Radian Group Inc (RDN) 2012 Q1 法說會逐字稿

Welcome to the Radian Group first quarter 2012 call. (Operator Instructions). I'll now turn the conference over to Vice President of Financial Communications, Emily Riley.

Thank you and welcome to Radian Group first quarter 2012 conference call. Our Press Release which contains Radian's financial results for the quarter, was issued earlier today and posted to the Investor's section of our website at www.Radion.biz.

During today's call you will here from S.A. Ibrahim, Radian's Chief Executive Officer, Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce Bazemore, President of Radian Guaranty, Inc, David J. Beidler, President of Radian Asset Assurance, Inc., and Scott Theobald, Executive Vice President and Chief Risk Officer Radian Guaranty, Inc. 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 subjects to risks and uncertainties which may cause actual results to differ materially. For discussion of these risks, please review the cautionary statements regarding forward looking statements in our Earnings Release and the risk factors in 2011 form 10-K 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. Today, I will first provide brief highlights of the quarterly results and then I will focus my remarks on how we keep our eye on the prize in terms of producing future shareholder value. I will discuss three key areas.

First, how do we think about Radian's future value for our shareholders, a value we hope to realize once we finally exit the downturn and shed our legacy burden. Second, what are some of the challenges we face in getting to the prize, and finally, what are we doing today to navigate through those challenges? Next, Bob will cover details of our financials which have complexities again this quarter.

Before we open the call to your questions, I will offer a few final remarks. Earlier today, we reported a net loss for the first quarter of $169 million or $1.28 per diluted share. This includes the impact of fair value losses of $91 million. At March 31, 2012 or book value per share was $7.65.

Now, let me discuss the future prize that keeps us focused, motivated and excited everyday at Radian. We believe our core mortgage insurance business is attractive with strong returns, outstanding credit quality and sound pricing. We continue to capture a much larger share of new mortgage insurance business today than ever before in our history in an extremely competitive but high quality market.

In fact, our market share of this profitable new business is double what it was in the challenging underwriting years of 2005 through 2008 and this increased volume is improving the overall credit profile of our MI portfolio. In the first quarter, we again wrote $6.5 billion of new mortgage insurance business and our pipeline remains strong with NIW reaching approximately $2.6 billion in April.

Slide 15 shows the performance of our primary mortgage books by vintage, where you can see the most recent books of business which are becoming a much larger portion of our total portfolio have been performing extremely well and are projecting strong returns on capital. Importantly, as of the first quarter, the 2009 through 2012 books grew to 31% of our primary risk force and the most problematic 2006 and 2007 books are down to 31.5% of the primary risk in force.

We view this shift as a positive differentiator share for Radian and one of the primary drivers of our expected return to operating profitability in 2013. Moreover, the MI industry volume could benefit in future years from higher mortgage originations, increase private MI penetration versus the FHA and the potential opportunity for an expanded private mortgage insurance role in the mortgage market. As we have mentioned in previous calls, each $1 billion dollars of NIW is expected to generate approximately $7.5 million in future after-tax value.

Our financial guaranty business continues to serve as an important source of capital for Radian Guaranty and we have reduced net par exposure from a peak of $115 billion in June of 2008, when Radian Asset stopped writing new business to $45 billion in the first quarter of 2012, primarily, through a series of successful commutations, including our recent Assured transaction and our even more recent success in commuting a our CDO of ABS exposure and a significant portion of our riskiest TRUPs exposure.

These actions have been STAT positive and importantly, provide increased likelihood to the future availability of Radian Assets capital for Radian Guaranty. It is also worth noting that while reducing its net par exposure, Radian Asset has paid out total dividends of $330 million to Radian Guaranty since 2008.

An additional $323 million in contingency reserves remains to support Radian Assets existing risks, representing a potential opportunity to add to Radian Guaranty's statutory capital through future exposure reductions. Radian Asset expects to pay another dividend to Radian Guaranty in July of approximately $50 million. As mentioned earlier, we continue to project a return to a small operating level of profitability in 2013.

While challenges and uncertainties clearly remain, some which I will discuss shortly it is important to note that in the scenario of Radian returning to sustained profitability, our statutory earnings would be tax-free for a significant period of time due to our substantial NOLs. Now, let's review a few of the major hurdles we must clear in order to achieve the prize.

They are the performance of our legacy mortgage insurance and financial guaranty books, the still uncertain macro economic environment and state of the housing market, various regulatory uncertainties, including QRM, QM and GSE reform and the effective management of statutory capital and holding company liquidity. Each of these is difficult and will require significant attention and focus.

However, we have been engaged in these efforts for quite some time and have consistently demonstrated our ability to overcome obstacles. In light of the prize we are seeking we will continue to pursue all viable alternatives and opportunities to achieve our objectives. Let me review what we are doing today to navigate through these challenges. First, we have taken many actions to improve Radian Guaranty's risk to capital position in order to keep writing new mortgage insurance business.

These actions include internal and external reinsurance, reductions and commutations of risk exposure and harvesting investment gains. Since moving Radian Asset under Radian Guaranty in 2008, have reduced Radian Asset's net par exposure by 61%, allowing us to take advantage of contingency reserve releases that benefit Radian Guaranty's risk to capital.

In the first quarter, our risk to capital ratio improved to 20.6 to 1. In addition to the capital management actions we've already completed, we announced an external quota share reinsurance agreement in April to further support our risk to capital ratio going forward for Radian Guaranty and we will keep seeking more alternatives and opportunities.

Absent for the capital support, we do expect Radian guarantee to exceed 25-to-1 in the latter half of 2012. However when this occurs, we have a plan in place that has been approved by our regulators and the GSEs to continue serving our customers and the housing market, uninterrupted through a combination of Radian Guaranty and it's subsidiary RMAI. Second, we continue to focus diligently on loss mitigation.

As we continue to work through the troubled 2006 through 2008 books our reserve to support mortgage insurance losses stands at $3.2 billion today and our primary reserve per default increased this quarter to $27,833. You will see on slide 16 of today's presentation that our rescission and denial activity remains steady while we continue to work through the poor underwriting years of 2005 through 2008, while allowing ample time for customers to challenge our decision and to provide documentation and support for each claim.

However, the number of denials has grown significantly in recent months and Bob will discuss this in his remarks. What is most important to remember is that we continue to pay appropriate claims while enforcing our rights on each poorly underwritten fraudulent, or negligently serviced loan.

Our loss mitigation efforts are focused on both helping borrowers who are current on their mortgage improve their ability to stay current, as well as on assisting those borrowing who are delinquent but have the means and the desire to fulfill the obligation and stay in their home. For current borrowers the HARP program continues to gain traction and accounted for $930 million of insurance in the quarter that is not included in NIW total.

Third, there are positive trends in improving results. The credit environment appears to be stabilizing and we are encouraged by the continued decline in the number of delinquent mortgage loans in our portfolio, as well as the decreased in our primary default rate to 14%.

Finally, our industry continues to slowly but steadily regain shares from the FHA and we believe private MI market penetration has more than doubled from the beginning of 2010 to its level today. The FHA has raised prices three times in the past two years and has clearly stated its intention to reduce its risk and take on a more traditional role in the housing finance market.

More broadly, we continue to hear resounding support in Washington for a larger role for private capital, including private mortgage insurance in the future of housing finance. Now, I would like to turn the call to Bob for details about the financial position. Bob?

Thank you. I will be updating you on our PNL activity and trends for the first quarter of 2012 and our financial position as of March 31, 2012. The MI provision for losses was $235 million per quarter compared to $333 million in the fourth quarter of 2011 and $414 million a year ago.

The loss development during the quarter was much improved as we expected and the lower level of new defaults that we attribute partially to seasonality and partially to the slowly improving economy and improving credit composition of our enforced book. Primary new defaults for the quarter were down by 20% compared to the first quarter of 2011, which was a little better than anticipated.

The recent slow down in claims paid and increase level of denials led to a reduction in the expected reinsurance recoveries from soon to expire Smart Home transactions by $27 million, which increased our net losses incurred this quarter. The remaining Smart Home recoverable as of March 31, 2012 is $38 million.

We're expecting a continuation of favorable (inaudible) trends for the balance of 2012 compared to 2011 and we expect a loss in 2012 and a return to a small level of MI operating profitability for the 2013 year. Cures during the quarter by bucket are depicted on web cast slide 13, along with a new separate line that breaks out spending claims from the twelve month plus, delinquent loans.

Overall cure levels have improved but are still below our anticipated levels and the cures coming from the older delinquent loans came down from previous quarters. The dollar amount of loss avoided on submitted claims related to denials and rescission for the first quarter of 2012 was $246 million, compared to $135 million in the fourth quarter of 2011.

These figures are net of the actual overturns that occurred during the quarter. The amount in our balance sheet representing future expected denials and rescission is $582 million before considering our IBNR off-set for future overturn. The increased the scope of our claim investigations beginning in 2011 has resulted in higher numbers of denials and has slowed down the claims paid level.

To repeat what we said last quarter, we believe we have a thorough process, which allows the servicer ample time to find documentation or provide additional information before record our denial or rescission. We also believe we have cautiously accounted for the recent increased level of denial activity because of the uncertainty around the sustainability of this rate.

In our assumption, approximately 50% of completed denials are expected to be reinstated, mainly as a result of servicers ultimately finding and producing the documents necessary to perfect the claim. You'll see a change to slide 16, where we have estimated the number of future reinstatements and the cumulative ways presented on this slide, rather than waiting for the actual reinstatements to occur.

Radian Guaranty's risk to capital ratio is estimated to be 26-1 as of March 31. The primary drivers of the changes for our risk to capital ratio this quarter were additions to stat capital from the financial guaranteed business, primarily from the assured transaction of which most of the total anticipated $100 million benefit was realized this quarter. Off-set by the MI operating losses which reduced capital.

Radian Guaranty ended the quarter with $920 million in statutory capital. In terms of futuristic capital impact, as we announced a few weeks ago, we have entered into an external reassurance policy on the newly written business that will allow us to reduce our net risk enforced by estimated $1.25 billion to 1.6 billion to about half of that benefit coming as of the end of second quarter this year.

We consider this reassurance to be an effective way to manage our risk to capital ratio in light of the new insurance written in past year. With regard to financial guarantee performance, the $31 million provision for loss of this quarter was driven by a $19 million increase in loss reserve on our Greek Sovereign exposure, to a current loss reserve of $24 million out of a total exposure of $31 million.

And some increased reserves on a series of smaller RNBS exposures. Our quarter-end loss reserve on Jefferson County is $26 million, compared to our total exposure of $225 million. While the assured transaction was positive in that it reduced exposure and produced an increase in stat capital, it negatively impacted our GAAP results for the first quarter in two ways.

First there was a write-off of associated deferred acquisition costs of approximately $16 million and second, there was a negative earned premium impact of $22 million. Due to the fact our unearned premium use for settled purposes was a statutory figure, so the difference between it and the GAAP had to be reversed this quarter.

As we announced previously, we commuted our large problematic CDO transactions along with a series of non investment grade TruPs CDO's. This transaction was another example of the successful track record in mitigating losses and problems of financial guarantee credits. The second quarter we will book a small statutory gain on the transaction and we will book a loss for GAAP purposes because of the commutation payment is higher than our net fair value liability.

The substance of this transaction is as follows; We've eliminated exposure on a $450 million deal that we believe would have been lost. We have also commuted our exposure on $700 million of TruPs. The transaction eliminates 81% of our B and below rated TruPs and 51% of our B and below rated total portfolio.

For this benefit, we paid out $210 million, of which we will initially book a projected recovery of $75 million. This $75 million is still at risk as the actual ultimate recovery will depend primarily on the future performance of the commuted TruPs CDO. The fair value losses for the first quarter of 2012 were driven mainly by Radian's credit spread tightening which reflects the market's improved view of Radian's outlook.

Within the $18 million net loss and other instrumental losses, the $15 million gain, the Company's debt repurchase as part of the tender offer for a portion of the 2013 debt. Other operating expenses for the quarter increased by $5 million dollars due to the implementation of a new accounting standard for deferred acquisition costs, essentially more costs are now being directly expensed and are in other operating expenses rather than being deferred and amortized.

In addition, we had an operating experience increase of $6 million compared to last quarter from variable stock-based compensation during the course. As of March 31, 2012, the valuation allowance against tax deferred asset is approximately $880 million or $6.60 per share. After the $133 million spent on the tender offer, we have approximately $350 million currently available at the holding company.

There were no contributions required to be made to it any of our MI subsidiaries this quarter. Absent any additional capital support, we expect Radian Guaranty to breach 25-1, sometime in the latter half of 2012. More contributions from the holding companies are possible during 2012 and beyond, including our requirement to provide Radian Mortgage Insurance with $50 million from Radian Group, at least 25-1 at Radian Guaranty.

There's also a potential use for holding company cash when our IRS issue is finalized which would occur in 2012. The remaining $104 million of our 2012 debt matures next February and we have $250 million of debt maturing over three years from now in June. I would like to now turn the call back over to S.A.

Thank you Bob. Before we turn the call over to the Operator, I would like to reiterate the following points. One, we wrote $6.5 billion in NIW representing a large share of today's high quality and profitable business.

Two, since 2008, we have reduced our Radian Asset risk exposure by 61% while paying $330 million in dividends to Radian Guaranty and our statutory surplus now stands at $1.1 billion. Three, at the end of the first quarter, our risk to capital ratio improved to 20.6 to 1.

Four, we have $350 million available in the holding company liquidity after opportunistically reducing debt maturing in 2013 by $146 million. And finally, at Radian, we are keeping our eye on the prize and focusing on actions that improve the likelihood of achieving the prize for our shareholders. And now I would like to open the call to your questions. Operator?

(Operator Instructions). Our first question will come from Douglas Harter with Credit Suisse.

I was hoping you could talk about your expectations for the pace of paid claims in the second quarter and remainder of 2012, kind of given the variatability we've seen there recently.

Doug, we do expect claims to increase for the balance of the year. We did revise our total year expectations to $1.1 billion and the expectation for the next three quarters will be in the $300 million range.

Great. And then also sort of on the rescission and denials it spiked up in March. Is that more unique to something that happened in March or what can you tell us about that level, Bob?

I think any one month is hard to explain so there could be things occurring either at the very beginning of the month or the end, so we really tend to look at the quarters numbers. That being said, the quarter's numbers are up as well and it's driven mostly by the increase in denials that we attribute to the scope increase that we have put in 2011, where we're examining substantially all of the claims that we receive.

Thank you.

We now go to Mark DeVries with Barclay's.

Thanks. Hey, Bob, could you remind us what the reserve implications are from denials or did those cease to be past due and they're not allowed to hold reserves again? Is there actually some accounting for the fact that you assume the 50% of those will ultimately become valid claims?

So once we do finally record the denial and that comes after obviously giving the servicers time to provide the documentation, then the denial is booked. However, because of the expectation that 50% will ultimately be reinstated, we essentially put up an IBNR to account for that 50% expected reinstatement level.

And how does that 50% reinstatement compare to the experience you've had so far with denials?

It's a little bit higher than the actual experience. The actual experience has been a little bit lower than that. But our expectation is that it will be around 50%.

Can you give us color on what the most common reasons are for denying claims?

Substantially all of it is related to documentation. So it's not providing the necessary documentation required to perfect the claim.

Okay, got it. Could you help quantify, I'm sorry if you did this already, but quantify the GAAP hit that you're going to take in the quarter from the commutation of the CDO of ABS and trust transactions.

We didn't say, it will be in the 10-Q. However, the reason that it's occurring is because the commutation payment was higher than the net fair value liability. As you know the fair value liability is done in a way that doesn't necessarily reflect a settlement value.

It incorporates Radian's credit spread which has a big impact on reducing fair value liability. So that's really why it's occurring. But the actual amount will be in the 10-Q.

Got it. And last, can you give us a sense, for how many of your remaining guarantee exposures you view as having the potential to result in additional commutations and what the benefit could be there?

Hi, this is Dave. We're always in talks with counter-party's about commutations and recent disclosures highlight a couple of them. There are benefits there and potential there.

Although, it's hard to put a number on it ahead of time. As we said, earlier, we have a great track record in terms of our success in commutations. Since we've dealt with some of major opportunities we have smaller opportunities left. That said, we will continue to try and hopefully succeed in the future.

Okay, thank you.

Now we'll go to line of Chris Gamaitoni with Compass Point. Your line is open. Good morning, guys. Thanks for taking my call.

Can you give us some clarity around what exactly is the $7.5 billion of European structure exposure? Is that mostly Corporate CDOs?

Can you repeat that?

Sure. In UK, outline $7.5 billion of European structured exposure in the FG unit partnership was wondering, is that mostly corporate CDO's?

Yes.

Are any of those European bank.

With respect to that exposure, it's going to be classified as European if the majority of the underlying are European, so there would be European banks within that.

Okay. Are most of those higher in the capital stack, correct?

Yeah. I mean, the capital points for the corporate CDOs, 91% we have internal rating with triple AAA so there's substantial subordination.

Thank you, on that. And then, with the denials, could you just maybe give clarity on why your experience is different than the rest of the industry as far as servicers not being able to find paperwork?

This is Teresa. We don't know what the processes are at some of the other MI company, so it's difficult for us to give a comparative in that regard. But we do let servicers know what we're missing. We give them a lot of time to try to provide that documentation. But what we found is that sometimes until we actually give the denial, the documents aren't forthcoming.

I guess a broader question; Do you have a view on kind of when cyclically will be more dramatic. This quarter is difficult to tell because of the seasonal impact but just maybe a view on credit and when cyclically really starts to pulls through.

This is Scott Theobald, good morning. Listen, that is a very tough question. We continue to see seasonal trends. We've been anticipating a cyclical recovery in the housing market for at least a few quarters now and we're optimistic but as the economy stars to grow and the housing market beginning to clear, we'll start to see higher house prices and favorable cycle impact on future default activity.

One final question, what percentage of your new defaults are repeat offenders?

About 3/4's of them.

Thank you so much.

Now we'll go to the line of David Epstein with CRT Capital.

Good morning, a couple of questions, first of all, first lien reserves were up to 27,833 versus 26,007. Why were those up so much?

The primary reason is really the aging of the portfolio so we didn't change our role rates by bucket. They're just more loans with a higher reserve. So pending claims are up and age delinquencies are up.

And on a slide 12, this probably relates to a rescission's and denials but could you go into more detail on why components are provision for losses in regards to existing defaults down from 226.9 to 57. You have a footnote there but could you elaborate.

That's the composition change and this has improved a lot, where in the past years we had a significant amount of incurred losses that were coming from development on existing defaults. That has come down through 2011 and has continued to come down in 2012 and in the future, we're projecting that most of the incurred loss that we see will be driven by the top line or new default line as opposed to the other two.

Thank you. Does rescission and denials come into that equation?

They do get factored in. Now we estimate them so if we're right about the estimates, then there shouldn't be a net impact, but intro quarter there could be some and we revised our estimates as we get new information. So there will always be some movement.

Thank you.

You're welcome.

We'll go no Matthew Dodson with Edmunds White Partners. Hi. This is John Evans but could you just talk about, you did a great job buying back this debt early. Your capital has gone up at the holding company and how do you plan to take out the maturities in 2013?

The remaining?

The cash?

We, we have cash at the holding company so whether we do it prior to maturity or at maturity it will be done likely be done in that way.

I guess the question I have for you is, and I didn't articulate well, I apologize but after that money goes away, if you assume you have 104 that goes away and you have 250ish roughly left, is that enough, do you believe with the holding company or do you need to raise more debt?

Well, it's something that will continue assess. Obviously, we have the 15 as the next age major need at the holding company but that's over three years from now so we will continually assess and we're going to preserve liquidity as best we can and continue to write business at the MI sub which is the driver of future value.

Thank you.

Now we'll go to the line of Scott Foss with the Bank of America Merrill Lynch.

Hi, thanks. Just to make sure. The understanding is that you guys are going to, is it fair to infer that you expect to stop writing business out of a rating guarantee in the latter half year when the risk goes 25-1 and that's what we should infer from this, right?

Not at all. And Teresa will answer that.

No, the way it works that we've been seeking waivers from some of the states and many of the states don't even have a hard stop with respect to risk to capital requirements. There are only 16 states that fall into that category. We've already received waivers from seven and we have applications pending in another four. So the idea is that even if we were to go over 25 to 1, we would continue to write business in Radian Guaranty in the majority of states. In the states where we couldn't write business and Radian Guaranty, that's why we got approval from the GSEs to write in RMAI, Radian Mortgage Insurance. We would write business in just those states in RMAI.

You fully expect RGI to keep writing business through all of this, business as usual, no expectations otherwise, right?

That's correct.

That's fair to say.

Right.

We want to, as we said, we have a plan to write business uninterrupted by using a combination of Radian Guarantee and RMAI and we expect Radian in majority of the states and RMAI in those states where we need to and we have approval to continue doing that.

Okay, great, thanks.

We'll go to line of Jordan Bloom with RBS. This is Dan and thanks for taking our question. We had a question regarding slide 13. Am I reading it right that of all the accounts who have not paid in over a year, you expect 46% to total net default rate on that entire bucket and just as a follow-up to that, I notice that it's down from 54% in the fourth quarter. Just wondering if you could comment on what's behind the assumption in the material decrease here.

The 46% is paid, right. So that would be net of denials and rescission's and the 57% would be the claims received the and the reason it's not comparable to fourth quarter is it's broken out, the pending claim on a separate line in the fourth quarter and prior to that, pending claims are always a part of that.

So 46% total is what you expect to pay on all accounts who have not paid in over a year. Is that the correct assumption.

That's correct.

Okay thank you. And one last question on the reinsurance agreement, just curious, what's motivation behind reducing the risk through the presumably more profitable new insurance and wonder if you could share more details, including who the counter-party is?

We won't say who the counter-party is and that won't be disclosed. However, the transaction to manage the risk to capital and that's very, very important to continue writing. As you see, we've written significant share of the new market and the new business and keeping our risk to capital at an appropriate level will enable us to continue to write which should generate significant value. I'll also point out that after three years, we do have the ability to commute the transaction despendings that will be our option and depending on the capital position. So if it's performing very very well, and our capital position is improved, we can commute and take back the business.

As we looked at a set of alternative ways in which we could continue writing the business in our view this represented the best alternative for the shareholders. It's an indirect way. It's not quite raising capital but an indirect way of getting capital support by transferring a portion of risk and we also felt very comfortable with the fact that there was somebody, some party out there that was strong in credit raying that believed in our risk and willing to share our risk.

Thank you very much.

And now we'll go to line of Bose George with KBW.

I was wondering, do you think the increase in HARP reflectivity could do anything to help the ultimate credit losses on the Legacy Books.

Yes, we certainly do. The view is that it should decrease the number of new defaults that we would see from the Legacy Books to the extent borrows can be put in a better position to pay and it says something about the borrows wanting to stay in their homes, making the effort to pursue or refinance.

Makes sense. The HARP volume, is it service the main servicer or do you see loans moving from one service to another, as well.

It's still the majority of it is same servicer. We are starting to see some particular new servicers really more engaged in the program. But the majority is still same servicer.

Thank you.

Now we'll go to line of Michael Dershowitz with GreenCourt.

Yes. A couple questions here. You mentioned, I think, in the press release on exhibit, I think it's E, that the commutation cost $108 million in cash. Was that from the whole co or the insurance co.

This was the.

Assured of commutation?

The insurance company.

How was that paid, just from cash and balance sheet or through a loan from somewhere else. Sorry? Was there a loan to the insurance company for that transaction or just paid from the cash on the balance sheet down there?

No, the cash, the company has significant in investments and cash.

You said at the end of the statements, I think, that the holding company will pay $50 million to the insurance company at some point this year?

The holding company is required to contribute $50 million to Radian Mortgage Insurance if and when Radian Guaranty breaches 25-1 so that's part of the GSE approvals for RMAIs so that would come from the holding company.

Does it actually grow or is it $50 million?

That's the requirement.

And just a final question here; Is there an update on the tax transaction. I think you mentioned last quarter there was an $80 million or so of tax due to the IRS?

There's no real update but is not the amount due. That's the amount that is brooked. We said if there was a settlement at the level that is booked, that would be the outflow. But there's no real update other than we're in negotiation and hope to get a favorable settlement at some point soon.

Thanks a lot.

We'll now hear from Howlett with Macquarie.

Just on financial guarantee and there's a lot of noise, how would your commensurate to model A going forward? We looked at what the earning break even results did in the past, how would you suggest us look at that going?

I think that's fair there will be things obviously with the assured transaction created some items this quarter that impacted GAAP. If we do things like that in the future, there could be some usual items, but I think a fair representation is a break-even go forward.

And do you guys give an update on I think there was a possibility of CDO holder exercising their walk away rights in the first quarter. I know there are maturities. Was there an update on that?

We had some CDO walk aways in the first quarter, mostly shorter dated exposures, but we've seen more activity in that area.

And just moving to the US, you said that rate of new notices to default declining was higher than estimated. I think you guys were guiding to a 14%, 15% year to year decline in net new notices. That was up in the first quarter. Do you exit to go back to your guidance if the back half of this year or do you think the rate it's heading at will be maintained?

Yeah, Matt, I think it's encouraging that it was higher than expected, but you know, I think our projections are for a 14% to 15% decline in both 2012 and 2013 and we haven't updated those. We'll see what happens in the second quart expert if we have reason to update it we will.

Will be happy if it's better.

Great, thanks.

Now we'll hear from Jack Micenko with SIG.

Thanks. RMAI, what's the capitalization is or will it be capitalized for the $50 million. I'm trying to get a sense of what the capacity is.

Today, it has $17 million so with another 50 it would have 67. And that's pretty substantial capacity. And certainly at the beginning you it has no business in it today.

Right, okay. And then, looking on slide 19, the 2006 default seem to inflect a bit in the last several months and rise again slightly. Anything specific there or anything you can talk about in terms of that '06 trend on the vintage .

No, this is Scott. That's the denominator, that book slowly fades away.

Okay, perfect. Thank you.

Now we'll hear from line of Jeff pun.

Bob, what was the IBNR reserve specific to the denials as the quarter ends?

It went up from last quarter, Jeff. So I'll say over a $100 million. But we'll get you an exact number. I don't have it right at hand.

What is your experience been in terms of the timeline for an overturn.

It varies, Jeff. I mean, we give them substantial amount of time, but sometimes you know, it could come earlier but it could go longer. I could say it varies.

It fair it to say you'll get hit with the over turns this year in the back half or first and fourth quarter? What's your expectation.

I think from the first quarter denials, I think yes, is the answer.

Okay. And lastly, you indicated that the cure rates that you're experiencing are a lot slower, obviously, than what you've booked the reserves to. What specifically accelerates your performance? Purely the economy and employment trends or is there something else you're focused on that will help you realize the rates you've booked to?

Went of the big things is the completion of a lot of modification programs because we know that so many of the borrowers are in modification programs in some stage and they've been slow to become complete. So that's a big thing we are expecting and looking for.

On that front, what percent of your book is currently involved in some form of modification, then?

We've disclosed that in the past. It's hard a number to get but we believe in the 20s in terms of percentage of delinquent loans.

Okay. Great thank you.

Now we'll hear from line of Shawn Fauret with Duetche Bank.

Hey, thanks for taking the question. Just with the break-down you guys have given historical on the primary loans and default and net projected default to claim rate it looks like it went from 45% historical up to 48%. Just wanted to get a sense of if that was if you guys had broken out the pending claims and had more detail on the twelve payments or more which includes pending claims and that being a higher number or why that 45 went to 48 this quarter.

Now because we broke it out. It's because there are more loans. So the, again, we didn't change role rates by bucket. The later stage buckets including pending claims which obviously at the highest reserves are bigger components of the reserve and there for, that number will go up naturally because of that.

And clearly went we're looking at it historical versus what you guys disclosed the twelve payments or more should include the pending claim and when we look a the aggregate of those two combined?

That's right, in past it has.

Do you know what the apples to apples would be for that would be on the projected claim rate for this past quarter?

It would be very similar, very, very are similar because we haven't changed by bucket the default to claim rate.

You guys were at 54% last quarter so right in line with that?

Very similar, yes.

Thanks.

We'll go to line of Steve with SABI.

Real quickly, you guys said that 3/4s of defaults are repeat offenders is that a right number you gave, roughly?

Yes.

And of those, any feel for how many were reperforming earlier because of hamp that will no longer have that hamp benefit versus just borrowers who are simply bad at matching the cash flow month to month and initially going delinquent but never end up in a claim? Any feel for what that percent that would be?

Not off the top of my head.

I guess in other words, do you feel that the higher percent of repeat defaulters this time around will go to claim versus historical experience because a lot of those repeat defaulters were reperforming because of hamp and that's no longer available to them?

I won go that far. I don't think there's any change in that opinion as to how the defaults will be resolved.

Okay.

Besides the economy going on, there's a number of factors at default such as hamp.

But none the less, we should be encouraged 3/4s being repeat defaulters and perhaps say voiding a claim do a larger degree than someone who nearly defaulted? Is that a fair statement?

To the extent that repeat defaulters could cure at least cure one that's a good sign.

And Bob, just on page 13, not to continue or hash this out, but I think most folks look at the twelve month plus gross claim rate of 57%, the question is asked whereby why is that not 100%. Can you, obviously, you net to 46 at rescission's and denial but could you bridge that gap. Is that ratings historical experience in terms of those late stage buckets. Is it a bombs up analysis on what you think those borrowers will ultimately do or how they'll ultimately reperform? How should we think about that and why is that not 100%?

First of all, the actual experience has been less than this, so that is the first thing. And then there are four reasons why we think that many of these twelve plus loans will not be submitted claims to us. The first one is that we do have an existing cure rate. It's been running 4% per quarter and we've been disclosing that so that demonstrating some of the loans are actually curing.

Second, we talked about this big modification effort by servicers, by the government and new programs and significant amounts of our loans are in mod . A lot of these loans are twelve plus because the borrowers have chosen not to pay their claims , I'm sorry, not to pay their mortgage because they want to deal. They want a mod or some sort of a program. So they're really not the same as historical twelve month delinquent loans.

We know from doing these outreach efforts that we've done that a lot of borrowers have the ability to pay. They're waiting because they may be, they may get a deal that decreases their payment and some of them, if time goes on enough, have improved their economic situation, gotten a job and we find the majority do not want to leave their home. They want to stay in their home.

And then the fourth one and we've spoken about this and hard to quantify, is that a lot of the older loans are aging not just twelve plus but two, three or four years and we think there's a reason why they're not becoming claims, either documentation, title, servicing and a lot of the external models we look at that estimate MI reserves take down the role rates as the loans become significantly aged. So for all of those reasons, we think our 57% role rate is appropriate for

Great. That's helpful. On aging, what's one of the contractual obligation for you to pay the claim? After how long, three years, four years?

There's no, there's nothing that says if a loan is a certain amount of time age that we won't pay the claim. It's just that there's a good sign if something is 3, 4, 5 years that something else is going on that might affect it.

Okay, so could be the borrower, that loan goes to foreclosure, yet the claim never comes through to a rating because of those reasons, and, there's not enough documentation to file the claim?

They don't go no four closure or they get to foreclosure and for whatever reason, it's not completed.

Logically, you would expect once a loan gets to that stage, the servicers would want to get it foreclosed and get the money back to the investors and if that hasn't happened in two years, there has to be some reason as to why it hasn't happened.

In other words, bridging the gap between the private label market that says a 100% of that twelve month plus bucket goes in foreclosure and what is a claim to an MI company are two different things?

That's right.

Okay. Great. Thank you.

And now back to Mr. Ibrahim.

I would like to thank you all for participating on our call and see you again next quarter.