Radian Group Inc. (RDN) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Radian's Second Quarter 2011 Earnings Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Emily Riley, Vice President of Financial Communications. Please go ahead.

Thank you, and welcome to Radian's Second Quarter 2011 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 Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2010 Form 10-K and our first quarter 2011 Form 10-Q. These are also available on our website. Now, I would like to turn the call over to S.A.

Thank you, Emily. And thank you all for joining us. Today, I would like to begin by commenting on our second quarter results. Highlighting several trends affecting the mortgage insurance industry and our company. And then, providing a brief legislative update before turning the call over to Bob, to cover the details of our financial results. Following Bob's remarks, I'll outline our company's most important priorities before we open the call to your questions. First, we are encouraged with the direction of Radian's second quarter results. Clearly, there's still room for improvement, as we faced the continued challenges and uncertainties in the business, as well as in the economic and regulatory environment. Before we focus on our results, it's important to note that we believe our capital and liquidity positions provide a competitive advantage for Radian. Our risk-to-capital ratio, which is an important measure of Radian Guaranty's financial strength for our stakeholders, regulators and customers, improved to 19.8:1 as of June 30. Radian's risk-to-capital ratio is among the strongest in our industry. Additionally, we maintained financial flexibility at the holding company to further support this ratio, if needed. As we do each quarter, we have updated our projections for the embedded value we believe is contained in our mortgage insurance business. While the projected expense declined this quarter, based on updated assumptions for an even more prolonged economic recovery period, we believe, that there is $1.2 billion in embedded value in our mortgage insurance portfolio. This means that while we cannot predict exactly when, we do expect Radian to return to profitability at some point in the future. Bob will provide more detail of the various complements that illustrate the compelling value proposition for Radian. Now turning to our second quarter results. Earlier today, we reported net income of $137 million or $1.03 per diluted share. This includes the impact of fair value gains of $194 million. We saw, again, this quarter how Radian's spread widening impacted the fair value line, resulting in the realization of some of the positive book value impact that we have said we expect to occur over time. At June 30, our book value per share increased to $8.48. Our mortgage insurance provision for losses was $270 million versus $414 million last quarter, and $424 million a year ago. Bob will explain the main drivers of the reduction in our provision in the quarter. Our mortgage insurance loss reserve was $3.3 billion as of June 30, a decrease from $3.5 billion last quarter and $3.7 billion a year ago. Our reserve for primary default was $25,334, essentially flat through last quarter, and up substantially from $22,957 a year ago. You may find these details on the webcast, Slide 14. For the sixth straight quarter, Radian's total number of primary delinquent loans declined. As you can see on Slide 18, the total number of delinquent loans decreased 5% in the second quarter from the first quarter of the year. Additionally, July delinquencies, again, declined slightly. You can also see on Slide 13, that the majority of our delinquent loans remain in late stages of delinquency, which we believe is the result of continued foreclosure and servicing delays. While our overall composition improved, the proportion of loans in the latest stage of delinquency remained essentially flat from previous quarter. We also saw some momentum in loss mitigation results in the quarter. In addition, loan modifications accounted for more than 4,100 loans or 21% of primary cures in the second quarter, compared to more than 3,600 loans or 17% of primary cures in the first quarter. Turning to new business, the $2.3 billion of new insurance we wrote, translated into an estimated market share between 18% and 19%. New insurance written in the quarter reflects a record low origination market, as well as the impact of declines in volume from certain customers early in the quarter, which was driven by a loss mitigation activity. Importantly, however, we were successful in growing NIW over the past 2 months and wrote in excess of $1 billion in new businesses in July. Our team signed on more than 70 new customers in the second quarter. And we have seen new demand from lenders this year for our training programs, particularly those that illustrate the benefits of a conventional versus FHA loan. In addition, pricing changes and a new streamline underwriting process that we announced in the second quarter were greeted with enthusiasm by our customers and will enable us to compete better against the FHA. Our NIW for the first 6 months of the year increased to $4.9 billion over the $4.6 billion written in the first 6 months of 2010. And the business written in the second quarter, again, consisted of loans with outstanding risk characteristics, 100% prime credit quality and 81% with FICO scores of 740 or above. We have continued to make progress as an industry, in recapturing market share from the FHA, with private MI market penetration estimated to be above 6% in June. This represents a meaningful increase in industry penetration over the last year, and we expect to continue gaining share as a result of the FHA pricing implemented in April. Turning to Financial Guaranty. Radian asset continues to serve as the unique source of capital for MI. Despite a challenging environment for the industry, Radian Asset was, again, profitable on an operating basis in the second quarter. There was a continuation of generally stabilizing credit trends in the quarter, and Radian Asset paid another ordinary dividend of $53 million to Radian Guaranty in June. In addition, the worst-performing TruPs CDO in our portfolio cured in July. Also in June, after receiving the approval from the New York Insurance Department, we successfully completed the acquisition of MIAC, the Financial Guaranty shell company we had agreed to purchase in February. As you know, that MIAC purchased is consistent with our goal of reducing non-core risk to help eliminate uncertainty while maximizing the ultimate capital available to Radian Guaranty. We are now working to evaluate the potential viability of MIAC as a newly capitalized municipal bond insurer. Turning to activities on Capitol Hill, the comment period on the proposed rule for risk retention for residential mortgages ended yesterday. Both Radian and our industry-trade association, MICA, provided comments on the proposed QRM definition. Radian also sponsored a University of Maryland research paper that concluded, that low down-payment loans, which are prudently underwritten and protected by private mortgage insurance, should be considered a QRM. We are encouraged by the support of low down-payment mortgage lending from more than 300 legislators, as well as from community, housing and other consumer groups. We feel this support for MI is also consistent with the government stated goal of reducing its role in housing. In terms of GSE reform, there have been several congressional hearings on the proposed options for housing finance, and legislation has been introduced. We expect that the discussions around GSE reform will linger past the 2012 election. However, we continue to hearing resounding support for the increased role of private capital in overall housing finance reform efforts on Capitol Hill. While the QRM and GSE reform efforts have a relatively long road ahead, we are encouraged by the bipartisan support for putting private capital at risk in a way that both protects tax payers and expands homeownership. Now, I would like to turn the call over to Bob for details of our financial position.

Thank you, S. A. I will be updating you on our P&L activity and trends for the second quarter of 2011 and our financial position as of June 30, 2011. The MI provision for losses was $270 million this quarter compared to $414 million in the first quarter. There are 2 principal reasons for this improvement: First, there was a relative improvement in the composition of delinquent loans; and second, we did not have a significant increase in IBNR associated with the overturns of denials and rescissions like we had last quarter. The breakdown of our incurred losses, which is disclosed on webcast Slide 12 shows: One, the loss reserves on new defaults that arose during the quarter; two, the reduction of reserves on loans that have cured or prepaid; three, the net incremental reserve on defaults existing at the beginning of the quarter; and four, the incurred loss relating to the disposition of claims, which includes actual denials and rescissions. As we said last quarter, in an ideal world, in which our actual performance matches our assumptions, the incurred loss components, other than the reserve on new default, would 0 out over time. While there still were incurred losses during the quarter, resulting from the composition change within our delinquencies, this impact was smaller than in the first quarter. Although, overall cures were down, a higher percentage of cures in last quarter came from the 12-month-plus bucket. Also, more delinquent loans remained in their existing status this quarter by either making payments or remaining in the 12-month-plus bucket, and thereby did not require incremental reserve. In terms of cures in the quarter, for loans that were 2 to 3 months delinquent as of March 31, 25.7% cured during the second quarter. Of loans 4 to 11 months delinquent, 11.5% cured. And of loans 12 months and greater but not pending claims, 4.5% cured. In addition, another 16.6% of Radian's delinquent loans that were not reported as being in the modification program reported at least one monthly payment made during the quarter, but did not fully cure. When thinking about future cures, we believe that the majority will come from modification or loans where borrowers have some wherewithal and inclination to pay and have demonstrated this by making some kind of payment. On webcast Slide 13, you see the disclosure we introduced last quarter, including the total reserves for each delinquent loan bucket, along with our current expected roll rates by bucket on a gross basis and net of expected denials and rescissions. Both gross and net roll rates were essentially unchanged from last quarter. The total amount of loss avoided on submitted claims related to denials and rescissions for the second quarter 2011, increased to approximately $193 million compared to $152 million in the first quarter of 2011. These figures are net of the overturn that occurred during the quarter. The amount in our balance sheet representing future expected denials and rescissions, now stands at approximately $650 million before considering our IBNR offset for future overturn. Loss mitigation efforts remain a significant priority at Radian. We believe that such efforts, which include denial and rescission, will continue at an elevated level. Claims paid in the second quarter were $513 million, which includes $54 million of commutation payment. We expect that this quarter's claims paid represents a peak and that claims paid will generally trend down slowly from here. We expect paid claims in the third quarter to be a little over $400 million, and for 2011 we still believe that claims paid will be in the $1.7 billion range. The improvement in our risk-to-capital ratio, which is estimated to be 19.8:1, is a relative strength for Radian. In addition to the lower incurred loss number which helped this quarter; a reduction of risk in force; statutory income at Radian Asset; the completion of an intercompany reinsurance agreement between Radian Guaranty and a related subsidiary in the quarter; and the sales of certain investments which produced statutory gains, all contributed to the improvement in our ratio. The latest dividend of $53.4 million from Radian Asset to Radian Guaranty was paid on June 30. We expect to continue to pay dividends in 2012 and 2013, although at this time, these dividends are projected to be below this year's level. We continue to see a reduction of exposure and a relatively stable credit performance at Radian Asset. We also continue to explore opportunities to reduce our exposure more quickly than normal runoff, including the potential use of the shell financial guarantor that we purchased. Much like what occurred in the first quarter, the change in fair value line was primarily impacted this quarter by a continued widening of Radian's own credit spread, contributing to a net fair value gain on derivative instruments for the quarter of $189 million. The total of our June 30, 2011 balance sheet amounts related to our derivative exposures and consolidated transactions is now down to a net cap liability that is approximately $27 million less than our current estimate of net present value of credit loss payments, as we show on webcast Slide 8. This means that if our projections are accurate, book value will be reduced over time by approximately $0.20 per share. As has been our experience, the fair value liability can be volatile over the course of the life of the transaction. We fully repaid $116 million of debt that matured in June 2011. Our holding company cash resources at the end of 2011 are still projected to be approximately $630 million, after giving effect to the amounts we can redeem from our CPS securities and subtracting the October intercompany tax payment, which is the only remaining material 2011 obligation. We may use some of these available liquidity to make a contribution from Radian Group to our MI subsidiaries, if necessary in the future, in order to strengthen our capital position. Our next material holding company obligation will be the repayment of $250 million of debt in 2013. We believe that Radian remains a compelling value opportunity. Our book value as of June 30 is $8.48. As I previously mentioned, we now believe that the present value of future credit losses on our fair valued exposures will be approximately $0.20 per share higher than our current net liability. So we expect that amount to come off our current book value over time. We have a valuation allowance against our deferred tax asset of $5.78 per share. While realizing this asset is subject to our return to a period of sustained profitability, it presents potential upside. We also believe there is a pre-tax embedded value in our MI book, which we estimate to be $1.2 billion as of June 30. This number has fallen recently due to an even more prolonged economic recovery that is now built into our assumptions about future losses. And the number is very sensitive to the ultimate frequency of losses and could potentially be eliminated if our actual frequency is higher than anticipated. However, at this time, it represents our best estimate of future value embedded in our current book of business. We also believe we are writing profitable business. A very rough estimate of the after-tax value produced by $1 billion of new insurance written today, based on our current pricing and quality is approximately $7.5 million. So a run rate of $10 billion annually would likely produce incremental future value of approximately $75 million. Lastly, our Financial Guaranty business has future and premiums that could represent upside that those amounts are greater than future losses and expenses. The sum of all these items represents what we believe is our intrinsic value. And while all of our assumptions are dependent on the macroeconomic development and other risks and uncertainties, we hope this clearly lays out the potential future value that we believe Radian offers, particularly if new insurance written volume is stronger over time. I'd now like to turn the call back over to S. A.

Thank you, Bob. Finally, I would like to take a few minutes to review the key priorities for our businesses, as Radian moves forward. For our Mortgage Insurance business, the priorities are: One, to write as much new business as we can and to be positioned to gain from competitor pull back in the near term, as well as some market recovery in the future; two, to diligently focus on loss mitigation by quickly paying deserving claims while enforcing our rights on each fully underwritten fraudulent or negligently serviced loan; three, to participate in the regulatory and legislative debates on the future of housing finance, with the goal of ensuring a favorable outcome for mortgage insurance and, importantly, for first time and low-to-moderate income borrowers; four, to rationalize our expenses in light of the weak mortgage origination forecasts; and five, to be actively engaged and open-minded about opportunities to create shareholder value through any restructuring or reshaping of the mortgage finance and mortgage insurance industry. The priorities for our Financial Guaranty business are: One, to provide capital support to our mortgage insurance business; two, to diligently manage our existing risk exposure while pursuing commutations and other exposure reduction opportunity; and three, to develop, evaluate, and if appropriate, pursue new business solutions that can further reduce exposure and create shareholder value. And now, operator, we would like to open the call for questions.

[Operator Instructions] And our first question will come from the line of Steve Stelmach from FBR. Steve Stelmach - FBR Capital Markets & Co.: On the IBNR, Bob, can you just give us a little bit more color on the volatility quarter-over-quarter? And if there's any sort of comfort that we can get that, that volatility is going to be reduced over time potentially? Anything there would be a little bit helpful.

Sure. Last quarter, what we saw was this phenomenon on overturns of denials and rescissions. And that was really new. We have never had that happen in the past. We had a small IBNR up for that, but we really had to increase it in the first quarter. What we found in the second quarter was that the IBNR on the balance sheet is okay, and there were really no adjustments to it, so we were comfortable. Can we limit future volatility? That's difficult. But I think in terms of this particular item, we are comfortable with it right now. Steve Stelmach - FBR Capital Markets & Co.: Yes. I get the point being as the overturn, you're not going to be surprised by overturns again. If there's a volatility in IBNR, it'll be because of something else but not this specific issue, is that a fair assumption?

No, I don't think there'll be volatility in IBNR unless we get a real unexpected situation in terms of overturns. Steve Stelmach - FBR Capital Markets & Co.: Okay. And then on the valuation allowance, is $5, a little bit over $5 a share, what do you guys need to generate in terms of EPS to realize that full $5?

Well, there's no real formula as to exactly when it turns around. It's really a judgment based on return to sustained profitability. So if we really feel like we have visibility on that and confidence in that, conceivably, it could turn around. But the number -- the actual realization of that number will depend on producing enough profit to generate that kind of tax effect. Steve Stelmach - FBR Capital Markets & Co.: Okay. And then just last question. On reserve per delinquent loan, obviously, there's been some variability within the industry. Could you give us a little bit of color on why you feel good about your current reserve for delinquent loans? Perhaps maybe some of the differences between your book and others that may attribute to the difference?

We're always doing our best to estimate the best reserve for default we can. We do feel comfortable with it. Currently, obviously, there are going to be things impacting it in the future. The roll rates are really the big item that we're doing our best to estimate, but they're going to be subject to the macroeconomic situation, as well as some of the servicing issues, et cetera. So that's going to be -- it's going to play out over time, but we are comfortable with our number and we do our best. In terms of the differences, I think, all of the companies are doing their best to estimate a very difficult number to estimate. And we're just going to keep every quarter learning as much as we can. And we do adjust when we see things that need adjusting. We adjust as quickly as possible and put the best number out there.

Our next question comes from the line of Douglas Harter with Credit Suisse. Douglas Harter - Crédit Suisse AG: I was hoping you could help by explaining a little bit more about that reinsurance contract that you entered into and how that impacted the capital at the MI subsidiary?

Yes. I mean, it's an excess of loss reinsurance agreement. It's been done before in our industry and by us. So it does take some risk away from Radian Guaranty. It's an arms-length transaction, so premium is transferred on an arms-length basis. It is risk transfer for accounting purposes and statutory purposes, so it's not a way out of the money catastrophic kind of situation, it's a real risk transfer at appropriate premium. It's known about by the insurance departments and it's a very arms-length kind of transaction. Douglas Harter - Crédit Suisse AG: Does that impact any of the parent company's liquidity to have that transaction?

No. It's an intercompany, between insurance company. Douglas Harter - Crédit Suisse AG: And then, just on switching topics to the QRM. What's your expectation now that we're past the common period? What should we expect from a timeline going forward from here?

Hi, it's Teresa Bryce-Bazemore. I think at this juncture is too early for us to really come up with a date and we haven't heard any projected dates yet. As you may know, the comments were due yesterday by the end of the business day. And we submitted comments at that time. And right now we are expecting that the regulators probably have been deluged with comments. So their process is to go through all of them, and then to sort of revisit their rule and come up with a final rule. The -- under Dodd-Frank, the rule, once it's published as a final rule, would be effective a year later. But at this juncture, it's too early. We haven't heard any sort of view from the agencies on what they think that timeline is. Douglas Harter - Crédit Suisse AG: Is there any standard practice as to how long it generally takes, or these things all vary?

They all vary. And a lot of it is based on sort of on how many comments and what the content of the comments are. And obviously, this is a pretty controversial rule, with members of Congress who actually passed the law saying that the proposed rule is not consistent with legislative intent.

Our next question will come from the line of Donna Halverstadt with Goldman Sachs.

My question's focused on the reserves and the reinsurance that have already been asked, but let me ask a follow-up. You listed the items that positively impacted your risk-to-capital ratio, and in terms of contribution to that improvement, was the intercompany reinsurance a big contributor? And if so, how much more capacity do you have to do more of that in the future?

Things that impact capital are bigger contributors on sort of a net-net basis. But the intercompany reinsurance impacts the risk, which is obviously a bigger number. So I would say all of the items that I mentioned helped and impacted the risk of capital. None of them in a very dramatic way, they all kind of contributed. There may be capacity to do more of that. That's something that we work through with the insurance department. It depends on the capital levels at the subsidiary which we're currently very comfortable with. I wouldn't expect material amounts of additional reinsurance in the future, but there could be some, and it's something that we could use, maybe, to a lesser extent in the future.

Okay. And another thing, I was wondering about to get to the interplay between opco capital and the holdco resources. In 2010, Radian Group downstream $423 million of capital support to subs, some to CMAC Texas, some to Radian Guaranty. If $423 million was the number in 2010, can you give us some numerical kind of rough expectations on what you think the number will be for 2011?

Well, we don't know what the number will be. It hasn't been -- it's been very, very insignificant so far this year. The smaller subs and the contributions there are dependent on minimum surplus and things like that. I think we've said we don't expect them to be material, but there could be some smaller ones. In terms of Radian Guaranty, I think we're going to have to see how that plays out. So far we haven't -- it hasn't been necessary, but we keep saying and we mean that the money at the holding company is there to support the MI business if necessary. So we don't have a projection at this point, but we'll have to see how that plays out.

Okay. And then the last question I wanted to ask, S. A. had made a comment about being open-minded about opportunities for shareholder value around any reshaping of the MI industry, and a couple of other folks have mentioned in passing industry consolidation. I was wondering if you could give us any sort of general color about what sorts of discussions are occurring amongst industry participants with respect to a reshaping of the industry?

Donna, as you know very well, I can't comment on anything in the way of discussions that may be occurring or not occurring. All I can tell you, that we at Radian have demonstrated in the past our open-mindedness, and we believe we are strongly positioned financially to participate in those opportunities as they may come up in the industry if they make sense for our shareholders.

Our next question comes from the line of Mark DeVries with Barclays Capital.

First, I just have one more follow-up on the risk of capital issue. Bob, how much more room is there to add to capital through harvesting investment gains like you did this quarter?

Mark, we have gains in the portfolio that we haven't harvested yet. And obviously, that -- in the future that's going to depend on where rates go as well and the value. It's something we've done in the past. We could do it in the future. I wouldn't say there are material further amounts, but if it makes sense and we have the desire, we can do some more of that.

Next question, just interested in getting an update on the trends you're seeing in modification, particularly around frequency and also the types that are occurring, whether you're seeing more principal forgiveness?

This is Teresa. I mean, I think that what we're seeing is continued volume coming through on modifications, although it's very difficult on the private side to really know what's coming through in sort of the way of private modifications. What we haven't seen -- we've seen a lot reported on principal forgiveness, but we haven't seen a lot in terms of what we've actually seen come through with respect to principal forgiveness.

And the next question is for S. A. Has the recapturing of FHA volume -- has it so far been slower than you would've expected? I mean, I think when we do the analysis, it looks like MI is a superior execution in almost any loan type, yet it's been somewhat slow to recapture shares. What is it that's causing brokers to continue to choose FHA?

It has been slower than we would have liked to see it driven by 2 factors, the larger one of which is the fact that every time the FHA pricing has improved and created an advantage over conventional versus FHA execution, the GSEs have in some cases added additional delivery fees negating or significantly reducing the advantage of the FHA execution. And the other issue is there's a lot of originators out there who need to be retrained in originating conventional loans versus FHA loans, which has been a big area of focus at Radian. We've had several campaigns, and a lot of our focus has been on training originators to originate conventional loans again.

Okay. And then last question. You mentioned the July volumes was a fair amount. Is that indicative of increased activity in the market? Or you think it's more of a market share gain on your part?

It is both. We continue to place a lot of emphasis on our sales and customer relations. We've recruited strong sales talent and are opening to the -- now open to doing more as it becomes available. We've seen -- we've won more business from existing customers. We continue to sign up new customers. In terms of market share going forward, calculation of market share has already become very difficult with 1 large participant in MICA no longer being in MICA. So market share calculations, which were always an estimate, are going to become even more complicated going forward. But looking at it from NIW terms, we are pleased with what we wrote in July and July and the uptick we saw.

Sorry, just one more follow-up. Are you seeing any signs that certain originators may be pulling away from some of the weaker players in the industry?

Teresa, do you want to answer that?

Well, we're starting to see a little bit of that, but we think that could escalate, obviously. But we're just starting to see that. Obviously, we are very focused on the fact that we have a very strong risk of capital competitively, and we think we're well positioned to compete. And so our salespeople are very aggressively going out and looking to increase our share with existing customers in addition to having a business development team that's successfully bringing on new customers and, very importantly, converting those new customers to producing new customers.

Our next question will come from the line of Chris Gamaitoni with Compass Point. Christopher Gamaitoni - Compass Point Research & Trading, LLC: On the net projected premium for the MI book, it decreased about $300 million this quarter and you gave us the guidance that, that was due to a prolonged economic recovery. Could you just give us the high-level assumptions that changed in your model?

Yes, I mean, I think, we are expecting a recovery later. So we're kind of running out the new defaults at the level that they've been happening recently, so we have no improvement to that. We lengthen that out, so the improvement starts later, and then the time over which it returns to normal is also longer. We try to be consistent with economy.com and their projections in terms of the economic recovery, so that's really where our sort of macro forecast is coming front. Christopher Gamaitoni - Compass Point Research & Trading, LLC: Okay. And then could you give us kind of a ballpark lifetime claims rate you're expecting for the 2009 to 2011 vintages, the much tighter collateral written?

Yes, I mean, it's the low single digits, depending on the LTV and et cetera. But it's a very low claim rate, and that is supported by the exceptional credit.

Scott Theobald, do you want to comment on that?

Yes, I agree with Bob. I'll just remind everybody that at this point of development, it is some of the best performing businesses we've ever done. Christopher Gamaitoni - Compass Point Research & Trading, LLC: And then could you also give us some color on the mix between rescissions and claims denials, what the kind of bucket between each of those used to be, what they are today, where you think they will be going forward and whether you've seen -- you've been able to deny more claims due to servicer improprieties that we all read about in the paper today?

Historically, the -- I mean, it's really only a few years -- the rescissions were a much greater percentage of the two. Denials have increased from where they started, but they're still -- the mix is still rescission-heavy compared to denials. We clearly are looking at the servicer issues and paying a lot of attention to that. More likely, in the past, that has resulted in a reduction or curtailment of the claim as opposed to a flat out denial. Christopher Gamaitoni - Compass Point Research & Trading, LLC: Okay. And could you just give us an update on what exactly those violations would be?

Those violations could be timeliness in terms of when they move forward with a foreclosure. They could be related to whether the property's been kept up and maintained properly, those kinds of things. And so there are a number of things. We share that information with the servicers so that they're aware of what those issues are. And we look at each claim to determine whether or not any of those issues have occurred and then make appropriate adjustments to those. But as Bob said, our real recourse generally is to make an offset on the amount of the claim paid. Christopher Gamaitoni - Compass Point Research & Trading, LLC: Okay. And then finally, have you had any conversations with either of the GSEs about them increasing their counter-party risk surveillance on MIs, and maybe the potential to gain additional NIW from weaker peers due to GSE involvement rather than originator intent?

The GSEs have always focused on all of us in terms of making sure that we all have the capacity to write business. And so far they have not tiered the participants in the industry, but I can't comment on whether they will do so in the future.

Our next question comes from the line of John Benda with SIG.

Just had a question on the CDO books, specifically the number of sustainable credit events that you guys list by maturity. So we see that's on different corporate entities. Can you give us an idea of how many distinct entities that's on? Is it on a couple thousand, couple hundred? I'm just trying to get a better feel on what's really going to move that book around.

Our Financial Guaranty team -- people will answer that.

We've got our Chief Risk Officer, Derek Brummer here, I believe.

Yes, there's probably about 850.

Remember, we've said over and over that on the corporate CDOs, we don't expect credit losses in that book of business.

Our next question comes from the line of Matthew Howlett with Macquarie.

Just on the paid claims forecast. We've heard of -- I think you said it peaked this quarter. We heard that from another MI as well. What gives you confidence in that estimate just given, as you mentioned, there are so many servicer delays and foreclosure delays that are going on today in the system?

We do that projection based on the number of claims received, and then we look at a time line as to when those claims will be paid. And obviously, you're right, that time line has a lot of uncertainty attached to it because we're examining every claim that comes in for potential rescission, and that lengthens out the process. I think our confidence with that statement has to do with the reduction in claims received from last year and the expectation that the claims will trend down generally. And we said slowly, because claims will remain elevated for the foreseeable future, but we don't think at the same exact level that it was this quarter.

That's helpful. But just on that same notion, why is it so difficult to give sort of an incurred loss forecast in terms of why hasn't it peaked or why can't you go out today and say it's peaked and it's going to come down, if you think you have the page right?

It's a much more difficult exercise to project incurred losses because even if we get new defaults right, and we've been fairly good at projecting new defaults and the reserve on that. You can see it's relatively consistent over the past couple of quarters. It's come down from last quarter. That first component of the incurred losses is easier to project. The much more difficult part is projecting the other -- essentially, the other 3. But really, 2 and 3 are the hard ones. Cures and prepays have been very difficult to project. We've overestimated the amount of cures consistently. And then the movement, this composition, which has really been a big component of incurred loss, loans moving through the aging and the buckets have been very difficult to project. It still is. And the roll rates, which are ultimately going to speak to the ultimate incurred losses are very difficult to project. We do our best, but we're not -- we're comfortable over the life with this embedded value talking in those terms, but there's a lot of uncertainty on that. From quarter-to-quarter, it's very difficult to do.

Got you. That's helpful. And then just switching to one quick question on the earned premium item. Were there any one-time sort of warranty pushbacks from warranties negotiations? I mean, is that line item [indiscernible] going forward, should we assume?

No. I think you could say 2 things about earned premiums. One, the risk in force has been coming down kind of steadily because we're not replacing what has been running off, and that's a slow downward trend in our premium. The bigger volatility from quarter-to-quarter on earned premium has been due to our rescission refund accruals, which have gone kind of up and down and, again, difficult to project. But that's the cause of the volatility. Absent that, you'd be seeing sort of a slow trending down of earned premium.

Okay. So there were some rebates in that line item this quarter?

The rescission refund accrual, yes, that did change this quarter, yes.

And just last question, you mentioned the ABS CDOs. Did you say that deal started paying again, in Financial Guaranty?

The ABS CDO, no, I think you're referring to in our trust portfolio, of our most troubled deals. And 2 banks cure -- prepay and cure the event default. But it's really kind of an idiosyncratic event. And while it's positive in the short term, it doesn't really alter our overall credit view of that transaction.

Our next question comes from the line of Mike Grasher with Piper Jaffray.

Just a few questions here. Bob, on the risk to capital, there are those states that adhere to the 25 to 1 ratio. When you look at your new insurance written overall, I guess, for the first 6 months of the year, and even if you could do a picture of 2010, what percent of that total actually would be coming from those states?

I think Ohio would be...

I think at this point, all of the states have, with the exception of New York, have agreed to do waive -- not for us because we're just -- but that they have agreed to sort of grant waivers. And so New York is the only state at this point that has still a hard 25:1. I don't think we've looked at sort of what the volume is in the states with the waiver process.

Teresa, New York was lower single digits.

In terms of percentages of business.

Okay. And then if you look at -- or Bob, another follow-up would just be on the non-CDO RMBS portfolio, any change in the reserve for that portfolio?

No material changes. That's generally an older book vintage-wise, which has kind of helped the performance. We do have reserves on it, but no material changes this quarter.

Okay. And then final question just for S. A. You mentioned GSE reform after 2012. What about the FHA, I think Congressman Ryan had been making some noise about the issues that maybe they have. Any speculation on what the future might hold for them?

From what I hear, my view is that the GSE reforms would, to some extent, address the FHA role going forward also, because one of the messages we hear consistently from everybody on Capitol Hill is the overall role of government versus private capital. And we hope that, if based on what we hear is right, there will be a diminished role for government capital going forward relative to private capital.

Our next question comes from the line of Scott Frost with Bank of America.

If you have mentioned this already, I'm sorry. Did you -- do you have any color on how much of the new business you're writing would conform to the QRM guidelines with the alternative definition if it were adopted, I think one of your competitors made a note about that in their release. Do you have any information on that?

I think generally, when we've looked at -- if the QRM were to come out as it was proposed at 20% down, obviously, there would be no business because -- now having said that, we have to remember that [indiscernible] proposed has a GSE while there's conservatorship as an exemption. So...

Right. Right. But what I'm talking about is there's an alternative definition that's contemplated in that proposal.

It's 10%. I do think it's about half of the business.

So, it's half of the business that you're writing right now?

Yes.

Our next question comes from the line of Steve Stelmach with FBR. Steve Stelmach - FBR Capital Markets & Co.: Just a quick follow-up on Financial Guaranty, public finance in particular. Anything, updates there on some of the more troubled credits within public finance? I know there's been some news in Jefferson County. I guess it's coming somewhat to a head. Do you still feel pretty good about reserves there and exposures?

Yes. All of our exposure from Jefferson County, first of all, is via reinsurance. And there are, obviously, negotiations going on as you alluded to. And our exposure will depend on whatever the eventual settlements that involves our primaries amounts to. Based on the information that we have thus far, we believe that our reserves are adequate given the nature of the conversation. Steve Stelmach - FBR Capital Markets & Co.: Great. And then just last, skilled nursing has been in the news lately. Anything we need to worry about there on the public finance side?

Not in particular. Healthcare, generally, is an area that we pay a lot of attention to, but nothing in particular about skilled nursing, no. Steve Stelmach - FBR Capital Markets & Co.: Okay. And you don't have an outside exposure there relative to sort of that $5.8 billion or...

No.

Our next question comes from the line of Shawn Pei [ph] with Citadel Securities.

I have a quick question. I know that you said that it's difficult to sort of project out the incurred losses, but I was hoping you can give me some color in relation to incurred losses you're seeing now, what percentage of them are due to sort of the '06 to '08 vintages versus some of the more recent stuff you guys started to write from '09 on? And how do you see that sort of proportion changing over the next few quarters, maybe even going out, like, 2 or 3 years?

The losses from '06 and '07 are still a big proportion of our incurred losses. We do a slide that shows you the premiums minus losses by vintage. And you can see the '09, '10 and '11 vintages. It's 15 that shows you that. And it's a very small proportion of our incurred losses coming from '09, '10 and '11. There's also a big proportion coming from '06, '07 and '08. And prior has actually slowed down some. So we're hoping over time that the problem vintages become a smaller portion, but it's going to be a while. It's going to still be a big proportion of our incurred losses over the rest of the year certainly.

Okay. Great. And just one more question. In the sort of like disastrous scenario that the QRM definition doesn't actually -- I mean, it gets passed down, doesn't change materially even after the comments. Where does Radian see itself moving from there?

While it could be premature to comment on exactly what we would do at that time, clearly, it's something we do think about. And we have capabilities that can to apply to a role in one of many areas in the mortgage finance, housing finance industry, whose future is still being shaped.

I would just add that given the fact that over 300 members of Congress have said that they don't think that the proposal as currently drafted is consistent with their legislative intent. We do believe and have had conversations with members of Congress that if the rule were to come out as it's been proposed, that we would look to try to have Congressional action take place. As I mentioned earlier, there's a one-year time frame before it would be implemented. But also there would be an even longer time frame if the GSE exemption remains while they're in conservatorship, which is expected to be for some time to come. So we think there's an opportunity as well to try to address the rule if it came out that way in addition to what S. A. was discussing.

The trouble about -- the challenge about dealing with futures scenarios is there are multiple scenarios possible. You could have an instance where the agencies come up with a relatively tight QRM definition. But subsequently, Congress, in terms of the GSE reform expense of all the private capital by reducing the amount of guarantees from 80% to a lower level, thereby expanding the role of people, of participants like the mortgage insurance industry. You could also speculate that at the same time, if they tighten up on government role in financing on the FHA participation, there will be a lot of borrowers that will still look at buying homes with less than 20% down who will have to find other ways of borrowing where there may be other roles possible. Again, we are closely monitoring, trying to influence what happens, and trying to keep ourselves in a strong position, a nimble position, to deal with that situation as it emerges.

We'll go on to the next question of Chris Gamaitoni with Compass Point. Christopher Gamaitoni - Compass Point Research & Trading, LLC: Just one follow-up on the public finance book. Given the recently debt deal in Congress, can you give us any color on what you think the additional risk to the municipal exposure is as federal funding is reduced to the states?

We don't see a material credit deterioration based on actions in Congress recently. Derek, do you want to add anything?

I was going to say -- I mean, we expected that. We would expect, generally, a negative trend on the public finance side over the next year or two, but not anything that would necessarily create a material change in our view.

And currently, there are no further questions. Please continue, Mr. Ibrahim.

Thank you, operator. And I'd like to thank you all for participating in our earnings call. Thank you.

Ladies and gentlemen, that does concludes your conference for today. Thank you very much for your participation and for using the AT&T Executive TeleConference. You may now disconnect.