Radian Group Inc. (RDN) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Radian's First Quarter 2012 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of financial communications, Emily Riley. Please go ahead.

Thank you, and welcome to Radian's First Quarter 2012 Conference Call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today and is posted to the Investors 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 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 how we keep our eye on the prize in terms of producing future shareholder value. I will discuss 3 key areas: first, how do we think about Radian's future value for our shareholders, a value that we hope to realize once we finally exit the downturn and shed our legacy burden; second, what are some of the challenges we face in getting to the prize; and finally, what are we doing today to navigate through those challenges. Next, Bob will cover the details of our financials, which have some complexities again this quarter. Before we open the call to your questions, I will offer a few final remarks. Earlier today, we reported a net loss for the first quarter of $169 million or $1.28 per diluted share. This includes the impact of fair value losses of $91 million. At March 31, 2012, our book value per share was $7.65. Now let me discuss the future prize that keeps us focused, motivated and excited every day at Radian. We believe our core mortgage insurance business today is attractive with strong returns, outstanding credit quality and sound pricing. We continue to capture a much larger share of new mortgage insurance business today than ever before in our history in an extremely competitive but high-quality market. In fact, our market share of this profitable new business is double what it was in the challenging underwriting years of 2005 through 2008 and this increased volume is improving the overall credit profile of our MI portfolio. In the first quarter, we again wrote $6.5 billion of new Mortgage Insurance business, and our pipeline remains strong with NIW reaching approximately $2.6 billion in April. Slide 15 shows the performance of our primary Mortgage Insurance books by vintage where you can see that the most recent books of business, which are becoming a much larger portion of our total portfolio, have been performing extremely well and are projecting strong returns on capital. Importantly, as of the first quarter, the 2009 through 2012 books grew to 31% of our primary risk in force and the most problematic 2006 and 2007 books are down to 31.5% of our primary risk in force. We view this shift as a positive differentiator for Radian and one of the primary drivers of our expected return to operating profitability in 2013. Moreover, the MI industry volume could benefit in future years from higher mortgage originations, increased private MI penetration versus the FHA and the potential opportunity for an expanded private Mortgage Insurance role in the mortgage market. As we have mentioned in previous calls, each $1 billion of NIW is expected to generate approximately $7.5 million in future after-tax value. Our Financial Guaranty business continues to serve as an important source of capital for Radian Guaranty, and we have reduced our net par exposure from a peak of $115 billion in June 2008 when Radian assets stopped writing new business to $45 billion in the first quarter of 2012, primarily through a series of successful commutations, including our recent Assured transactions and our even more recent success in committing a large CDO of ABS exposure and a significant portion of our riskiest TruPs exposure. These actions have been stacked positive, and importantly provide increased likelihood to the future availability of Radian Assets Capital for Radian Guaranty. It is also worth noting that while we're using its net par exposure, Radian Asset has paid out total dividends of $330 million to Radian Guaranty since 2008. An additional $323 million in contingency reserves remains to support Radian Asset's existing risks, representing a potential opportunity to add to Radian Guaranty's statutory capital through future exposure reductions. Radian Asset expects to pay another dividend to Radian Guaranty in July of approximately $50 million. As mentioned earlier, we continue to project a return to a small level of operating profitability in 2013. While challenges and uncertainties clearly remain, some of which I'll discuss shortly, it is important to note that in the scenario of Radian returning to sustained profitability, our statutory earnings would be tax-free for a significant period of time due to our substantial NOLs. Now let's review a few of the major hurdles we must clear in order to achieve the prize. They are: the performance of our legacy Mortgage Insurance and Financial Guaranty books; the still uncertain macroeconomic environment and the state of the housing market; various regulatory uncertainties including QRM, QM and GSE Reform; and the effective management of our statutory capital and holding company liquidity. Each of these is difficult and will require significant attention and focus. However, we have been engaged in these efforts for quite some time and have consistently demonstrated our ability to overcome obstacles. In light of the prize we are seeking, we will continue to pursue all viable alternatives and opportunities to achieve our objectives. Let me now review what we are doing today to navigate through these challenges. First, we have taken many actions to improve Radian Guaranty's risk-to-capital position in order to keep writing new Mortgage Insurance business. These actions include internal and external reinsurance, reductions in commutations of risk exposure and harvesting investment gains. Since moving Radian Asset under Radian Guaranty in 2008, we have reduced Radian Asset's net par exposure by 61%, allowing us to take advantage of contingency reserve releases that benefit Radian Guaranty's risk to capital. In the first quarter, our risk-to-capital ratio improved to 20.6:1. In addition to the capital management actions we've already completed, we announced an external quarter share reinsurance agreement in April to further support our risk-to-capital ratio going forward for Radian Guaranty, and we will keep seeking more alternatives and opportunities. Absent for the capital support, we do expect Radian Guaranty to exceed 25:1 in the latter half of 2012. However, when this occurs, we have a plan in place that has been approved by our regulators and the GSEs to continue serving our customers and the housing market uninterrupted through a combination of Radian Guaranty and its subsidiary, RMAI. Second, we continue to focus diligently on loss mitigation. As we continue to work through the troubled 2006 through 2008 books, our reserves to support our mortgage insurance losses stands at $3.2 billion today, and our primary reserves per default increased this quarter to $27,833. You will see on Slide 16 of today's presentation that our rescission and denial activity remained steady while we continue to work through the poor underwriting years of 2005 through 2008, while allowing ample time for our customers to challenge our decision and to provide documentation and support for each claim. However, the number of denials has grown significantly in recent months, and Bob will discuss this in his remarks. What is most important to remember is that we continue to pay appropriate claims while enforcing our rights on each poorly underwritten, fraudulent or negligent reservist loan. Our loss mitigation efforts are focused both on helping borrowers while current on their mortgage to improve their ability to stay current, as well as on assisting those borrowers who are delinquent but have the means and the desire to fulfill their obligation and stay in their home. For current borrowers, the HARP program continues to gain traction and accounted for $930 million of insurance in the quarter that is not included in our NIW total. Third, there are positive strengths and improving results. The credit environment appears to be stabilizing and we are encouraged by the continued decline in the number of delinquent mortgage loans in our portfolio, as well as the decrease in our primary default rate to 14%. Finally, our industry continues to slowly but steadily regain share from the FHA, and we believe private MI market penetration has more than doubled from the beginning of 2010 to its level today. The FHA has raised prices 3 times in the past 2 years and has clearly stated its intention to reduce its risk and take on a more traditional role in the housing finance market. More broadly, we continue to hear resounding support in Washington for a larger role for private capital, including private Mortgage Insurance in the future of housing finance. Now, I would like to turn the call to Bob for details of our financial position. Bob?

Thank you, S.A. I'll be updating you on our P&L activity and trends for the first quarter of 2012 and our financial position as of March 31, 2012. MI provision for losses was $235 million this quarter compared to $333 million in the fourth quarter of 2011 and $414 million a year ago. The loss development during the quarter was much improved as we expected with a lower level of new defaults that we attribute partially to seasonality and partially to the slowly improving economy and improving credit composition of our enforced book. Primary new defaults for the quarter were down by 20% compared to the first quarter of 2011, which was a little better than anticipated. The recent slowdown in claims paid and increased level of denials led to a reduction in the expected reinsurance recoveries from our soon to expire Smart Home transactions by approximately $27 million, which increased our net losses incurred this quarter. The remaining Smart Home recoverable as of March 31, 2012 is $38 million. We're expecting a continuation of favorable incurred loss trends for the balance of 2012 compared to 2011 and we still expect an operating loss for the year in the MI segment in 2012 and a return to a small level of MI operating profitability for the 2013 year. Cures during the quarter by bucket are depicted on webcast Slide 13 along with a new separate line that breaks out pending claims from the 12 month plus delinquent loans. Overall, cure levels have improved but are still below our anticipated levels, and the cure is coming from the older delinquent loans came down from previous quarters. The dollar amount of loss avoided on submitted claims related to denials and rescissions for the first quarter 2012 was $246 million compared to the $135 million in the fourth quarter of 2011. These figures are net of the actual returns that occurred during the quarter. The amounts in our balance sheet representing future expected denials and rescissions is $582 million before considering our IBNR offset for future overturn. The increased scope of our claim investigations beginning in 2011 has resulted in higher numbers of denials and has slowed down the claims paid level. To repeat what we said last quarter, we believe we have a thorough process which allows the servicer ample time to find documentation or provide additional information before we record our denial or rescission. We also believe we have cautiously accounted for the recent increased level of denial activity because of the uncertainty around the sustainability of this rate. In our assumptions, approximately 50% of completed denials are expected to be reinstated, mainly as a result of servicers ultimately finding and producing the documents necessary to perfect the claim. You will see a change to Slide 16 where we have estimated the number of future reinstatements that are cumulatively presented on the slide rather than waiting for the actual reinstatements to occur. Radian Guaranty's risk-to-capital ratio is estimated to be 20.6:1 as of March 31. The primary drivers of the changes to our risk-to-capital ratio this quarter were additions to stat capital from the Financial Guaranty business, primarily from the Assured transaction of which most of the total anticipated $100 million benefit was realized this quarter, offset by the MI operating losses, which reduced capital. Radian Guaranty ended the quarter with $920 million of statutory capital. In terms of future risk-to-capital impact, as we announced a few weeks ago, we've entered into an external quota share reinsurance policy on our newly written business that will allow us to reduce our net risk in force by an estimated $1.25 billion to $1.6 billion by year end, with about half of that benefit coming as of the end of the second quarter this year. We consider this reinsurance to be an effective way to manage our risk-to-capital ratio in light of our dramatic increase in new insurance written over the past year. With regard to Financial Guaranty performance, the $31 million provision for losses this quarter was driven by a $19 million increase in loss reserves on our Greek sovereign exposure to a current loss reserve of $24 million out of the total exposure of $31 million and some increased reserves on a series of smaller RMBS exposures. Our quarter end loss reserve on Jefferson County is $26 million compared to our total exposure of $225 million. While the Assured transaction was positive in that it reduced exposure and produced an increase in stat capital, it negatively impacted our GAAP results for the first quarter in 2 ways: first, there was a write-off of associated deferred acquisition cost of approximately $16 million; and second, there was a negative earned premium impact of $22 million due to the fact that our unearned premium used for settlement purposes was the statutory figure for the difference between it and the GAAP BCR had to be reversed this quarter. As we announced previously, we commuted our large problematic CDO of ABS transactions along with a series of non-investment grade TruPs CDO. This transaction was another example of our successful track record with mitigating losses in problem Financial Guaranty credits. In the second quarter, we will book a very small statutory gain in the transaction and we will book a loss for GAAP purposes because the commutation payment is higher than our net fair value liability. The substance of this transaction is as follows: We've eliminated exposure on the $450 million deal that we believe would have been a total loss. We've also commuted our exposure on $700 million of TruPs. The transaction eliminates 81% of our B and below rated TruPs and 51% of our B and below rated total portfolio. For this benefit, we paid out $210 million of which we will initially book a projected recovery of $75 million. This $75 million is still at risk as the actual ultimate recovery will depend primarily on the future performance of the commuted TruPs CDO. The fair value losses for the first quarter of 2012 were driven mainly by Radian's credit spread tightening which reflects the market's improved view of Radian's outlook. Within the $18 million net loss in other financial instruments, the $15 million gain, the company's debt repurchase as part of the tender offer for a portion of the 2013 debt. Other operating expenses for the quarter increased by $5 million due to the implementation of a new accounting standard for deferred acquisition costs. Essentially more costs are now being directly expensed in our other operating expenses rather than being deferred and amortized. In addition, we had an operating expense increase of approximately $6 million compared to the last quarter from variable stock-based compensation during the quarter. As of March 31, 2012, the valuation allowance against our deferred tax asset is approximately $880 million or $6.60 per share. After the $133 million spent on the tender offer, we have approximately $350 million currently available at the holding company. There are no contributions required to be made to any of our MI subsidiaries this quarter. Absent any additional capital support, we expect Radian Guaranty to breach 25:1 sometime in the latter half of 2012. More contributions from the holding company are possible during 2012 and beyond, including our requirement to provide Radian Mortgage Assurance with $50 million from Radian Group breached 25:1 at Radian Guaranty. There is also some potential use for some holding company cash when our IRS issue is finalized which could occur in 2012. The remaining $104 million of our 2013 debt matures next February and we have $250 million of debt maturing over 3 years from now in June of 2015. I'd like to now turn the call back over to S.A.

Thank you, Bob. Before we turn the call over to the operator, I would like to reiterate the following points. One, we wrote $6.5 billion in NIW representing a large share of today's high-quality and profitable business. Two, since 2008, we reduced our Radian Asset risk exposure by 61% while paying $330 million in dividends to Radian Guaranty and our statutory surplus now stands at $1.1 billion. Three, at the end of the first quarter, our risk-to-capital ratio improved to 20.6:1. Four, we have $350 million available at the holding company liquidity after opportunistically reducing our debt maturing in 2013 by $146 million. And finally, at Radian, we are keeping our eye on the prize and focusing on actions that improve the likelihood of achieving the prize for our shareholders. And now, I'd like to open the call to your questions. Operator?

[Operator Instructions] And our first question will come from the line of Douglas Harter with Credit Suisse. Douglas Harter - Crédit Suisse AG, Research Division: I was hoping you could talk about your expectations for the pace of paid claims in the second quarter and the remainder of 2012 kind of given the variability we've seen there recently.

Doug, we do expect claims paid to increase for the balance of the year. We did revise our total year expectation to $1.1 billion and the expectation for the next 3 quarters will be in the $300 million range. Douglas Harter - Crédit Suisse AG, Research Division: Great. And then also sort of on the rescissions and denials, it spiked up in March. Was that kind of more unique to something that happened in March or what can you tell us about that level, Bob?

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

All right and we'll now go to the line of Mark DeVries with Barclays.

Bob, could you remind us kind of what the reserve implications are from denials? Or did those cease to be past due and therefore you're not allowed to hold reserves against them? Is that right? Or is there actually some accounting for the fact that you assumed that 50% of those will ultimately become valid claims?

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

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

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

Okay. And can you just give us some color on what the most common reasons are for denying claims?

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

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

We didn't say it'll be in the 10-Q. However, the reason that is occurring is because the commutation payment is higher than the net fair value liability. As you know the fair value liability is done in a way that doesn't necessarily reflect settlement value. It incorporates Radian's credit spread, which has a big impact on reducing the fair value liability. So that's really why it's occurring but the actual amount will be in the 10-Q.

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

This is Dave Beidler. We're always in talks with counterparties about commutations and recent disclosures highlight a couple of them. There are benefits there and potential there although it's hard to put a number on it ahead of time.

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

And now we'll go to the line of Chris Gamaitoni with Compass Point. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Can you give us some clarity around what exactly is the $7.5 billion of European structured exposure? Is that mostly corporate CDOs?

Can you repeat that please? Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Sure. In your K, you -- outline is about $7.5 billion of European structured exposure in the FG unit. I was wondering is that mostly corporate CDOs?

Yes. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: And are any of those European banks?

Well, with respect to that exposure, it's going to be classified as European as the majority of the underlying referenced obligations are European so there would be some European banks within that. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay and most of those are higher in the capital stack, correct?

Yes, I mean the attachment points for the corporate CDOs, 91% of them will have an internal rating of AAA so there's substantial subordination. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And then with denials, could you just maybe give me some clarity on why your experience is different than the rest of the industry as far as servicers are not being able to find paperwork?

This is Teresa. We don't really know what the processes are at some of the other MI companies. So it's difficult for us to sort of give a comparative in that regard. But we do let servicers know what we're missing. We give them a lot of time to try to provide that documentation. But what we found is that sometimes until we actually give the denial the documents aren't forthcoming. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And then I guess a broader question. Do you have a view on kind of when cyclicality will be more dramatic? This quarter, I think it's difficult to tell it because of the seasonal impact but just maybe a view on credit and when cyclicality really starts to pull through?

This is Scott Theobald. Listen, that's a very tough question. We continue to see seasonal trends. We've been anticipating a cyclical recovery in the housing market for at least a few quarters now. We're still optimistic. But if the economy starts to grow and the housing market begins to clear that we'll start to see higher house prices and a favorable cyclical impact on our default inventory and future default activity. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And one final question, what percentage of your new defaults are repeat offenders?

About 75% of them.

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

A couple of questions. First of all, the first lien reserves were up to 27,833 versus 26,007. Why were those up so much?

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

Okay. And on Slide 12, and as this probably relates to rescissions and denials, but can you go into a little bit more detail on why components of provision for losses in regards to existing defaults we're down from 226.9 to 226.57 and you have a footnote there, but could you please elaborate a little bit?

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

Does rescissions and denials come into that equation?

They do get factored in. Now we estimate them so if we're right about the estimates, then there shouldn't be a net impact. But intra-quarter, there could be some and obviously we revise our estimates as we get new information so there'll always be some movement.

And now we'll go to the line of Matthew Dodson with Edmunds White Partners.

Actually this is John Evans but could you just talk a little bit about -- you did a great job buying back this debt early. Your capital has gone up at the holding company. How do you plan to take out the maturities in '13? Cash?

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

Okay, well, I guess the question I have for you is and I didn't articulate it very well, I apologize. But will you have -- after that money goes away, if you assume that you have a $104 million that goes away, you basically have $250-ish million roughly left. Is that enough do you believe at the holding company or do you need to potentially raise more debt?

Well, it's something that we'll continually assess. Obviously, we have the '15 as the next major need at the holding company but that's over 3 years from now. So we will continually assess and we're going to preserve liquidity as best we can and continue to write business at the MI sub which is really the driver of future value.

And now we'll go to the line of Scott Frost with Bank of America Merrill Lynch.

Just to make sure, the understanding is that you guys are going to -- is it fair to infer that you expect to stop writing business out of Radian Guaranty in the latter half of the year when your risk-to-capital goes over 25:1? And is it your -- that's what we should infer from this, right?

Not at all, and Teresa will answer that.

No, in fact the way it works is that we've been seeking waivers from some of the states. And many of the states don't even have a hard stop with respect to risk-to-capital requirements. There are only about 16 states that fall into that category. We've already received waivers from 7 of them, and we have applications pending in another 4. So the idea is that even if we were to go over 25:1, we would continue to write business in Radian Guaranty in the majority of states. And in the states where we couldn't write business in Radian Guaranty that's why we got approval from the GSEs to write in RMAI, Radian Mortgage Assurance and we would write business in just those states in RMAI.

So you fully expect RGI to keep writing business through all this business as usual, no expectations otherwise, right? That's fair to say.

That's correct.

We want to, as we've said, we have a plan to write business uninterrupted by using a combination of Radian Guaranty and RMAI and we expect to use Radian Guaranty in the majority of the states, and RMAI only on those states where we need to and we have approvals from our regulators as well as the GSEs to continue doing that.

Okay, and now we'll go to the line of Jordan Bloom [ph] with RBS.

It's actually Dan Vasquez. So we had a question regarding Slide 13. Am I reading it right that of all the accounts who have not paid in over a year, you only expect 46% of total net default rate on that entire bucket? And just as a follow-up to that, I noticed that it's down from 54% in the fourth quarter. Just wondering if you could comment on what's behind the assumption in the material decrease here?

Yes. The 42% is paid, right? So that would be net of the denials and rescissions. 57% would be the claims received. And the reason it's not comparable with the fourth quarter is we've broken out the pending claims on a separate line in the fourth quarter and prior to that pending claims were always a part of that.

Okay so 46% total is what you expect to pay on all accounts who have not paid in over a year. Is that the correct assumption at this point in time?

That's correct.

Got you. And one last question on the reinsurance agreement, just curious what's your motivation behind reducing the risk through -- it's presumably the more profitable in new insurance and I wonder if you could share anymore details including who the counterparty is?

We won't say who the counterparty is and that won't be disclosed. However, the transaction is done to manage our risk-to-capital. And that's very, very important to continue writing. As you see, we've written significant share of the new market and the new business and keeping our risk-to-capital at an appropriate level will enable us to continue to write which should generate significant value. I'll also point out that after 3 years, we do have the ability to commute the transaction depending on, obviously, that will be our option, and it will depend on our capital position. So if it's performing very, very well and our capital position is improved, we can commute and take back the business.

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

And now we'll go to the line of Bose George with KBW. Bose George - Keefe, Bruyette, & Woods, Inc., Research Division: I was wondering, do you think the increase in HARP refi activity could do anything to help the ultimate credit losses on those legacy books?

Yes, we certainly do. I mean, the view is that it should decrease the number of new defaults that we would see from the legacy books to the extent that borrowers can be put in a better position to pay. And I think it also says something about the borrowers wanting to stay in their homes by making the effort to pursue a refinance. Bose George - Keefe, Bruyette, & Woods, Inc., Research Division: Makes sense. And then the HARP volume you're seeing is it still same servicer or do you see loans moving from one servicer to another as well?

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

All right and now we'll go to the line of Michael Deuschwitz [ph] with Green Courte [ph].

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

This was the Assured?

Yes. On the Assured commutation.

It was from the insurance company.

How was that paid? Just from cash in the balance sheet or through loans from somewhere else? Sorry?

The computation is in the insurance company.

Was there a loan down to the insurance company for that transaction or just you have paid from the cash on the balance sheet down there?

No. The cash -- the company has significant investments in cash.

Understood, okay. And you said at the end of the statements I think it was kind of fast that the holding company is going to pay $50 million down to the insurance company at some point this year?

The holding company is required to contribute $50 million to Radian Mortgage Assurance, if and when Radian Guaranty breaches 25:1. So that's part of the GSE approvals for RMAI. So that would come from the holding company.

Could it actually grow or is it just $50 million? Is that the max guarantee?

That's the requirement.

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

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

And now we'll hear from the line of Matthew Howlett with Macquarie.

Just on Financial Guaranty. I know there's a lot of noise this quarter. How do we -- how would you commence of the modeling going forward? Should we sort of look at one of the sort of the earning breakeven type results you did in the past? And how do you suggest us to look at that going forward?

Yes, Matt. I think that's fair, Matt. There will be, things with the obviously, the Assured transaction created some items this quarter that impacted GAAP. If we do things like that in the future, there could be some unusual items. But I think a fair representation is a breakeven go forward.

Got you. And then would you guys give an update on, I think, there was a possibility of some CDO holders exercising their walkaway rights in the first quarter. I know there's some maturities in that coming up but was there any update on that?

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

Okay, got you. And then just moving to the U.S. MI. Bob, you said that the rate of new notices default decline was a little bit higher than your expectations. I think you guys were guiding to a sort of a 14%-15% year-over-year decline in net new notices. Anyway it's up a little bit in the first quarter. Do you expect it to go back toward your guidance in the back half of this year or do you think that the rate that it's heading at is going to be maintained?

Yes, Matt. I mean, I think it's encouraging that it was a little bit higher than expected. But I think our projections are for a 14% to 15% decline in both 2012 and '13. And we haven't updated those. We'll see what happened in the second quarter and if we have reason to update it we will.

And we'll be very happy if it's better.

And now we'll hear from the line of Jack Micenko with SFG.

RMAI, I'm just wondering what the capitalization there is or will it be capitalized for the $50 million. Just trying to get a sense of what kind of capacity is in that sub.

Today it's about $17 million. So with another $50 million, it would have $67 million. And that's pretty substantial capacity. Certainly, at the beginning, it's got no business in it today.

And then looking on Slide 19, the '06 default seemed to inflect a bit in the last several months and rise again slightly. Anything specific there or anything you could talk about in terms of that '06 trend on the vintage?

This is Scott Theobald. That's mostly the denominator effect as that book slowly fades away.

Now we'll hear from the line of Jeff Pundt with The Dowling and Partners [ph] .

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

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

Okay and what has your experience been in terms of the timeline for an overturn?

It varies, Jeff. We give them a substantial amount of time, but sometimes it would come earlier. But it could go longer. I would say, it varies.

I mean, is it fair to say that you'll probably get hit with the overturns this year in the back half? Or with the fourth and first quarter still on the '13 would be -- what's your expectation?

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

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

One of the big things is the completion of a lot of our modification programs because we know that so many of the borrowers are in modification programs in some stage. And they've been slow to be completed so that's a big thing that we are expecting and we're aiming for.

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

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

Great. And now we'll hear from the line of Sean Farrow [ph] with Deutsche Bank.

Just with the breakdown that you guys have given historically on the primary loans in default and the net projected default to claim rate, looks like it went up from 45% historically up to 48%. Just wanted to get a sense of if that was because you guys had broken out the pending claims and had a little bit more detail on the 12 payments or more which includes the pending claims and that being a higher number or why that 45% went to 48% this quarter.

It's not because we broke it out. It's because there are more loans in the bucket. Again, we didn't change our roll rates by bucket. The later stage buckets including pending claims which obviously at the highest reserves are bigger component of the reserve and, therefore, that number is going to go up naturally because of that.

Got you. And clearly that -- so when we're looking at it kind of historically versus what you guys have disclosed this quarter, the 12 payments or more should include the pending claims, I mean, when you look at the breakdown or when we look at the aggregate of those 2 combined.

That's right. In the past it has.

Do you know what the apples to apples would be for 12 payments or more and the pending claims on that net projected default to claim rate for this past quarter?

It would be very similar, very very similar because we haven't -- again we haven't changed by bucket the default to claim rates.

Okay, because you guys had about 54% last quarter so probably you're right in line with that?

Very, very similar, yes.

And now we'll go to the line of Steve Stelmach with FBR. Steve Stelmach - FBR Capital Markets & Co., Research Division: It's Steve Stelmach. Real quick, you guys said that, I think, 3 quarters of new defaults are sort of repeat offenders. Is that the right number that you gave roughly?

Yes. Steve Stelmach - FBR Capital Markets & Co., Research Division: And of those, any feel for how many were reperforming earlier because of HAMP that will now no longer have that HAMP benefit versus just borrowers were simply bad at managing the cash flow month-to-month and so eventually it eventually would go into delinquent, but never really end up in a claim. Any feel for what percentage that could be?

Not off the top of my head. Steve Stelmach - FBR Capital Markets & Co., Research Division: I guess, in other words do you feel that a higher percentage of repeat defaulters this time around would actually go to claim versus historical experience because a lot of repeat defaulters were reperforming because of HAMP that's no longer available to them.

No, I wouldn't go that far. I don't think there's any change in the opinion as to how these defaults will all sooner be resolved. Besides that HAMP that as the economy going on, there's a number of factors involved such as HAMP. Steve Stelmach - FBR Capital Markets & Co., Research Division: So but nonetheless, you should be encouraged by 3/4 sort of being repeat defaulters and perhaps avoiding claim to a large degree than some of the newly defaulted...

No. To the extent that they repeat default demonstrate that it could cure at least one step is actually a good sign. Steve Stelmach - FBR Capital Markets & Co., Research Division: Okay, all right. And then Bob, just on Page 13, not to continue to hash this out but I think most folks look at the 12 months plus gross claim rate of 57%, the question that's always asked is why is that not 100%. Can you -- obviously you're net down of 46% after rescissions and denials, but can you just sort of bridge that gap for us? Is that sort of Radian's historical experience in terms of those late stage buckets? Is it sort of bottoms up loan by loan analysis on what you think those borrowers will ultimately do or how they've also reperformed. How should we think about that? Why is that not 100%?

First of all the actual experience has been less than this. So that's the first point. And then there are really 4 reasons why we think that many of these 12 plus loans will not be submitting claims to us. The first one is that we do have an existing cure rates. It's been running about 4% per quarter. We've been disclosing that so that demonstrates that some of the loans are actually curing. Second, we talked about this big modification efforts by services, by the government, new programs and significant amounts of our loans are in MOD programs. The thing you have to realize is that a lot of these loans are 12 plus because the borrowers have chosen not to pay their claims or I'm sorry not to pay their mortgage because they want a deal. They want a mod or they want some sort of a program. So they're really not the same as historical 12 months delinquent loans. We know from doing the outreach efforts that we've done that a lot of borrowers have the ability to pay. They're waiting because there maybe -- they may get a deal that decreases their payment. And some of them, if time goes on enough, have improved their economic situation, gotten a job and we find the majority do not want to leave their home. They want to stay in their home. And then the fourth one, and we've spoken about this but it's hard to quantify, is that a lot of the older loans are aging not just 12 plus but 2, 3, 4 years. And we think there's a reason why they're not becoming claims, either documentation, title, servicing and a lot of the external models that we look at that estimate MI reserve actually start taking down the roll rates as the loans become significantly aged. So for all of those reasons, we think are 57% of roll rate is appropriate for the 12 plus delinquent months. Steve Stelmach - FBR Capital Markets & Co., Research Division: Great, that's helpful. And on the aging, when is the contractual obligation void for you guys to pay the claim like after how long? 3 years, 4 years?

There's nothing that says if a loan is of certain amount of time age that we won't pay the claim. It's just that there's a good sign if something is 3, 4, 5 years that something else is going on that might affect it. Steve Stelmach - FBR Capital Markets & Co., Research Division: Okay, so it could be that that loan still goes to foreclosure yet the claim never comes through to Radian because of those reasons? This age portfolio there's not enough documentation to actually file the claim?

Because they've gone through foreclosure or they get the foreclosure for a different reason not complete it.

You would logically expect once a loan gets to that stage that servicers would want to get it foreclosed and get the money back to the investors. And if that hasn't happened in 2 years, there has to be some reason as to why it hasn't happened. Steve Stelmach - FBR Capital Markets & Co., Research Division: Right, yes. And so, in other words what's bridging the gap between the private label markets is that 100% of that 12 months plus bucket goes in the foreclosure and what is actually a claim to an MI company are 2 very different things.

That's right.

And I will turn the conference back over to Mr. Ibraham.

Well, I'd like to thank you all for participating on our call and see you again next quarter.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.