Radian Group Inc (RDN) 2013 Q3 法說會逐字稿

Welcome to Radian's third quarter 2013 earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I'll now turn the conference over to Emily Riley, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you and welcome to Radian's third quarter 2013 conference call. Our press release, which contains Radian's financial results for the quarter, 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 Derek Brummer, Executive Vice President and Chief Risk Officer of Radian Group.

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 2012 Form 10-K as well as subsequent quarterly and other reports and registration statements filed with the SEC. These are also available on our website. Now, I would like turn the call over to S.A.

Thank you, Emily. Thank you all for joining us and for your interest in Radian. Today, I will provide highlights of our third-quarter financial results and share my thoughts on the topics and trends important for our Company and industry. Following my remarks, Bob will cover the details of our financial position.

Earlier today, we reported a net loss for the third quarter of 2013 of $13 million, or $0.07 per diluted share. This includes minimal fair value and other financial instrument gains and minimal losses on investments. The results for the quarter also included a $22 million incurred, loss initially booked for the Freddie Mac agreement announced in August, and approximately $17 million of variable compensation expense directly related to the increase in our stock price during the quarter.

The results for the quarter compared to net income for the quarter ended September 30, 2012, of $14 million, or $0.11 per diluted share, which included combined net losses from change in fair value of derivatives and other financial instruments of $42 million and net gains on investments of $85 million. Book value per share at September 30, 2013, was $5.17.

I'm pleased with Radian's improved financial performance this year, and the generally positive trends we've seen in the economy, housing market and overall business environment. Here are a few important highlights from the third quarter.

First, we continue to write a high volume of new mortgage insurance business in an extremely attractive market, adding to the volume of business we have written after 2008. This business is projected to be a major driver of future profitability for Radian. In July, we broke a Company record, writing the largest monthly volume of flow business ever before in Radian's more than 35 year history. And this quarter's $13.7 billion of new flow business was the Company's second highest quarterly volume.

Second, this high volume of new business improves the credit profile of our portfolio. In the third quarter, the high-quality books of mortgage insurance business written after 2008 represented 57% of our total portfolio. If you combine this book with loans that have completed a HARP refinance, it represents more than two-thirds of our primary mortgage insurance portfolio. In addition, the most problematic 2006 and 2007 books are now down to less than 15% of the total portfolio. You can see the breakdown on slide 19 of our webcast presentation.

Third, we entered into an agreement with Freddie Mac in August that eliminates our claim exposure of 14,342 loans and helped reduce our total primary delinquent loans by 31% from the third quarter of last year.

Fourth, slide 17 shows that for the first nine months ended September 30, 2013, the primary earned premiums less incurred losses from our 2009 and later MI vintages are positive and far exceeded the comparable negative sum from the 2008 and prior vintages. In fact, the $238 million of premium earned for the nine months of this year was greater than the $210 million of premium earned in all of last year.

Fifth, the MI incurred loss ratio was 76% in the quarter, which represents another positive trend which we have seen for the last three quarters. And finally, since 2008, we have successfully reduced the exposure in our Financial Guaranty business by 77%, including many of the riskiest segments of the portfolio.

Radian maintained strong holding Company liquidity of approximately $700 million and Radian Guaranty's risk-to-capital ratio was 19.8 to 1 at September 30, 2013. We continue to expect to maintain a risk-to-capital ratio for Radian Guaranty of 20 to 1 or below while also preserving a strong level of holding Company liquidity. Bob will provide more detail on our capital contribution in the quarter and future expectations.

The details of the new GSE eligibility capital requirements for MI are still unknown, but we continue to hear that they will be issued by year-end. We fully expect to have the ability to comply with the new requirements within the implementation timeframe. We have written a total of $122 billion of new mortgage insurance business from 2009 through October which we expect to produce attractive returns.

Our primary insurance in force now stands at $159 billion compared with $135 billion a year ago which is an increase of 18%. This insurance in force growth represents the success we've had at Radian in writing new high quality mortgage insurance business over the past few years.

We have retained our business from the nation's largest lenders while adding new customers including credit unions, community banks and independent mortgage lenders. In fact, 26% of our NIW in 2013 came from customers new to Radian in the last two years and the pipeline of prospective customers remains strong.

We have challenges in today's business environment that may impact near-term volume. While the improvement in the economy help many aspects of our business it also caused interest rates to rise above the record low levels we've seen in the past few years. And those higher interest rates have recently driven a significant decline in refinance volume, a trend we expect to continue into 2014.

It is important to note that this increase in interest rates is likely to increase our persistency rates which will help us grow our insurance in force. On average, every 1% increase in persistency translates into approximately $1.6 billion of insurance in force remaining on our books each year.

Experts view the future demand for homes and therefore, mortgage loans to be strong as the number of US households owning a home is expected to accelerate. Much of this growth will be driven by demographic groups, including the Hispanic community seeking to fulfill their dream of becoming homeowners. According to the Harvard Joint Center for Housing Study, Latinos are expected to constitute 40% of the 17 million new households projected to be formed from 2010 to 2025.

In order to support this growing population of first-time homebuyers, Radian entered into a two-year exclusive partnership last month with the nation's largest industry trade group for this community, the National Association of Hispanic Real Estate Professionals. This partnership allows Radian to work directly with the Association to provide its membership with information, tools and resources to make the right choices for sustainable homeownership.

Turning back to market trends, the decline in refinance activity, combined with the typical effects of seasonality in the fourth quarter, will most likely meaningfully reduce total national mortgage origination volume and that's Radian NIW in the fourth quarter. While Radian's monthly volume in October remained relatively strong at $3.5 billion, industry experts forecast is smaller overall origination market next year.

We also anticipate increased competition in our industry from new and existing MI companies. These headwinds will be partially offset by a growing purchase market where MI penetration is about 3 to 4 times greater than for refi loans and with more lenders choosing private MI over FHA.

The positive factors of higher purchase volumes and increased share from the FHA is illustrated by our industry's penetration of the insured market of 12% to 13% in the third quarter. This represents an increase of 40% from the second quarter of this year and an impressive 70% since the third quarter of last year. We believe that one-third to one-half of the business that the FHA is writing today meets our credit standards and therefore, represents additional new business opportunity in the future.

Turning to the business environment, competitors recently reduced their borrowed paid mortgage insurance premiums by 5 basis points which we promptly matched. Given the credit quality of today's new business, we are comfortable that these premium rates will provide us with attractive returns.

Now, I'd like to summarize the progress made against three important priorities for Radian -- writing new mortgage insurance business, mitigating losses in our mortgage insurance portfolio, and reducing our Financial Guaranty exposure. First, we wrote $13.7 billion of new mortgage insurance business in the third quarter, which was the second-highest quarterly volume in Radian's history.

Second, for the nine months ended September 30, 2013, the primary earned premiums less incurred losses from our 2009 and later vintages are positive and far exceed the comparable negative sum from the 2008 and prior vintages, as shown on Slide 17. We are encouraged by this trend.

Next, we successfully completed a transaction with Freddie Mac that helped reduce the total number of primary delinquent loans by 17% from the second quarter of this year and 31% year-over-year. The agreement also helped reduce the default rate on our primary book in the third quarter to 7.8%.

Finally, our Financial Guaranty business serves as an important source of capital for Radian Guaranty. We have successfully reduced our Financial Guaranty exposure from a peak of $115 billion in 2008 when Radian Assets stopped writing new business to $26 billion in the third quarter of this year.

Over the same period, the statutory surplus increased from approximately $950 million to $1.2 billion. In addition to statutory surplus of $1.2 billion as of September 30, 2013, Radian Asset had additional claims paying resources of $380 million, including $256 million of contingency reserves.

We stay actively engaged with key policymakers in Washington on the legislation and regulation affecting our industry. Overall, we continue to hear resounding support on Capitol Hill for a healthier balance between the public and private sectors in today's mortgage market, which is extremely positive for our industry.

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

Thank you, S.A. I will be providing you with our P&L activity and trends for the third quarter of 2013, our capital and liquidity positions as of quarter-end and some updated expectations regarding 2013 and beyond.

The MI provision for losses was $152 million this quarter compared to $136 million last quarter and $172 million a year ago. Note that this quarter's incurred loss includes approximately $22 million, initially booked in conjunction with the Freddie Mac agreement. Incurred losses continue to reflect improving delinquency trends and declining claim submissions. Our loss ratio is also benefiting from increasing premiums from our growing book of business.

There are no major assumption changes in our loss reserve estimate this quarter. One trend that we watch closely is newly submitted claims, since this can be an indicator of changes in the economic environment and/or foreclosure and short-sale activity. We've added disclosure on slide 25 that shows the quarterly trends on resubmitted claims, demonstrating that they have been stable or down consistently for the last few years and we expect that trend to continue.

Paid claims for the quarter were impacted by the Freddie Mac agreement. Our $255 million payment at closing in substance accelerated a set of claims. While claim submissions on loans contained within the agreement will be processed in the normal course over the next several years, we will not pay anything further on them, thereby reducing the ongoing run rate of claims paid compared to what would have occurred. Our revised full-year total claims paid estimate is $1.5 billion and we expect 2014 claims to be significantly lower than 2013 but to remain elevated compared to historical levels.

The average claim amount ticked up this quarter compared to the second quarter, due primarily to a higher average coverage percentage on claims that were paid. We believe that the average claim amount for the nine months this year is a reasonable proxy for the future average claim amount, although quarter-to-quarter levels tend to bounce around a little.

The Freddie agreement and other proactive efforts have enabled us to reduce our primary pending claims inventory by 30% from 17,625 at year-end 2012 to 12,363 as of September 30, 2013. And we anticipate that pending claim inventory will continue to decline.

Our September 30, 2013, loss reserve assumes $291 million for future denials and rescission. Our IBNR reserve assumes $286 million of future denial and rescission overturns. These two numbers are not specifically related. One is an estimate of future net denials and rescissions on our delinquent loans and the other is an estimate of future overturns of previous denials and rescissions. However, the net amount of new rescissions and denials in any given period and in the amount of overturns are the numbers that you see every month and our default roll forward.

Single premium business written after 2008 has continued to perform extremely well in 2013, with loss ratios similar to those from monthly premium business. As expected, single premiums have fallen as a percentage of our new business to 29% in the third quarter and we expect those levels to continue to fall as the purchases start to dominate the mortgage origination market and as QM is implemented.

While we expect mortgages originated in 2012 and 2013 to have relatively long lives, we saw in the 2009 to 2011 vintages that interest rate movements that can cause shifts in prepayment activity are very hard to predict, which is the reason we like to write a representative mix of single premium business.

Beginning April 1, we reduced the quarter share percentage for new business ceded to our external reinsurance partner from 20% to 5%. That has helped reduce the amount of ceded premiums written significantly in a second and third quarters. We are reevaluating the 5% voted share sitting percentage go forward and we expect to make a decision around year-end.

In addition, we will have the option to recapture a portion of the ceded quota share risk at year-end 2014 and 2015. Minimal fair-value gains for the quarter will cause primarily by an improvement in collateral spreads offset by further tightening of Radian's credit spreads.

Slide 8 depicts our current balance sheet fair value position along with the expected net credit losses or recoveries and fair-valued exposures. Based on our projections, we expect to add approximately $314 million, or just under $2 per share to pre-tax book value over time as the exposures mature or are otherwise eliminated.

That number is derived by taking the net balance sheet liability of $255 million and adding the present value of expected credit loss recoveries of $59 million. During the third quarter, operating expenses were impacted by approximate $28 million of long-term incentive compensation expenses. The comparable expense in the first quarter was $38 million and in the second quarter was approximately $19 million.

This expense is driven primarily by stock price changes, which impacts the fair value of these cash-settled awards. Approximately $17 million of this quarter's expense was a direct result of Radian's stock price increase of $2.31 during the quarter.

The potential volatility in our results associated with the stock price changes will be tempered after June of 2014 when approximately half of the awards mature, and substantially all of such remaining awards mature by June of 2015. The balance of our equity incentive awards are valued at grant date and amortized over their lives in a much more predictable manner.

Our risk-to-capital ratio ended the quarter at 19.8 to 1. We had another close to breakeven quarter of statutory results, grew our risk in force significantly, and made a capital contribution this quarter of $115 million from Radian Group to Radian Guaranty. The math on this risk-to-capital this quarter is that we added approximately $2 billion to our net risk in force which, at 20 to 1, requires $100 million in incremental capital to support it.

Our current plan is to manage our risk to capital below 20 to 1 and we have substantial resources with which to do so. With expected market contraction due to seasonality and a decline in refinance volume, it is unlikely that we will grow risk in force at the same pace in the fourth quarter but we still expect to grow and we will likely require a capital contribution in the quarter to stay below 20 to 1.

Current holding company liquidity is approximately $700 million. We have $55 million of debt maturing in June of 2015, with the balance of our outstanding debt due in 2017 or later. I would now like to turn the call back over to S.A.

Thank you, Bob. Once again, I'm pleased with Radian's improved financial performance this year and the generally positive trends we have seen in the economy, housing market and overall business environment. Our success in having written $122 billion of new high-quality MI business from 2009 through October, which has improved the composition of our mortgage insurance portfolio and fueled our primary insurance in force growth will drive Radian's future earnings.

Now I'd like to open the call to your questions. Operator?

(Operator Instructions)

Geoffrey Dunn with Dowling & Partners.

Can you talk a little bit -- well, talk about what you think the return impact is of your recent price cut? If you can get as specific as possible, I'd appreciate it. And then as we look at the industry moving forward, competition seems like it's only going to pick up as you have a couple new entrants come in additionally. How do we gain confidence in -- we don't see pricing competition on what is effectively remains a commodity product out there? And just in general, how do we get confidence that we don't quickly compete away the returns you've fought so long to recapture?

Geoff, with regard to the returns, the impact is small. If you think about 5 basis points on a part of the business, it's really small. It's -- we're still looking at mid to upper teen ultimate returns on the business at the credit quality that we're currently writing. And we don't think it impacts it significantly.

Geoff, we -- while we can't predict the competitive environment in the future, we do know that some of these price cuts are short-lived, so we're hoping that it will be a reasonable way that the industry reacts going forward in terms of preserving reasonable and attractive returns. As Bob said, the credit quality of the business is very high.

It also is interesting because, obviously, one of our areas of focus is gaining share back from FHA, and SA talked in his remarks about how there is still a significant amount of FHA business that is in our credit box. The one, I guess, silver lining about this price change is that it does increase, we believe, the competitiveness with FHA.

Okay. And on a somewhat-related, it's still a small piece but over the last couple quarters, you've seen the mix of new business in the 95 and above area and the 679 and below area increase. I think the census has been that there's not much to do there because of the LLPA impact and restriction on really getting a lot done. But is that an up-and-coming space? Do see that business continue to ramp up and potentially providing some premium yield to offset the rate cuts on an overall average basis?

Yes. I think that is a really a direct result of what we're seeing in terms of the FHA price increases and also a focus on lenders trying to make sure that they're putting borrowers in the best product, and often that's now an MI, private MI product instead of FHA. So I think that's why we've seen that increase at the 95 level with slightly lower FICOs, but still very strong FICOs scores. I would expect to see that continue at this point.

Mark DeVries with Barclays.

First quick question, Bob, do you have an estimate on likely capital contribution in 4Q?

Not specifically, Mark. But I think I led you to believe that the growth and risk in force is not expected to be the same as it was, and then if you look at the math, it'll be something south of $100 million.

Okay. Along those lines of the growth and the risk in force, are you -- I know you provided your October NIW, do you have a sense for how lapse rates are trending and clearly, volumes will be down this quarter just for seasonal reasons and also the refi. But I assume lapse is also dropping. Do you have a sense for how the pace in growth and risk will change with the impact of seasonality and lower refi?

Yes, there's so many different parts to the equation, it is very difficult. I think that we expect persistency rates to increase, that's clear. Will that fully offset the loss in volume from refis going away? Probably unlikely, but somewhat offset for sure. Then you've got the other dynamics of the market size and penetration, all offsetting each other; so I think we expect to grow and continue to grow. The third quarter was a very strong NIW quarter, so the growth and risk in force was really at a high-level this quarter.

Okay. And just one other element around that lapse question. How are persistency rates on the HARP loans comparing to your broader population? I would assume you're seeing even slower lapse rates or higher persistency on those; is that a fair statement?

It sounds fair. We don't have the specific details in front of us but it sounds fair, sure.

Okay, what percentage of your book now is -- or loans is in HARPs?

It's in the 11% to 12% range.

Right. Just about 11% and 12%, yes.

Got it. Then finally could you comment on your Puerto Rico exposure? I think you, for the first time, put the number and the size of it in the release. Can you just talk about what your expectations are around that exposure? And what, if any, reserves do you have against it?

This is Dave Beidler. We added the Puerto Rico disclosure, as you pointed out, to the website because of recent market concern about that credit. We've been closely monitoring it for years because of the economic headwinds that the credit faces.

But having said that, the government has taken a lot of positive, proactive steps and I think it can be differentiated from many of the other headline-grabbing public finance credits which have engaged in a lot of saber-rattling and more negative actions from our perspective.

We believe overall that our exposure at approximately 2% of our total exposure is really quite reasonable in any likely scenarios. And at this point, we aren't projecting losses. But we think that our exposure is quite manageable.

Got it. I assume because that, (technical difficulties) because your non-protection losses, you haven't set aside reserves against that, correct?

That's correct.

Jack Micenko with SIG.

I wanted to talk about initially, the early-stage assumption set. So in your index, 72% of the default in the quarter were customers you seemed to know already. You've got a big book of new business relative to the legacy book. Talk about inflows going down, you're at 22% assumption set on the new book, on the new default rather. Peers have moved down into the teens. When do you think we can see that move with you on an ongoing basis as we move into '14 and beyond?

Yes, this is Derek. I think, generally, we've been seeing the same trends that competitors just pointed out. We've seen shares increasing. We've seen all over the claim rates decreasing over time. Really, to this point, I don't think we've seen sufficient trend development to actually warrant making a change in terms of our roll rate.

The other thing I would point out is that the vast majority of our new defaults continue to come from our own legacy portfolio, probably approximately 95%. Obviously, that's going to have a higher roll to claim rate. I think one of the things you'll see is as you see the transition of new defaults to the newer book of business, you naturally see that roll down over time. But I think before we make a change, we'll want to see the trend in terms of cures and roll to claim rate develop a little bit further.

Okay. And then on the rate side, I see general interest rolled out 95 to 97 products, number 620 to 680 FICO range and it looks like the pricing, 148 bps, which is a little less than 3 times the 90 to 95 pricing. My question is, when you look historically, pre-crisis, where is pricing in the higher-quality 85 to 95 relative to where it's been historically? And is it fair to think that, even if pricing comes in on the mid-range stuff as credit loosens and mortgage more globally that a move to riskier, but being paid for that risk could offset topline blended revenue?

Yes. Jack, I think that's fair. The historical rates included a lot of lender paid and we're doing much more strict by the card rate, which means that our average premium rates are higher overall than they've been in quite some time compared to what they were. Certainly as was mentioned before, as we do more 95 LTB and we return to more historical norms in terms of 50/50, 95 versus 90s, that the premium rates will go up because of that. So you will see some offsetting and I think at this point, even with the decreasing 5 basis points, you're going to see premium rates overall that are as high as they've been in history.

I would just add that we also have the implementation of the QM coming up and so that potentially could even make the credit quality slightly more restrictive. I don't think it's going to be a lot, but I think it will maybe ebb the credit moving away from what we're seeing today.

Sean Dargan with Macquarie.

Bob, I just wanted to make sure I got something correctly. You said that you expect claims to come down in 2014 versus '203 but still remain high on a historical basis. Did you say that you expect NIW to be down in 2014 over 2013?

We didn't, no, we didn't say that. The reference of the claims was that the $1.5 billion this year and then saying that we expect 2014 will be much less than that. But if you look historically, that it's still going to be high by historic standards, so there wasn't any comment about the new insurance rate.

Okay. And you referenced Radian Asset in the press release. I was just wondering if you had any conversations with the FHFA and had gotten their thoughts about what they think about that capital support?

At this point, the FHFA basically has kept its views to itself, so we expect to get greater clarity on those views when they come out with them publicly or give us an advanced hunting period but at this point, we are not aware of their thinking exactly.

I would just add, though, as we've said, we've done wonderful job managing the risk down in Radian Asset and exposure is much less than it was. The capital is of a much higher quality by anyone's measure in terms of its availability and its ultimate access.

Okay, thanks and just one more. Regarding Puerto Rico, at what point in FG do you establish a reserve? So if you deem it more likely than not that there will be losses or do have to wait -- excuse me, until a restructuring or default or what's the test for that?

It is going to be driven largely by our internal rating process. So with respect to Puerto Rico, in particular, what we're going to be looking for to see if it returns to economic growth. It's been essentially in recession since 2007 so we're going to want to see some underlying growth. We're also going to want to see a decrease in the structural budget deficit in Puerto Rico.

As Dave referenced, they've been making a number, taking a number of steps to help close that gap. We'll just want to see how effective that is. And then the other thing we're going to watch closely is their ability to continue to fund themselves at an affordable rate. Now, if those trend in the negative direction, what that would ultimately lead to is potentially a downgrade, below investment grade and it's really when it moves into the below investment grade category then we would start setting up reserves.

Craig Perry with Panning Capital.

My question has been answered. Thanks so much.

Connor Ryan with Deutsche Capital.

I just wanted to quickly touch on what you think a reasonable range should be for NIW next year? I assume you're just using MBA origination assumptions? The second question is, have you given any consideration to reporting operating EPS on a go-forward basis?

I would have Teresa add more color but basically you know it's difficult, and all the industry forecasts have been changing pretty rapidly in terms of next year's projections. So it's a moving target in terms of NIW. All I'd like to point to is seasonally, we do expect to see the purchase activities that follows historical seasonality patterns to pick up in the second quarter as it normally does, and it stays elevated in the second and third quarter. Typically, it comes down in the fourth quarter and is low in the first quarter.

Second, we see independent of those seasonality factors, but hard to predict the timing continued for the gains relative to the FHA -- penetration improved relative to the FHA. And then most forecasts and most people in the industry we talked to have said that we are looking at a couple of years of refis going away driven lower volume. But after that, they expect the industry to return to higher volumes as stability in the industry continues to take hold. Teresa?

Yes, I would just add that when we take a look at the overall volume, we usually look at MBA along with the Fannie and Freddie estimates to try to get a view from all three. I think nothing really much more than that to add to what SA said, except we do report on a monthly basis, our NIW, and will continue to do so.

In terms of operating EPS, we've certainly considered it. I think to this point, we have disclosed and been very transparent about the items that we think are either unusual or one-time or had a specific impact during the quarter. For instance this quarter, the Freddie Mac agreement required us to book initially a $22 million incurred loss, some of the stock comp, and that's what we've done to date. But we have certainly considered operating EPS.

Okay, and I was (multiple speakers) just curious, why wouldn't you?

Well, I think that the obvious answer is this Freddie Mac, $22 million initially booked, that's an incurred loss so that's -- that couldn't be excluded from operating EPS, but it's an item that everyone needs to know why it happened and when it happened. So the definitions are hard and I think that's the reason so far. Instead, we've chosen to disclose the items that we think you need to know about specifically.

Yes, I know. But what I'm saying is, you can still do that, right? What I'm saying is that to the extent that you're trying to focus on what is a clean operating number and then you can make any comments you want about any one-time item. But I'm just a little confused as to why you wouldn't also include that number?

Okay, so noted, thank you.

That's a good point. We'll keep that in mind.

Bose George with KBW.

Actually, on the price cuts that you mentioned, was that 5 basis points across the board?

It was 5 basis points on the borrower paid monthly premium.

Okay. And actually just conceptually, when you think about the price cuts, how do you think lenders view it? Is that a price among all the other factors they look at? Just curious how they respond to a price cut, relatively small price cut like that?

I think it really does vary depending on the lender and size of the lender. I think what we find is that the smaller institutions, particularly, some of the independent mortgage banks and community banks and so forth view that as much more important. I think some of the larger institutions may not feel it's as critical, but there's sort of a variety of views out there.

Okay, great and then can you remind us the ROEs on the new monthly premium that you're writing, assuming your 18 to1 risk to capital?

Yes, mid to upper teens.

Howard Amster with Amster Trading.

Can you give me a sense of how much recapture the business you incurred out is potentially brought back in '14 and '15?

Yes, Howard, so we have two deals and I think we disclosed the specific amounts, but in the first, what we call the first deal, two-thirds of that is eligible to be recaptured at the end of 2014. And the second deal, which is the one that's ongoing, half of that will be eligible to be recaptured at the end of 2015. It is our option to do that.

Right and can you just give me a sense of how much risk in force that would be that you could potentially bring back on board for the 2014 and 2015 number?

The total combined is $2.6 billion. And I don't know exactly what the breakdown is, but the total combined is $2.6 billion, so one-half to two-thirds of that.

Geoffrey Dunn with Dowling & Partners.

Thanks, Bob, I wanted to follow-up on your comment about or might have been Teresa's comment about pricing even though you cut rates, [Premio] could end up being at the top levels or even above what we've seen historically. So if the monthly -- I've heard it's running maybe on average around 58 bps across the board, 5 basis point cuts brings us down to 53. Do you think that mix shift is going to bring you back up to that 58 monthly average and sustain it?

Over time, it certainly can get close, Geoff. It's going to depend on the mix. So it depends how much of 95, because those have a significantly higher premium, but yes, directionally, yes and perhaps all the way to the level.

Okay, and given the way that the FHFA is guiding the GSE, and particularly LLPAs, that doesn't seem like the approach there is going to change anytime soon. I mean, is that a prospect that can even happen in the next two to three years?

You mean in terms of whether or not they would reduce the LLPAs, Geoff?

Yes, I mean, it seems like that's one of the prohibitive items that's really preventing more of sub-680 lending. So I'm trying to get an idea of -- to me, it seems like we're probably looking at rate pressure here unless that space opens up and you can expand your product base. It just seems like maybe that the GSE stance might prohibit that.

Well, I think that you're absolutely right; it's very hard to know where that's going to go. We've certainly raised that issue with the FHFA as well as others in Washington. At the same time, you continue to see Acting Director DeMarco focus on price as a way to try to get private capital back into the market. So at this juncture, I couldn't say that I would expect that to happen, but there could be changes there, and other changes that could precipitate it in the future.

Okay and then when you -- obviously, we don't have details on the GSE capital changes, but have you heard of any discussions about them considering basically sources and uses or claims paying resources in their capital assessment, to which end, obviously your revenue would matter and maybe that could help keep pricing rational going forward?

No, we've not heard that, Geoff. We've heard more traditional risk to capital with some variations off of that. I don't want to tell you that, that's not going to happen, because we really don't know exactly what it's going to look like but we've not heard that specifically.

Jack Micenko with Susquehanna.

Bob, real quick, can you just drill down a little bit more on the stock expense timing? I think you said mid-2014 and mid-2015. Can you talk to that a little more with clarity on the quarterly impact?

Yes, so I think the rule of thumb that we've had over the -- for this year is that it's been about $7 million specific impact for every dollar increase in stock price. That held true, the $17 million to the $2.31 this quarter. I think the point that I was making is that these things were, they were finite and half of the awards will be paid out in June, by June of 2014 so essentially half of the volatility then goes away. And then after June of 2015, there will be very little, if any, remaining volatility associated with stock price because the more traditional equity awards are valued at grant date and amortized. These are unusual for us in that they are cash-settled, so the accounting is different.

Josh Bederman with Pyrrho.

Yes, I think you mentioned this earlier. Can you tell us what the penetration is for purchase and refi originations, respectively?

Refis have been 4% to 5% and purchases have been in the 18% to 19%. That's why we say about 4 times.

Okay. So just doing the math on what the MBA is forecasting, that actually shows that your market share -- your share of originations NIW should be relatively flat next year excluding any gain that the private MI industry gets from the FHA increasing pricing. Does that [fit] with what you guys are seeing?

It really depends on the variety of factors. I think you can get there via those calculations. It's really going to depend on the penetration. It's going to depend on how much refi falls and continues to fall. We are certainly looking at a fourth quarter that is going to be significantly lower than the third quarter.

I think it's hard to predict next year for the reasons we went into earlier. All I can say is we have positioned this Company to write as much NIW, profitable NIW as we can and regardless, we are better off for having written the huge volume that we've written to date.

Jackie Earle with Compass.

Sorry if this is already answered, but I jumped on a little late. Could you provide any color on the reasons for the price cut and how new entrants have had an impact? That would be great, thanks.

Yes, Teresa will answer.

I think that we saw a couple competitors in the market start to make this price cut, so we just matched that. We haven't seen any impact at this point from new entrants in that regard.

And the last price cut to my knowledge was about three years ago and it was the same situation there with roughly the same competitors.

The other point that I made earlier that you may not have heard is that ones that have -- one of the benefits here is that the price cut actually makes us a bit more competitive with FHA as we continue to focus on trying to pick up business from the FHA since it's still a significant portion of what they are doing is within our credit box.

Thank you. Mr. Ibrahim, please go ahead with any closing remarks.

Again, I'd like to thank all of you for participating on our call and look forward to seeing you all on the call next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.