is mainly driven by mortgage industry volume and the mortgage insurance in-force FHA penetration rate.

The mortgage industry volume stands to increase as the housing sector recovers over the next few years. And we believe the MI penetration rate will improve further as Washington's commitment to promote private capital over public capital plays out. This commitment was underscored by the FHA this week in their newly released GFC reform strategy.

Priority number two, to diligently focus on loss mitigation by quickly paying deserving claims while enforcing our rights on each poorly underwritten, fraudulent or negligently reservice loan. We paid $292 million in claims for the fourth quarter and $1.5 billion for the year. We believe claims peaked last year and are expecting to pay $1.3 billion in claims for 2012.

Priority number three, to participate in the regulatory and legislative debates on the future of housing finance. We continue to engage with legislators and other decision-makers in Washington, both directly and through trade associations and think tanks. Earlier this month we sponsor our third housing finance discussion panel on Capitol Hill, where a group of mortgage industry experts unanimously supported a healthier balance between the public and private sectors in today's mortgage market. We also hear this sentiment as a consistent theme in our meetings with key legislatures.

Priority number four, to rationalize our expenses in light of the weak market origination forecast. In 2011, we implemented a major expense reduction initiative and we continued to focus on reducing expenses through continuous improvements. Our actions in 2011 reduced -- included a workforce reduction of approximately 7% of Radian's corporate and mortgage insurance staff.

Turning to Financial Guaranty. Radian Asset continues to serve as a unique source of capital for mortgage insurance. The priorities for our Financial Guaranty business are -- priority number one, to provide capital support to our mortgage insurance business.

Radian Asset has performed well and has consistently paid dividends to Radian Guaranty and is expected to pay approximately $50 million in 2012. As I mentioned earlier, Radian completed a three-part transaction with a short guaranty last month that included the commutation and ceding of public finance business that is expected to add $100 million to Radian Guaranty's statutory capital in the first quarter of 2012.

Priority number two, to diligently manage our existing risk exposure, while pursuing commutation and other exposure reduction opportunities.

Our net par outstanding in Radian Asset declined 12% from the fourth quarter of last year, and including the first-quarter Assured commutation our net par outstanding declined by 32%.

Since 2008 when we stopped writing new business in Radian Asset, total net par has been successfully reduced by $62 billion or 53%, including large declines in the riskier segments of the portfolio.

The first-quarter counterparty walk-aways mentioned earlier from termination of 15 -- of 14 corporate CDO transactions will reduce our Financial Guaranty exposure by an additional $5.8 billion.

We took advantage of prudent portfolio decisions, helping us avoid most of the CDO RMBS business that adversely impacted our FG peers. And we restructured our Financial Guaranty business to become a source of capital for our mortgage insurance business.

In an industry with many casualties, our Financial Guaranty business stands out in terms of its creditness, disciplined exposure reduction and steady dividend contributions.

Now I would like to turn the call over to Bob for details of our financial position. Bob?

Thank you, S.A. I will be updating you on our P&L activity and trends for the fourth quarter of 2011 and our financial position as of year-end 2011.

The MI provision for losses was $333 million this quarter compared to $277 million in the third quarter. Our loss development during the quarter was similar to the third quarter and about as we expected with a higher level of new defaults that we attribute to seasonality.

For the year MI incurred losses were $1.3 billion, down from $1.7 billion in 2010. Primary new defaults for the year were down by 18% compared to 2010. We are expecting continued improvement in incurred losses in 2012, but we still expect an operating loss for the year in the MI segment.

Based on current projections we expect to return to a small level of MI operating profitability for the 2013 year. Our projections assume annual reduction in new defaults of between 14% and 15% for each of 2012 and 2013, which is significantly less than the percentage reduction we saw in both 2010 and 2011.

Among our additional assumptions are no material increases to our expected roll rates and a very slow but steady improvement in the overall economic condition, consistent with the Economy.com projection.

Our increased level of new writings in 2011 brought our year-end risk in-force from 2009 through 2011 book up to 28% of our primary risk in-force, and the most problematic 2006 and 2007 books are down to one-third of our primary risk in-force. This positively differentiates Radian from much of the industry.

While we believe our existing MI book of business has a positive embedded value, the sensitivity of our results to the future economic situation, and the ultimate success of government programs such as HARP II and the proposed expanded HAMP makes it difficult to determine a point estimate of our embedded value.

We believe that the embedded value of our book is clearly positive; however, our current estimate is down substantially from previously disclosed point estimates primarily due to the continued slowdown in the pace of the economic recovery, which has increased our ultimate claim projections on today's performing loans to a 9% level.

Cures during the quarter were as follows. For loans that were 2 to 3 months delinquent as of September 30, 23.9% cured during the fourth quarter. For loans 4 to 11 months delinquent, 11.2% cured and of loans 12 months and greater, but not pending claims, 4.7% cured. Obviously any success with regard to the newly proposed expanded HAMP program will help us achieve our expected cure rates.

The dollar amount of loss avoided on submitted claims related to denials and rescissions for the fourth quarter of 2011 was $135 million compared to $165 million in the third quarter of 2011. These figures are net of the overturns that occurred during the quarter. The amount on our balance sheet representing future expected denials and rescissions was $631 million, before considering our IBNR offsets for future overturns.

We increased amount of IBNR this quarter due to an increase in our estimate of future rebuttals. The increased number of our claim investigations during 2011 has resulted in a higher number of rescissions than denials, although, the percentage of rescissions has come down as expected.

Our thorough process, which allows servicers ample time to find documentation or provide additional information before we record our denial precision, has not changed. And our rebuttal experience over the past two years has been incorporated into our accounting estimates, and thus we believe our IBNR appropriately considers potential future overturns.

Radian Guaranty's risk-to-capital ratio is estimated to be 21.5 to 1 as of December 31. A primary driver of the changes to our risk-to-capital components this quarter were the MI and FG statutory operating losses which reduced capital. This incorporated the increase in mortgage insurance reserved for default to statutory reserve booked during the quarter on our CDO ABS transaction, and a $15 million increase in reserves related to the Jefferson County, Alabama bankruptcy. Our year-end loss reserve on Jefferson County is now $27 million compared to our total exposure of $228 million.

Our risk-to-capital ratio benefited from several deliberate actions, including intercompany reinsurance, commutation, a reorganization of certain Radian insurance subsidiaries and the capital contribution of $100 million. As S.A. mentioned, effectively managing our capital position is our main priority in order to maintain and grow our level of high-quality new business writings.

While some of the positive impact of our capital initiatives was realized by the end of 2011, we will receive additional benefits of approximately $100 million dollars during the first quarter due to the Assured transaction, and we are expecting additional risks to capital relief in 2012 from an external quota share reinsurance policy on our newly written business that we are working to complete in the first quarter.

We saw continuation of improving credit trends on several Financial Guaranty asset classes during the quarter, including on our TruPS CDOs that you can see clearly in the last four columns of webcast slide 27.

Based on the recently announced transaction with Assured and a growing number of structured finance transactions that have been terminated during the first quarter of 2012, we are continuing to accomplish our goal of reducing the par exposure in Financial Guaranty in order to increase the level of, and improve access to, our Financial Guaranty capital.

A large proportion of our contingency reserves relate to our corporate CDOs, which either expire over the next several years or for which more counterparties are exercising their walk-away rights. This is a short- to medium-term statutory capital opportunity that is unique to (inaudible).

Despite having a pretax loss for the quarter, we had income tax expense of approximately $65 million. $57 million of this expense is due to non-operating remeasurement of our FIN 48 on certain tax positions relating to the REMIC tax issue we have previously disclosed.

As reported, we have reached preliminary agreement with the IRS Appeal Division, but were recently notified that the Joint Committee on Taxation is opposed to this agreement, and thus the settlement negotiation will be reopened.

We have guaranteed the ultimate tax liability at Radian Group, which allows us to keep the cash at the holding company while awaiting the final outcome, rather than contributing it to the insurance subsidiary based solely on the additional liability we have booked.

The existing deposit amount with the IRS is $89 million. While the ultimate outcome of this matter is uncertain, a settlement at that level would require approximately $73 million from Radian Group to reimburse our insurance subsidiary for the tax payment. As of year-end 2011, the valuation allowance against our deferred tax asset is approximately $800 million or $6 per share.

After the $100 million contribution to Radian Guaranty, which satisfies the GSE's immediate requirements in connection with RMAI eligibility, we have $482 million currently available at the holding company.

Absent any additional capital contributions, we expect to breach 25 to 1 after the first quarter of 2012. More contributions are possible during 2012 and 2013 to make certain that we keep writing new business, including our requirement to provide Radian Mortgage Assurance with $50 million from Radian Group when we breach 25 to 1 at Radian Guaranty. There is also a potential need for holding company cash when our IRS issue is finalized, which could occur in 2012.

$250 million of our debt matures on February 13, and as disclosed, we have launched a tender offer for this debt with $100 million of targeted cash spend at a price between [78 and 86]. I would now like to turn the call back over to S.A.

Thank you, Bob. Over the past year, we've taken proactive measures that have allowed us to maintain a competitive risk-to-capital ratio for Radian Guaranty, while ending the year with $480 million of holding company liquidity. This was achieved through investment gains, internal reinsurance, restructuring and commutations which demonstrated our ability to improve our risk-to-capital position. We will continue to explore similar opportunities to further enhance our statutory capital position as we move forward.

We also expect to have the ability to write new business above 25 to 1 through state-level waivers and the GSE approvals of our RMAI subsidiary. As a result of all of our actions, we have successfully positioned Radian's mortgage insurance business to compete even more effectively with the growing and diversified customer base.

While there are some things we cannot change, we have focused on those we can by continuing to differentiate and position ourselves as an industry leader as the economy shows signs of improvement. We have substantially strengthened the position of our mortgage insurance business to compete successfully in the market for high-quality new business and benefit from future mortgage volume growth.

As demonstrated by our January NIW and our strong pipeline, the positive momentum in new business in the fourth quarter has continued into 2012.

Now I would like to turn the call over to questions. Operator?

(Operator Instructions). Geoffrey Dunn, Dowling and Partners.

Bob, could you provide a little bit more detail in the non-financial benefits of the risk capital this quarter? It looks like whatever you did internally beyond $150 million added to your subs had a net impact of another $100 million benefit. Could you detail what else happened during the quarter to help that ratio out?

Yes, Geoff, and I think we have said it, there was internal reinsurance done which that ceded risk, so that comes off the risk in-force. There were commutations done, and typically we have done commutations that positively impact our capital by a little bit. And then there were also -- there was restructuring of the insurance subs. The most prominent of those was the RMAI subsidiary which has $70 million of statutory capital and is now a direct subsidiary of Radian Guaranty. So all of those things were done and impacted the statutory risk-to-capital ratio.

And then on the risk -- the rescission in denials, obviously you booked an additional IBNR this quarter for rebuttals. What type of range of rebuttal expectations do you have factored into your assumption, and what is the cumulative amount in your reserves that you are assuming in terms of a benefit for risk for R&D in the future?

As I have said, the expected future denials and rescissions, the benefit built into the reserve growth is $631 million. The offset or the IBNR against that would be about $129 million. So that is the future expected overturn that is in the number.

And in terms of rebuttal or overturn assumptions, I would say that on rescissions it is a relatively small number and on denials it is a much higher number, and we specifically allocate the ultimate number to the mix between rescissions and denials.

And just on that $631 million rough breakdown of benefit from rescissions versus denials?

I don't have that breakdown, but typically historically it has been more rescissions than denials. The recent experience denials have come up in relation to rescissions.

Mark DeVries, Barclays Capital.

The first question quickly, Bob what would be the impact roughly of $100 million benefit from the commutations in the next quarter, would that -- all the things being equal would that take you down to around 19 to 1 risk-to-capital, is that about right?

Yes, I mean we will be publishing the exact formula or calculation for the risk-to-capital ratio in our 10-K so you will be able to see the components and then you'll be able to put the $100 million -- the $100 million of it is a capital benefit, and you are talking -- I presume you are talking about the Assured transaction.

So it's kind of a moving target, so we hesitate to say exactly what it's going to mean, but you'll be able to incorporate that $100 million. And then obviously you're going to have other things going on during the first quarter that will impact both risk and capital.

And what type of benefit might you get from that quarter share reinsurance contract you mentioned on the new business?

When we finalize the agreement, and we did say we expect to finalize it some time during the first quarter, we will put those numbers out there, but, no, we're not doing it yet because we are still in the process of finalizing it.

And the $15 million increase you mentioned on the reserve projection accounting does that reflect everything you know -- we kind of know how that situation year-to-date? I think I read recently that the county was diverting cash from the sewer projects for general use. Does your current reserve kind of reflect the lastest developments there?

Yes, absolutely it does. This is Dave Beidler.

Got it. And finally what are your expectations for benefits from Hamp 2.0, and is that reflected in your reserves?

This is Teresa. Are you referring to the HARP II 2.0 and then kind of expanded Hamp (multiple speakers)?

I'm sorry, I meant -- more specifically I meant the HAMP, like in particular the increase in incentives they're providing on principal forgiveness.

I think we're not really in a position to say sort of how much of a pickup we think we will get from that. We certainly think it's going to be a positive. So to the extent that more borrowers can qualify for it and that there are more incentives to take people through modifications that should definitely be a positive for us.

But nothing specific to reflect any reserves at this point?

No.

No, I would say that we believe the expanded HAMP will help us achieve our projected cure rates that are built into our reserves.

Jon Evans, Edmunds White Partners.

Can you just talk a little bit about, I guess, your thought process relative to minimum capital that you need to have at the holding company?

So you have $480 million right now. If you're successful in this tender, if you look at the high end of the range $86 plus $40 it's $90 a bond you're basically going to pay. So what kind of minimum do you think you need to have at the holding company?

And then can you talk a little bit about your thought process relative to refinancing the 13th, because it seems like that's the key issue to get to the other side for the stock, so could you help me understand that?

Yes, I would say it's very difficult to put a number out there. What I would say is that we are carefully managing our holding company liquidity. We have done that for several years now. And at this time we are comfortable with the tender offer at the level that we have gone out with, but it's very difficult to just put a number on it.

Clearly we want to keep as much flexibility as possible; however, our main priority is to keep writing new business. We think that is the best ultimately for the Company and shareholders, so we are going to do what we need to do to make sure that we keep writing. So it is a process that we have to go through and we have to make judgments, but it is something we are very careful in managing.

Bob, could I ask you one follow-up just relative to that, because it seems like it would be pretty important for the stock. I assume you're not going to wait until the last minute to refinance the 13s, right?

We will carefully review all of our options, as we always do. And I think you have seen the first step with the tender in addressing the 2013s, and we will keep reviewing it and decide what we think is best for our Company.

And then a question relative to the delinquencies. Can you help us understand your guys' thought process? You have seen a trend where they have continued to go down sequentially but not just year-over-year. Do you think that trend of sequential decreases, even though it is small, continues as the book starts to burn out, or could you give us any thoughts relative to that?

We do. We think that delinquencies will continue to decline. We even put out there the new delinquency decline expectation between 14% and 15% for the next two years. So, yes, we do. And it is driven by the change in the profile book of business. We have got 28% of our book now made up of from 2009 and subsequent. The most problematic books are a lower percentage of the book. And what is left in the current section from the poorer vintages have been performing.

Great. Hey, thanks so much.

Robert Haynes, Credit Suisse.

Hi, could you give me a sense of what the dollar amount of your aggregate statutory capital is? And also I know the state of Pennsylvania is not an RBC state, but what is the minimum capital requirement for an MIs domiciled in the state of Pennsylvania?

The statutory capital levels at year-end will be approximately $843, million. And Pennsylvania minimums are a very small level; they wouldn't come into play.

Chris Gamaitoni, Compass Point.

Can you give us the kind of upper balance for the IRS potential, how much extra cash above where you're currently expecting for that to end up being?

I mean, there is a a range out there. I would say -- what we said is at the level we have booked to -- you know, if we settled at this level it would produce the need for about $73 million. The upper range is a little bit more than that, but we don't -- at this point in time we don't expect to settle at a level above that $73 million.

And then on the -- I am just trying to look at how the CDO of ABS impacted capital. It looks like the contingency reserve in the FG business was flat quarter-over-quarter. I would've thought it would've decreased more with -- or it was down about $10 million -- would've decreased more with CDO of ABS. Can you just walk me through how that impacted the actual capital level of BMI?

We had given a range last quarter of a stack capital impact of between $88 million and $109 million. The actual stack capital impact in the quarter was $91.8 million. The contingency reserve -- I don't think you mean that that impacted the contingency reserve. The contingency reserve is going to go up based on premiums. It is going to go down based on reduction of exposure, so that reserve on the CDO of ABS wouldn't specifically impact contingency rules.

And then, I guess, finally looking at Jefferson County, how should we think about the $27 million reserve in context of the overall exposure? Like what are the imputs that are calculated based on that? What kind of payment curtailments do you expect on a percentage basis? I am really just trying to put a bound for myself on if payments are less than you expect to make an adjustment -- I mean, what are your expectations -- are embedded in that reserve today?

Setting up our reserves encompasses a probability weighting of a number of scenarios, including the ones you mentioned. And based on all the information that we have to date and the things that we read publicly, all of those factors have been considered in calculating that reserve.

So is there a potential you can give a weighted average probability that results in the reserve calculation for payment curtailment as a percentage? Is it 10% or is that what the number ended up being?

We're not going to disclose that, no.

John Bendall, SIG.

Hello, good morning guys. I am on the call for Jack Micenko today. Just a couple of questions for you. First on your default book, did you disclose the percentage of GSE and private sector loans? Is there a breakout for that? Like is it 70% of those are GSEs loans or --?

We don't disclose it, but it is in that range.

And then my second question was around the cure rates that you guys gave for the fourth quarter. Looking on an annualized basis could you -- would it be safe to say you would expect to annualize those kinds of numbers or how do you look at that?

It's very difficult to say that because many of our defaults -- and we have talked about this in the past -- many of our defaults are redefaults. So they go into default, they cure, and then they redefault. I think we have said something like two-thirds, maybe even more, of our defaults are redefaults. So annualized yo are probably talking about the same defaults quarter after quarter, so it's a very difficult thing to do -- that's why we don't do it.

And then one final question with Financial Guaranty. How do you motivate counterparties when you commute some of that exposure? I mean is that just they are looking for the business or -- I mean, how does that really work on the whole when you are seeking counterparties?

Well, there are a host of different answers to that question depending on the kind of exposure and who the counterparties are.

Okay, but would you say they're more abundant? Is it a tougher process? I am just trying to think what is the ability for more of that is in the future is basically the question.

I could talk to the corporate CDOs. If you think about the maturity is near-term, right? Most of them -- we publish that when they are going to mature. So as they approach maturity, there is less market volatility associated with them. We said before that there is -- we believe there is very little credit risk associated with them.

So, for instance, the counterparty could decide -- I'm going to stop paying premiums for the rest of the life and essentially walk away, which they have the right to do, and that is really what is happening on the first-quarter deals that S.A. had talked about.

And then one last thing, on your NIW growth, it seems like it is really outpacing like, for instance, NPG. Where are your additional opportunities coming from versus the competitors that remain in this space in terms of marketshare gain? Is it the stronger salesforce or --?

I think it's a couple of things. One is that, as we have been reporting for the last couple of years, we have been diversifying our customer base, and so we have continued to add a lot of customers to our customer base. We've also strengthened our salesforce. We restructured our salesforce last year to focus on both cultivating our existing customers, as well as bringing on new customers and really transitioning those new customers into customers that were submitting new NIW. And I think all of that played into helping to position us.

I think the good relationship that we have with our customers helped position us in term of the increase in NIW that you saw.

So we also benefited to some extent in the very near past from two of our peers no longer writing business. But as Teresa said, this has been a very systematic process of continuing to invest in our business, go after a diversification and expansion strategy to increase the number of customers we do business with, and invest in the business in terms of sales and other -- training and other capabilities.

We also have, I believe, one of the best training capabilities that we offer to our customers. And like I said in my comments, we benefited from having positioned ourselves, whether by design or luck, to benefit from the disproportionate volume increases we saw among the midsize independent mortgage companies, the community banks and regional banks.

[Stuart Yanks], Clarin Road.

Bob, can you clarify one thing? You said you expect to be above 25 to 1, absent sending down additional capital at the end of the first quarter? Does that include the $100 million Assured transaction?

Yes, the first quarter will benefit from the Assured transaction. So the statement about expecting to go above 25 to 1 without any additional capital contributions after the first quarter, yes, that is accurate.

It is after the first quarter.

After the first quarter, okay. And then can you kind of just give us a little bit more color on your outlook for the delinquent inventory and how you see your reserve for the delinquent loan metric changing over time?

If I back out paid claims, it looks like the delinquent inventory is still growing. It grew about 10,000 loans in 2011 and 8,000 loans in 2010. So absent paying claims, it seems like it's still growing. What sort of changes -- does the cure ratio drop or -- you know, it seems like you are on pace to kind of liquidate the entire delinquent inventory.

Well, it is more about the new defaults. New defaults are driving incurred losses. The cure rate, obviously built into our reserves and we expect that to occur over time, but the primary driver of the improvement will be a decrease in new defaults, which we have seen over the past two years has occurred in a pretty substantial amount.

So should the cure ratio be above 100%, outside of kind of the two or three seasonally strong months then going forward?

Not necessarily. You know, it will improve over time -- at some time it will be, but we didn't say when. I think you have got to think about incurred losses being driven mostly by new defaults now. We're having less of an impact from development on the existing defaults, and we do a slide on that to show you. So incurred loss in the future will be driven more by the new defaults development.

The thing I struggle with is the cure ratio seems -- or cures seem to burn out as well with the new defaults, so that's why I sort of am trying to get a little more clarity.

Yes, that's right. I think the cure rate has been low for really the last couple of years due to all of the reasons that -- you know, with modifications and slowdowns in servicer actions, a lot of these government programs, HAMP -- the expanded HAMP which is proposed will help. And ultimately we believe our cure rates will be achieved, but it's slow and it's over time, it's not right away.

So should we continue to see the reserve per delinquent loan metric continue to edge up then?

You could. A lot of the reserve for default is going to be dependent on the weighted average age, how many claims are in-house that haven't been paid, how many delinquencies are new versus old. So that's going to be a big driver of the reserve for default, in addition to severity, which is almost at the max, we don't think reserve for default will go up as a result of severity changes anymore. That's about as high as it can go.

But if you see reserve for default go up it's either going to be because we've increased loan rates, which is possible but we don't expect to happen, or because more of the delinquency population is older and therefore requires a higher reserve.

Steve Stelmach, FBR Capital Markets.

Bob, I think you mentioned in your prepared remarks, and it goes a little bit to the last question, that expanded HAMP HARP 2.0 is going to help you achieve your cure assumptions built into the reserve. How are we supposed to interpret that? Is that you are now incorporating expanded Hamp and HARP 2.0 in your reserve methodology as of December 31, or was perhaps your prior cure assumption a little bit optimistic?

No, I would say neither, Steve. I think that we don't incorporate specifically HAMP. And it would be HAMP, because HAMP is on delinquent loans. The HARP is going to help on the current loans avoiding future default, which is a great thing as well.

I would just say that the more that can be modified and with the eligibility criteria potentially expanding, that is beneficial in helping us achieve our projected cure rates, but it's not specifically in there because it's too difficult to do that.

Correct. And there too much for a bias that is higher. Is that a fair assumption?

I'm sorry?

Is it just too early to bias your cure rate assumption higher based on expanded HAMP, I guess is the --?

Yes, I would say that is accurate.

Then for the past few quarters you guys have put out your net profit for your first-lien domestic portfolio. I think it ended last year like $1.5 billion net profit, as of September 30, well, $1 billion of net profit estimated. I think in your prepared remarks you talked about that still being a positive number. Where are we today? If you disclosed that, I apologize I didn't see it in the slide deck.

We are not going to be disclosing a point estimate going forward. I do believe it's difficult in doing that. It is dependent so much on the future macro economy, some of these government programs, we are just not comfortable with a point estimate. I think we made it very clear that, one, it's positive and, two, the changes have been more been related to the current portfolio, and our expectations for future claims on the current portfolio, which we said now the claim rate on the current portfolio is up to 9% in our projections, and that, you know, we are very comfortable with that number.

But in terms of the point estimate we are really not comfortable anymore because it changes due to these things that are beyond our control and in the future.

Okay, that's fine. And when you say -- I think you inferred that the net profit is probably lower than previously thought -- lower than the $1.5 billion you saw at the beginning of the year or lower than $1 billion you saw at September 30, just to clarify it?

Yes, so lower than both -- but yes.

Okay, got it. Lastly on the quarter share reinsurance agreement, any color on the counterparty for that agreement? Is that (multiple speakers)?

No, we wouldn't be disclosing the counterparty. But it would be -- obviously it would qualify and we would obtain statutory credit.

Okay that's fine. I was just curious if that was a subsidiary of an originating institution or a bank or whether it was just a standalone insurance company?

No, we wouldn't be disclosing that.

Pat Dowd, King Street Capital.

What is the dollar amount of delinquent risk in-force?

You can probably calculate that yourself. It's not readily in front of us. But you know the amount of delinquent loans and you know the average loan size and coverage amount, so it's pretty calculable.

So if I take the number of delinquent loans times the average claim, I think that's $5.8 billion. Is that the right context?

Or you can take the default rate times the risk in-force, that's a good way to do it, or you can -- I mean, there are a lot of ways to get close to it.

Is that something -- I think if you multiply the default rate times the risk in-force you get to a lower number than if you multiply the delinquencies times the average claims. I'm just not sure which --

We have actually been able to get the number while we are waiting, so it's about $5.6 billion.

Great, that's helpful. And then on RAA surplus, it was flat quarter-over-quarter at $1 billion. You talked about being $92 million hit from the ABS CDO reserve. Where did the offsetting gains come from?

I mean, typically we have contingency reserve releases that increase that surplus, so that could be part of it. And the other operating results for the quarter would also be a component, including potential investment gains, so there are a number of things that impact it.

You don't have it on hand though?

Not at the components, no.

And then finally can you just walk us through the bridge from $726 million of cash at the hold co. as of September 30 to the $483 million? I mean, I know some of the major components of that, but it seems like there's a decent amount going on there.

So in the fourth quarter of 2011 there was the tax payment that had disclosed intercompany; that has about $84 million. There was also a capital contribution of $50 million which we disclosed as well last quarter, and then the $100 million capital contribution that was incorporated this quarter. Those are the primary components. That gets you close. We have other minor things that flow in and out quarter-to-quarter.

Matthew Howlett, Macquarie.

Bob, the guidance on going above 25 to 1 in 1Q, that is a little bit higher than I would've thought. I guess, maybe you could help me understand a little bit better. If your current ratio was 100% in January like you put out. Defaults are -- I guess, in January were going on a rate of 20%. And maybe that might slow, but given the benefit of seasonality in February and March, and your expectation that reserves in the MI section will be really driven by new notices of default, which I take sort around the 21,000 area in 1Q, how do you get a -- how did that drive the risk-to-cap up? And what else -- is it the growth in the numerator, is it adjustment to the existing reserves -- anything else you can help me understand that would be appreciated?

I think there seems to be some confusion around this because I think what we said was that sometime after the first quarter we may exceed 25 to 1 risk-to-capital. And so that was the main thing we said -- after the first quarter we may exceed 25 to risk-to-capital.

Obviously there many moving parts to it -- that the future development of losses. There are other uses of capital that go into it. There are also offsets in terms of potentially what else we may be able to successfully do, similar to what we have done in the past that could offset it.

But we wanted to, in terms with being fulsome in our discussions, lay that out for you. We don't have any exact date that we expect that to happen but we wanted to lay it out.

Got you. Thanks for clarifying that. You may be aware of this already, but a competitor, Genworth, has said that new defaults they think are going to go down a rate of 20% this year. I know your January numbers year-over-year were that. Is there anything reasonably that your book would improve at the rate that of others' MI? It seems like you guys are all kind the same in terms of your performance.

I don't know how to -- I don't know their portfolio well enough to know whether we will be similar or different. But I think the macroeconomic factors that seem to be driving the default improvements apply to everybody. And more of our defaults come from the full doc loans as we go forward. But Bob actually gave a number of what our expectations are and how they compare to the past.

I would say that an expectation of between 14% and 15% and an expectation of 20% are very similar. They are both in a range that is reasonable.

And obviously how does that compare to what happened in the past, Bob?

It's lower. Our number for the year 2011 was 18% for the year, 2010 was 30%. So it is lower than what has happens over the past two years -- that's our number. And again, I would see those two numbers as being pretty similar.

And we hope they are right.

Exactly. And then one more question, it is probably directed at you, S.A. The House Committee on Financial Services, I think, last week approved the FHA Emergency Act. And it looks like they're going to raise the monthly insurance premium -- the high-end of it to 205. I think they are currently at 115; they can go up to 155. But they are going to push it up. It sounds like they may raise it to build up a shortfall in their reserves.

And if they do go to 205, how much how much beneficial will -- how much the premium or discount will you guys be towards the FHA? I mean, how much of a benefit towards a customer gain in going through private MI versus an FHA premium at those rates?

I think Teresa is the best person to answer that.

Well, I would say that, you know, the increases in FHA would be helpful to us. I mean, with the changes that occurred in 2011, with them increasing their fee in April 2011, and decreasing the MI premium that we put in place for borrower paid in the middle the year, that already made the product competitive with FHA.

Some of the changes that occurred at the end of the year where the GSEs were required to increase their GC to pay for the two-month payroll tax deduction extension was sort of narrowing that benefit, particularly when it came to note rates. So any increase in the FHA premium would be a positive in helping to make the MI more compelling for a borrower from a payment perspective than an FHA.

I think with that, operator, we are ready to wrap up the call for today. And I would like to thank all the participants who participated in it, and see you at our next quarter call.

Thank you. With that, that does conclude our conference. We thank you for your participation and for using AT&T. You may now disconnect.