Radian Group Inc (RDN) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Radian's second-quarter 2012 earnings call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded. With that being said, I will turn the conference now to Ms. Emily Riley, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Radian's second-quarter 2012 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today. And it, as well as the slides that will be referenced during today's call, have been 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; Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty; and Derek Brummer, Chief Risk Officer and General Counsel of Radian Asset.

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 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 our quarterly results. Then I will focus my remarks on the topics that we believe are most important to you. How we at Radian continue to expand our mortgage insurance franchise, and capture a larger share of new high-quality business while effectively mitigating losses in our legacy portfolio. What we are doing to reduce our risk exposure and financial guarantee, and provide important capital support to our MI business. And how we are managing our capital, and positioning Radian for success and a return to profitability. Next, Bob will cover the details of our financials, and then I will provide a few summary points before we open the call to your questions.

Earlier today we reported a net loss for the second quarter of $119 million, or $0.90 per diluted share. This includes the impact of fair value and other financial instrument losses of $95 million, which consisted primarily of the impact from the April commutation of our troubled CDO of ABS transaction and certain TruPs exposure. As you know, commuting these exposures and removing this risk for Radian was a critical achievement that helped us further reduce our financial guaranty risk and preserve our capital. Bob will discuss the accounting implications during his remarks.

At June 30, 2012, our book value per share was $6.75. Radian Guaranty's risk-to-capital ratio remains steady at 21-to-1 in the second quarter. The maintenance of our risk-to-capital ratio over time has been achieved by the many actions we have taken to manage our risk-to-capital position, including internal and external reinsurance, reductions in commutations of risk exposure, and by realizing investment gains. We believe that Radian is positioned to continue writing new high-quality mortgage insurance business uninterrupted well into the future.

Now, let me turn to the topics that we believe are top-of-mind. First, we continue to write more new mortgage insurance business with outstanding credit quality that can generate strong returns. In recent months, we have been capturing a larger share of new mortgage insurance business than ever before in our history in an exceptionally competitive but high-quality market. In the second quarter, we wrote $8.3 billion of new mortgage insurance business, and wrote $14.8 billion through the end of the second quarter.

We wrote 3 times as much new business in the first half of 2012 as we did in the first half of last year. And the momentum continued in July with another $3.4 billion of new business written. The business written in the month of July alone is estimated to generate $20 million in after-tax value over its life, after adjusting for reinsurance, and perhaps even more, is the credit performance is better than expected as has been the case with our most recent originations.

There is no denying that our sales and customer service teams have hustled. Their energy and enthusiasm helped to set Radian apart as we continued to increase the amount of business we are writing. We have successfully retained our traditionally strong share of business from the nation's largest lenders, while steadily increasing our business volume from credit unions, community banks, and independent mortgage lenders. In fact, 18% of our NIW in 2012 came from customers new to Radian since last year, and nearly 40% from the approximately 1,100 customers new to Radian since 2008.

Importantly, as of the second quarter, the 2009 through 2012 books grew to more than 35% of our primary risk in force, and the most problematic 2006 and 2007 books are now down to just under 30%. If the pace of our new business volume continues, we expect that by mid-2013 our book of business written after 2008 will be larger than the book written in 2008 and prior. We viewed this shift as a positive factor that differentiates Radian, and view it as one of the primary drivers of our expected return to operating profitability in 2013.

Second, we continue to focus on mitigating losses in our mortgage insurance portfolio. There are positive trends and improving results in our legacy book, as the total number of defaulted loans continues to decline. The default rate on our primary book fell further in the second quarter to 13%, and the default rate on primary flow business fell below 10%. As we continue to work through the challenging 2006 through 2008 books, our reserves to support our mortgage insurance losses stand at $3.2 billion today, and our primary reserve for default increased again this quarter to $28,413.

You will find the details of our rescission and denial activity on Slide 19 of our webcast presentation. These rates remain steady and elevated as we work through the legacy books, where underwriting and servicing shortcomings are prevalent. As you can see on Slide 20, our denial activity has increased, with most of the denials coming from one servicer. Bob will provide more details on this in a moment. What is most important to remember is that we continue to pay appropriate claims, and have paid in excess of $5 billion since 2008, while enforcing our rights on poorly underwritten, fraudulent, or negligently serviced loans.

Third, our financial guaranty business continues to serve as an important and unique source of capital for Radian Guaranty. We have reduced our net par exposure from a peak of $115 billion in June 2008 when Radian Assets stopped writing new business, to $42 billion in the second quarter of 2012, primarily through a series of successful commutations, a reduction of total financial guaranty risk exposure by 64%. Importantly, as you can see on Slide 25, our long-duration muni exposure was reduced by 74% since 2008. Our remaining structured finance exposure consists primarily of our corporate CDO book. As you can see on Slide 28, of the $20.2 billion in corporate CDO exposure, $10.1 billion, or 50%, matures by the end of 2013, and the remainder by the end of 2017.

Since 2008, Radian Asset has paid Radian Guaranty a total of $384 million in dividends, including the most recent dividend of $54 million. Radian Asset expects to pay another dividend of approximately $40 million to Radian Guaranty next year. In May, Radian Asset also released $55 million of contingency reserves with the approval of the New York Department of Financial Services, which increases the total release of contingency reserves related to the direct book since 2008 to $270 million. As mentioned earlier, in April we significantly improved the credit profile of our financial guaranty book by commuting our large CDO of ABS exposure and a significant portion of our riskiest TruPs exposure. An additional $288 million in contingency reserves remains to support Radian Asset's existing risk, representing a potential opportunity over time to add to Radian Guaranty's statutory capital, as the exposure is ultimately reduced and contingency reserves are released.

Fourth, we continue to project a return to a small level of operating profitability in 2013. While the challenge of our economy and legacy portfolio clearly remains, we believe, based on our experience and trends, that we will achieve a small operating profit next year.

Finally, our industry continues to slowly but steadily regain share from the FHA. And we believe the private MI market penetration has more than doubled from the beginning of 2010 to its level today. The FHA has raised prices four times in the past two years, and have 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 Congress for larger role for private capital, including private mortgage insurance in the future of housing finance. At this time, it appears unlikely that any significant legislation impacting our industry will be taken up before the election.

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

Thank you, S.A. I'll be updating you on our P&L activity and trends for the second quarter of 2012, and our capital and liquidity positions as of June 30, 2012. The MI provision for losses was $208 million this quarter, compared to $235 million last quarter and $270 million a year ago. The improved loss development this quarter was driven by the decline in new defaults, due primarily to the improving credit composition of our in-force book. Primary new defaults for both the second quarter and for the first half of the year are down by 20% compared to 2011.

First-time default, which we view as more likely to ultimately become a claim, and repeat default, continue to decline. In the second quarter, first-time defaults were 4,867 compared to 5,565 in the first-quarter this year, and 6,953 in the second quarter of 2011. We believe that this new-default trend will continue as a result of the changes in our book composition and improved HARP results. We expect a larger MI operating loss in the second half of 2012 compared to the first half, due to seasonality, and expect a small operating profit for the year 2013, which assumes the continuation of improved new-default trends, and no material adverse reserve development or unexpected financial guaranty losses.

The amount in our June 30 balance sheet representing future expected denials and rescissions is $532 million. The IBNR reserve relating to future overturn of already denied and rescinded policies is approximately $224 million. As we have previously disclosed, approximately 50% of the currently outstanding denials are expected to be reinstated, mainly as a result of servicers ultimately finding and producing the documents necessary to perfect the claim within the time frame allowed under our master policy. While our experience clearly supports this estimate, it is important to note that this assumption is not very material to our overall loss reserve estimate. For example, even if the reinstatement percentage shifted significantly to 75%, the resulting addition to our total loss reserves would only be about $97 million.

Because our recent denial figures have been skewed by one large servicer, we have separated this specific denial information for this servicer on the default roll-forward Slide 20. This servicer represented about 30% of our defaults, and 72% of our denials in the second quarter. And we believe that the denial line excluding this servicer is more representative of our overall denial trend.

We've also updated the information relating to our default inventory that we introduced in June. And that's on Slide 13 and 14. We showed delinquent loans for which at least one payment was made during the quarter, but remained in default, which demonstrates the borrower's commitment to pay, and new defaults that have been in and out of default multiple times, which are defaults that have historically gone to claim at a lower rate than first-time default. We believe that the numbers and trends on these slides help provide support for our default-to-claim estimate.

In addition, Slide 15 shows the aging of our delinquencies. Many of our older delinquencies remain in the early stages of resolution, meaning that no foreclosure action has started. We are reviewing the servicing of many older delinquencies to ascertain whether foreclosure timelines dictated by our master policy were violated. Based on our preliminary analysis, we believe that a meaningful percentage of these delinquencies, to the extent they do become claims, will be subject to claim curtailment or denial, and thus will not become fully paid claims.

Radian Guaranty's risk-to-capital ratio is estimated to be 21.0-to-1 as of June 30. The primary driver of the slight increase to our risk-to-capital ratio this quarter was the addition to net risk in force from our substantial new insurance written, though some of this increase was offset by risk [ceded] under our quota share reinsurance. Radian Guaranty ended the quarter with $923 million of statutory capital, up slightly from last quarter, as additions to our statutory capital from the financial guaranty business were mostly offset by MI operating losses.

For the next few quarters, we expect our strong new insurance volume will continue to increase our net risk in force, and operating losses in the second half of the year will decrease our capital level. These effects could potentially be offset by investment gains that are currently embedded in our portfolio by reinsurance or by capital contribution.

With regard to financial guaranty performance, there were minimal incurred losses during the quarter. As some of you probably saw, we expanded our financial guaranty disclosure during the quarter by listing on our website the specific details regarding much of our direct-structured finance portfolio, and information regarding a publicized municipal credit.

As we announced last quarter, we commuted our $450 million problematic CDO of ABS transaction, along with a series of TruPs CDOs for which the collective exposure of just under $700 million was reduced to a $75 million recoverable. This $75 million is still at risk, as the ultimate recovery will depend primarily on the future performance of the commuted TruPs CDO. Because the fair value of these transactions prior to the commutation was impacted by Radian's credit spread, which reduced the fair value liability, we recognized a combined loss of $108 million for GAAP purposes, essentially representing the difference between our payment and the fair value liability that existed. $64 million of that loss is the portion related to the CDO of ABS, and is contained on the gain and loss on other financial instruments line, and the balance relating to the TruPs is contained within the change in fair value of derivatives line. Importantly, the statutory impact of the transaction this quarter was a small gain, and hence a small addition to statutory cap.

As always, Slide 9 depicts our current balance sheet fair value position, along with the expected net credit losses or recoveries on fair valued exposures. There is currently a net credit recovery, as the majority of the previous quarter's expected payment is for the CDO of ABS commutation payment. And we currently expect to recover the payment made with regard to the TruPs. If our projections are correct regarding the future credit loss payments and recoveries, we will see an addition of approximately $196 million to our pre-tax book value over time, as the exposures mature or are otherwise eliminated. That number is arrived at by taking the net balance sheet liability of $138 million, and adding the present value of credit loss recoveries of $58 million. And both of these numbers are shown on Slide 9.

The $7.7 million gain on sale of affiliates is from the sale of a financial guaranty shell which completed the assured guaranty transaction. As of June 30, 2012, the valuation allowance against our deferred tax asset is approximately $924 million, or $6.92 per share. Although we believe this amount will be realized in the future, and we would not have to pay taxes on significant future profit, this GAAP valuation allowance will only be reversed if and when we demonstrate a sustained level of profitability.

During the quarter and in July, we repurchased approximately $24 million of our 2013 debt at a modest discount. We have approximately $340 million currently available at the holding company, and our remaining 2013 debt outstanding is down to $80 million. There were no contributions required to be made to any of our MI subs this quarter.

Absent any additional risk to capital support, we still expect Radian Guaranty to breach 25-to-1 sometime in the second half of 2012. Contributions from the holding company are possible during 2012 and beyond, 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 potential use of some holding company cash when our IRS issue is finalized, which may occur in 2012. As a reminder, we have $250 million of debt maturing just under three years from now, in June of 2015.

I'd now like to turn the call back over to S.A.

Thank you, Bob. Before we turn to the operator, I would like to summarize four important points. First, we wrote $8.3 billion in NIW in the second quarter, representing what we believe is the largest share of today's high-quality and profitable business. And we wrote another $3.4 billion in July.

Second, since 2008, we reduced our Radian Asset risk exposure by 64%, while paying $384 million in dividends to Radian Guaranty, and releasing $270 million in contingency reserves. And our statutory surplus stands at $1.2 billion.

Third, at the end of the second quarter, we maintained a steady risk-to-capital ratio of 21-to-1. And finally, we have $340 million currently available in holding company liquidity after taking advantage of opportunities to continue reducing our 2013 debt, which now has a remaining balance of $80 million.

And now, operator, I would like to open the call to questions.

Jasper Burch; Macquarie.

I guess starting off with your expectation for profitability in 2013. I was wondering if you can give us more color around milestones to get there? I know Bob said that you are expecting to continue the current default trends. Does that mean to get there you are expecting continued 20% year-over-year decline in new notices? And then, what are you expecting on the new business side?

This is Bob. I think we are expecting a continuation of the decline in new defaults. I think we said 15% from 2012 to 2013. So, I think that's fair. I think we are running a little bit ahead of that now. Our expectation with regard to new business, I think that is not going to impact our expectation with regard to profitability in 13 that much. However, certainly it helps in terms of generating additional premiums so that certainly is a good thing. And then, obviously, we caveat, look, if you look at the incurred loss development, it's been mostly due to the new defaults of the incurred losses have been due to the new defaults and not the prior development which we saw in prior years. And we are expecting that trend to continue as well. As well as, no more unexpected financial guarantee losses. So given that, our projections are showing profitability in 2013.

Okay. That's helpful. On a different note, I noticed you had a paid claim on the financial guarantee book. What was that? In the quarter?

We actually had a recovery. I believe you see a negative. There was a recovery, as sometimes happens within the business, you pay something out but then you get a recovery. So that's what happened.

Mark DeVries; Barclays.

First question, you had a steady decline on the average claim size over the last three quarters. What's behind that? And what's your expectation of that going forward?

Well, it's mostly due to the curtailments that have been increasing as of the recent past. We've all read about the servicing issues that are out there and we have curtailed more regarding those claims. And we do expect that to continue for the foreseeable future.

Okay. Got it. How much longer should we expect to see the elevated level of denials?

Well, specifically with respect to denials, since a lot of the denials are now driven by servicing practices. That is what is driving the denial issue and the servicing practice are not changing. Having said that, before I turn that over to Teresa for more details, a lot of the denials are coming from, indeed 75%, from one servicer. And to the extent that we can resolve some of the issues that are related to that servicer, there could be a change in our denial posture. But I will let Teresa explain the mechanics of denials in more detail.

I would say that, as you can expect, good servicing practices are increasingly critical to mitigating our risk of loss. And the flaws with servicing practices have now been well documented. While we have not increased the number of documents that we require, we have increased our enforcement of receiving all documents within the time frame provided under the master policy. As an example, the receipt of the servicing notes is very important in evaluating whether a curtailment of the claim is warranted. It's important to note that the master policy terms give servicers ample time to produce documents and that even after a denial, servicers have one year from acquisition of title to produce the documents. That is the reason why our IBNR reflects an assumption that 50% will be resubmitted with the appropriate documents.

Okay. That 50% reinstatement rate, how consistent is that across servicers? Do you see a fair amount of variation where some are higher and some are lower? Or are you seeing that consistently across most servicers?

This is Scott. There is variation of across servicers and their ability to resubmit documents.

Okay, great.

In fact, I would point out that even the denial rate is not consistent across servicers because some servicers can produce documents right up front.

Got it. And then finally, despite some significant commutations, the volatility, the financial guarantee premium line is held around $16 million. Is that a reasonable run rate or should we expect that to decline going forward?

Yes. It should decline over time, certainly as the book has declined. This quarter I think there was some refunding, which helped the earned number, as we know that can cause some volatility in the line. Over time you will see that go down.

Douglas Harter; Credit Suisse.

Thanks. Bob, I was hoping to drill more into your comments that you expect a larger seasonal loss in the back half of this year. I guess the question I had was the first half saw a large increase in reserves per default. Does that comment anticipate something like that continuing to occur? Or is it just sort of more on the lower cure as higher no notices?

I think it's the latter. We haven't really changed our default-to-claim expectations. The reasons the reserves per default is up is more due to the composition changes than anything. And, yes, seasonally, we do expect typically in the fourth quarter, especially. But in the second half of the year, generally, you get a higher level of new notices and a lower level of cures.

But you are not necessarily anticipating any big changes to those reserves or defaults?

We are not.

Great. Thank you.

David Epstein; CRT Capital.

Is it purely a function of seasonality that your cures on early stage delinquencies were down in Q2 from Q1?

Yes, seasonally, the first quarter is always the best for cures.

Jack Micenko; SIG.

A couple of questions. Talking about the late stage bucket on the default side. On Pages 14 and 15 on the deck. Thanks for the additional color. The bullet at the bottom of 15 where you talk about servicing of the oldest delinquent loans to determine whether foreclosure time lines are violated. We touched on the paperwork time frame. Can you expand on that bullet a little more around the time line, and what time lines you are speaking of?

Yes. The servicers are required to begin the foreclosure within six months from the default. And then they have a year to perfect the claim after that. So, those are the general time frames within our master policy. Now, of course, there could be some things within the law that extend that. But those are the general guidelines. So, we are really looking at 18 months from default that's the time frame, the six months plus the year.

This will imply a significant amount of that late stage may see some rescission going forward. And then on Page 14, the breakout of the new defaults in the previously delinquent. I'm wondering if anecdotally you can share with us what that chart would look like if we applied that to the late stage component of the book? What's the new default composition there, relative to, obviously early defaults will be more previously delinquent I would guess. Can you give us any sense on how many have gone into that late stage? You have the payment numbers on terms of days from default, but can you give a breakout on the late stage bucket as you have on 14?

This is Scott. I don't have the late stage bucket in front of me, but for the total default it's about half of the default. Half are repeat defaults.

Shawn Faurot; Deutsche Bank.

I don't know if I missed it in the prepared commentary. But did you talk about the tax issue and timing and any updates on that?

We didn't. But there is really no update, other than we were still in negotiation and it's possible that it would be resolved in 2012. But it's also possible that it would go on, and potentially be even be litigated if an agreement cannot come to pass.

Do you feel like you have the ability to push that off, as it relates to the whole liquidity, any needs there?

To the extent that it would, a settlement may require cash in 2012. If there was no settlement then it would be pushed off.

Okay. And then single versus monthly premiums. I know you are increasing disclosure around that. Can you talk about the current market and the why people are looking for one versus the other? Or why you guys would be targeting monthly premiums? Seems like you've been getting some push back from other competitors doing more on the single premium front? Can you talk about that dynamic a little bit to get more color?

First let me talk about our philosophy, and then Teresa can give you color on the market. In terms of the philosophy, we take the view at Radian that we cannot forecast whether a loan is going to be on the books for five years or seven years so we cannot forecast persistency rates. If you asked people even three months ago, they would have said that persistency would have continued to remain low. And, in fact, we are seeing it trend up as refinancing activity in the industry has taken off. It could take off some more in the case of some borrowers as property values start creeping up.

So our view is to try to achieve the best balance. And we believe the current mix somewhere in the range of 30% to 40% single premiums gives us an ability to balance our returns over the long term. And indeed, to the extent that persistency, since it's a lot of our single premiums are 90% LTV borrowers, who we believe have a higher propensity to refinance. Indeed if persistency comes down and it is more skewed towards a single premiums, we will benefit from having the realized the premium and the risk going away faster. Having said that, Teresa can give you color on the market.

I would say, I think first with respect to our pricing, we believe that the pricing for both our monthly and single premium products is profitable. Having said that, I think if you go back and look at 2010 into 2011, the single premiums were one of the products that was most competitive with the FHA. Now with all of the changes that have occurred from a pricing point of view, in terms of us reducing the pricing on our monthly MI, and the FHA having increased theirs, there is a lot more opportunity to push the monthly MI product. In addition to all of the training we've done with loan officers and lenders, so I think that's why you have seen that trend happen over time, because the monthly product has become a lot more competitive with the FHA.

Okay. That's helpful. One more, just the recovery that you talked about on Slide 9 as it relates to the financial guarantee business, can you talk about that a little bit more and how that's structured? And a time line for those recoveries and if you have any expectations there?

It's going to be based on the performance of the commuted TruPs, CDOs. It was part of the commutation transaction. And we will have to see how they perform. And essentially if there are no losses on them, we will get their money back. And if there are losses, that money could go toward the losses. Now, it's capped at that amount. So it can't be any more than that. That's why we say our exposure has been reduced to that level.

And that's $200 million something?

No, no. That's the primary component of the number down below that negative 72.2 in financing guarantee.

That's present value, right? What's the total amount not present value? Do you know?

It's not much more than that.

Randy Raisman; Marathon.

I just want to dig a little bit more on your materials guidance. You put in that you still believe your paid claims will be $1.1 billion for the full year. And you're telling us that the risk-to-capital is going to go greater than 25 times. And you are saying you expect an increase in losses in the second half of the year. But you are talking about turning profitable in 2013. What's going to drive that big shift because to go from 21 to 25 implies some significant losses we will start seeing. How do I then go from that to being profitable? Then have I one other question after that.

If you look at the components of the risk-to-capital, risk divided by capital, you will see that a move from 21 to 25 doesn't take that much. It's a pretty sensitive kind of calculation. I think a move from 21 to 25, absent, and we were very clear in saying be absent any additional risk to capital support. So given just the results of the business, where we are writing a lot of business, that's a good thing for the business. But that increases the numerator or the risk. And due to seasonality, we expect MI operating losses in the second half of the year. Both of those will be items that serve to increase the risk-to-capital ratio.

Now we have done a lot of internal things as you have seen. Internal reinsurance, external reinsurance. Certainly investment gains which we have in our portfolio. And all of that can serve to offset the increases to our risk-to-capital. We will have to follow it and see how it plays out. We are set up to continue writing if we do go above 25 to 1, which is very important. But it isn't a number that requires a lot to move. It's a fairly sensitive calculation.

Right. And then can you just expand a little on the comment you made on the whole IBNR and the potential restatement issue? I want to make sure I'm completely clear on that and that have I all those numbers. So you have reserved $224 million for claims that could potentially result in $500 million of losses. And you think that as long as your estimates are right, then there is no further impact to capital? And if not then obviously you would need to true up the reserve from the $224 million to whatever it ultimately ends up getting put back to you? Is that the right way to think about that?

Just to be clear, the reinstatement, that's what you were talking about.

Yes, I'm sorry.

So, the two different items, but we always disclose them so everyone understands what they are. The first one is that $524 million. Is that what it was? $500 million relating to future expected denials and rescissions. We are expecting that in the future we will deny or rescind net $500 million plus, give or take, in the future and that number is in offset to our loss reserve. There is a gross reserve number, but then we offset our loss reserve and we report based on that net number. That's a component of our loss reserves. If our rescission denial assumptions are too low and they are higher, then there is a benefit. If they are too high, then it will go the other way.

The other thing is that $224 million which is the component of the IBNR. It's not the whole IBNR, but it's the component relating to reinstatements of denials that were already denied, but can be reinstated if the documentation is provided. And that is that 50% that we are talking about.

So does that mean then that $224 million, those are reserves you have taken on claims you denied for whatever. That $224 million is basically 50% of what you've denied.

That's exactly right. We are basically taking credit for 1 out of 2 because we have the expectation that the other ones can come back and we include that in our reserve estimate. So we make sure that when denials come back, then we don't have to adjust the reserves. They are built into the reserves.

And then the $524 million for future expected denials, you bring your reserve down by that amount? So how much lee way do you have in coming up with that $524 million number? That's a big deduct from incurred losses. So I want to understand the process behind that.

There is no lee way. It's based on history and based on trends. It's an audited number annually that needs to be justified and we do just that. We only put that number out there and include in our reserves when there is justification based on history and based on what we see in the inventory. It's a very significant part of our reserve estimate that requires much support and justification.

And without that our reserves would not be accurate. Because if you step back and look at the reserves, the expectation of future losses, and therefore, the gross losses we take our adjusted by the denials and rescissions which is an established past trend. So it has to be done that way.

Conor Ryan; Saba Capital.

I was curious going through some of your reserve per new delinquent information. Based on backing into what amount of your loss reserves were associated with new versus existing. And it looked to me like your quote-unquote cure ratio assumption had declined this quarter. Is that something that we can expect going forward? Or is that sort of momentary in nature?

The individual assumptions haven't changed. So if there is an increase in 3 payments or fewer, could be that there are more that are 3 as opposed to 2. It's going to be maybe composition within a bucket. Individual assumptions really haven't changed.

Right. But what I'm saying is if I look at Slide 11 components of provision for losses.

Okay.

Based on the number of new delinquents you have, it looks like the reserve per delinquent was roughly $8,540.

Right. But again, a new default this quarter could be 3 months down or 2 months down. There are differences. It could be loan size. You know, it's going to be the individual characteristics of the loans, as opposed to a change in our assumptions regarding any of those things.

So, it's loan by loan. It looks to me like if you take that number as a percentage of your paid claim number for the quarter, it had dropped decently.

That's going to be more coincidence than anything. Our assumptions regarding default to claim rate have not changed.

Okay. It's been relatively consistent in the past.

Bose George; KBW.

First on your HARP re-fi activity number was up quite a bit. Was there anything you changed or was that just the market?

This is Teresa. I think it was just the market. We continue to see those servicers ramp up their participation. And particularly with some the program changes that really took place in March, we really started to see that increase even more.

And then going back to the profit expectation you gave on the new business you are writing. I was curious what loss assumptions are being incorporated?

It's a projection that takes our loss ratio to about mid-30s or so.

I meant on the new business, on the $20 million?

That's what I'm talking about. It's not, for example, looking at the past couple of years which have performed better than expectations. This is more of an average expectation based on a longer history than just the recent past.

Okay. Great. And then a quick follow-up on the single premium discussion. Do you know what percentage of the market is single premium?

I don't think we know that answer.

Jason Stewart; Compass Point.

On the new business side, can you talk about any guideline changes or products that you are finding the market's most receptive to in driving the new business?

Well, I think one of the important factors in term of the new businesses is part what S.A. talked about in terms of the number of new customers that we brought on board. And that's been a huge driver in addition to working with our existing customers to increase the amount of business that we are getting from them. I think the one underwrite program that we put in place has certainly made it easier for customers to do business with us. I think a lot of it has been around training and relationships and the customer service that we provide.

Okay. So nothing on maybe a particular LTV?

No, nothing like that, no.

As you saw from our numbers, the LTV mix remains very strong, very high quality and relatively stable. So the credit factors continue to remain very strong. It has been mostly our success in focusing on, and not just recently but for the last few years, focusing on the expanding our sales force and going after more customers segment by segment.

Okay. Great. Then one question on Page 20. As this one servicer that has a lot of denials related to it, transfers servicing to others, would you expect the trend to change at all? Or is it your expectation that if once they can't find a document to give you, they won't be able to transfer it to a new servicer to find it for you?

This is Scott Theobald. This is after a claim submission so once something is at the claim level it is not going to get transferred anyhow.

Anand Krishnan; Fore Research.

Question related to Slide 20 where you've separated out denial related to one servicer. I wanted to check what has been the historic reinstatement experience from the servicer?

Yes, we wouldn't give any individual reinstatement rates for any individual servicer.

Because the reason you separated it out to show that it's from one servicer is because it's a disproportionate denial. So I wanted to see how to think about the go forward reinstatement.

To the extent that it's a big component of our overall denials, it's going to be a bigger component of the reinstatement that we estimate. But we wouldn't brake it out individually. But our overall denial reinstatement is 50%.

Geoffrey Dunn; Dowling & Partners.

On the curtailment review you talked about, do you have any kind of sizing color you could provide us? What type of opportunity do you think there is to reduce gross severities given the extended time line? Is it something, maybe a 10% or 20% opportunity?

I was going to say, I don't think we can estimate a sizing on that. It really is a loan-by-loan kind of analysis with respect to what the issues have been. Over time, we've had curtailments that have been done for a number of reasons. Over time, we have seen an increase in the amount that are due to servicing negligence, that you wouldn't be surprised to see. But until we look at each individual loan, we just don't know what that is going to entail.

And obviously when we are dealing with the dollars here, we have to be concerned about pushback from the counter-party. Is it very clear in the documentation what would constitute a curtailment opportunity? Or is this another one of those things where like rescissions or denials, we might have to consider some overturned decisions down the road?

This is Scott Theobald. When we actually pay the claim and it is a curtailment for servicing related, part of the explanation for the curtailment will be very specific as to what the servicing issues were, what the infractions were. Having said that, we do expect to be challenged on some of these. However, we make it very clear what the servicing fractions that the curtailment is designed to mitigate.

Okay. And then last question, with respect to denials, what's the typical time line? And I know it can vary and be lumpy but what's the typical time line for response on the denial? And if it's a shorter time, has the ramp up on that one particular servicer and their denial response been consistent with that?

The time frame of responding kind of varies. There's multiple requests for the documents come in, and after those multiple requests are exhausted, then a denial goes out. Even after the denial goes out, they still have the one year from the acquisition of title before they can't resubmit. So the time frame depends.

Steve Stelmach; FBR.

Jeff asked my curtailment questions. But I have one on average premiums. As you are writing a lot of new business, credit quality for the business is still very, very strong. Indicative of what is probably a tight lending environment out there. To the extent that lenders begin to loosen the purse strings a little bit, is there a chance for average FICOs to migrate down, LTVs up, and average premiums to go a little higher from here? Or sort of what we see is what we get? What sort of trajectory in premiums?

It's pretty much what you see is what you get. There are certainly could be changes in the mix from 90 LTV to 95 LTVs which do have different premium rates. So that could occur. But we haven't seen any degradation in the credit.

And I would say with respect to the pricing as long as the LLPAs continue to be in effect, I wouldn't expect to see us get much difference in the FICO levels that we are seeing today. Just because I think from a pricing point of view, it would still push that business towards the FHA.

Also, I think the lenders are waiting to see more clarity on the QM definition and other factors. So right now in talking with them, it doesn't appear that they are really in anyway trying to push the envelope. If anything, most of them are operating well inside the box that they could be operating at.

Got. Thanks for that. And thanks for the increase disclosure in the past few months in those late stage delinquencies. That's been helpful. Thank you.

And that will conclude our Q&A session. I'll turn it back to our hosts for any closing comments.

Thank you. And I'd like to thank everybody for participating on this call. See you guys on the next call. Thanks.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.