MGIC Investment Corporation (MTG) Q1 2013 Earnings Report, Transcript and Summary

Michael J. Zimmerman - Senior Vice President of Investor Relations Curt S. Culver - Executive Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of MGIC and Chief Executive Officer of MGIC J. Michael Lauer - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Mortgage Guaranty Insurance Corporation and Executive Vice President of Mortgage Guaranty Insurance Corporation Lawrence J. Pierzchalski - Executive Vice President of Risk Management - Mortgage Garuanty Insurance Corporation Timothy J. Mattke - Chief Accounting Officer, Senior Vice President and Controller

Mark C. DeVries - Barclays Capital, Research Division Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division Sean Dargan - Macquarie Research Douglas Harter - Crédit Suisse AG, Research Division Geoffrey M. Dunn - Dowling & Partners Securities, LLC Craig William Perry - Sabretooth Capital Management, LLC Conor Ryan Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division

Good day, ladies and gentlemen, and welcome to the MGIC Investment First Quarter Earning Call. [Operator Instructions] I would now like turn the conference over to your host, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Thanks, Terry. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corp. Joining me on the call today to discuss the results for the first quarter of 2013 are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; Executive Vice President of Risk Management, Larry Pierzchalski; and Senior Vice President and Controller, Tim Mattke. I would like to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website, which is located at mtg.mgic.com, under Investor Information, includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. As we have indicated in this morning's press release, we have posted on our website the supplemental information containing characteristics of our primary risk in force, new insurance written and a summary of other statistics that we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the press release of this morning and the Form 8-K that was filed earlier this morning as well. If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the press release. Now with that, let me turn the call over to Curt.

Thanks, Mike, good morning. The net loss for the first quarter was $72.9 million, or $0.31 a share, compared to $0.10 a share last -- lost last year. The increase in the loss from last year resulted primarily from the material higher realized gains in the first quarter of 2012 versus the realized gains this quarter. Adjusting for this fact, the first quarter of 2013 was an improvement over the first quarter of last year. We are continuing to see steady improvement, what some may call credit burnout on the legacy books of 2005 through 2008. The speed at which new notices decline from this point and how fast the cure rate on existing notices improves will be primarily influenced by future national and regional economic activity, and is the most important variable regarding our return to profitability. Unfortunately, it is also the most difficult to predict. Importantly, these older books should be under 50% of our total risk in force by the end of this year. We are pleased with the performance of the business written beginning in 2009, which now accounts for 36% of our flow risk in force and comprises 32% of our total risk in force. Our new business is of high quality and is expected to have returns of approximately 20% over its life. These books have generated just 2% of new delinquencies received in the quarter and reinforce our belief that we are in a golden era of credit quality, and an improving housing market coupled with the outstanding credit quality of our new business and our industry's growing share of business from the FHA, offers us an opportunity that we are dedicated to capitalize on. As a result of the successful capital raise in March and the subsequent contribution of capital to MGIC, the risk to capital ratio of MGIC at the end of the quarter was 20.4. This means that MGIC meets the current capital requirements of all jurisdictions and has no need to operate with waivers or with MIC. The capital raise has also taken off the table any customer concern of our risk to capital, and that will be a positive for us as we seek to regain market share. To help MGIC maintain regulatory capital ratios in compliance with state standards, I'm pleased to announce that we entered into an external reinsurance transaction with a panel of financially strong reinsurers led by PartnerRe. The transaction is a 30% quota share that is partially offset by both a ceding commission and a profit commission in favor of MGIC. The treaty will cover business written between April 1, 2013, and the end of 2015, and has a scheduled termination date of yearend 2018. We view that adding reinsurance with strong partners in a cost-effective manner provides us increased flexibility to deal with capital standards. In the first quarter, new insurance written was $6.5 billion, up 55% from the same period last year, an additional $3 billion of HARP refinance transactions were completed during the quarter, bringing the total to $21 billion since the inception of the program. All in, approximately 12% of our primary risk in force has benefited from HARP or similar refinance programs, and more than 98% of them are current. The 2007 book of business has been the largest beneficiary, with 21% of that book having benefited from the lower payments available through HARP. Additionally, approximately 12% of the risk in force has been modified through HAMP or other loan modification programs. Our industry continues to regain market share from the FHA. We estimate the private MI industry's market share at 10% in the first quarter. Within our industry, MGIC's market share is estimated at 17% for the first quarter. It is important to point out that we also estimate that 75% of the private mortgage insurance market is comprised of the much more profitable monthly premium plans. And within that segment, we estimate our market share to be 22%. And as I mentioned earlier, we believe that our strengthened financial condition puts us in a position to regain market share within our industry. Losses incurred in the fourth quarter were $266 million, down 21% from last year, and down 17% from last quarter after adjusting for rescission settlements and Freddie Mac-related charges that were recorded in the fourth quarter. The lower level of incurred losses resulted primarily from the number of new delinquent notices received, which were lower than the fourth quarter. The delinquent inventory at the end of the quarter was 126,610, down 21% year-over-year and 9.5% in the quarter. We expect that there will be a continued decline in the delinquent inventory throughout the year; however, not necessarily at the rate we saw this quarter as there is a strong seasonal influence on notice activity in the first quarter. Paid claims in the first quarter were $469 million, down 30% from last year and down 11% from last quarter, adjusting for the $100 million payment to Freddie Mac. The claims received on unpaid inventory continue to decline, and we expect that the current claim filing patterns we're experiencing will continue and will result in both claims received and claim payments trending modestly lower throughout the balance of 2013. Recently, we executed settlement agreements with Countrywide regarding the rescission disputes between our firms on GSE and non-GSE loans. The agreements cover all Countrywide-related loans, whether they're current or delinquent. The agreements include past rescissions and denials, rescissions suspended since November 1, 2011, and the protocol for payment of future claims. There was no additional charge taken in the first quarter as a result of executing these agreements, as the financial impact was in line with our original expectations. As you will recall, in the fourth quarter of last year, we recorded a charge of $100 million associated with this settlement and a settlement with another lender we think is probable. We have submitted the GSE-related agreement to the GSEs for their approval. Once that agreement is approved, the related litigation will be dismissed, bringing closure to a very significant contingency. The same result will occur once the non-GSE agreements are approved by the appropriate parties and implemented. The process of receiving approvals and implementing agreements will take some time, and therefore, the operational impact to this agreement should not show up in our monthly or quarterly statistics until sometime in the fourth quarter. The good news is that we have reached an agreement with Countrywide and believe that it's probable that the GSEs will approve it as well. Cash and investments totaled $6.2 billion at the end of the quarter, including cash and investments at the holding company of $670 million. The increase from last quarter is a direct result of the March capital raise. Our next scheduled debt maturity is approximately $100 million due in November 2015, and we have sufficient cash to cover the holding company's liquidity needs for the next 4 years. Let me now take a couple of minutes to address emerging housing policy and regulatory actions that could impact our business. First, earlier this year, the QM rule was issued. As a reminder, it appears to line up fairly well with the type of lending that is taking place today in the marketplace and the type of business we want to insure. And we believe that most lenders will be reluctant to make loans that do not meet these parameters. We estimate that 99% of our new risk written in the last several quarters would have met the QM definition. We are still waiting -- still awaiting the issuance of the QRM, or the Risk Retention rule. And while we won't know until it is published exactly what it will contain, it appears less likely it will restrict our ability to insure quality low down payment loans. Next, the FHFA and the GSEs are separately developing mortgage insurer eligibility standards, including new capital requirements that would replace the use of external credit ratings. These revised eligibility requirements and capital standards are expected to be released in 2013. However, the timing of their implementation is unknown. Also the Wisconsin Insurance Regulator is leading an NAIC effort that is developing new capital standards. And while it is separate from the FHFA effort, we believe they are consulting with one another. There is no timeframe established for the NAIC effort at this time. Finally, there's been a lot of discussion recently on capital issues that the FHA is having, given their capital ratio is a negative 1.4% versus the mandated positive 2%. To help address this, the FHA recently implemented its third premium increase within the last year. The ability to cancel FHA coverage was also eliminated beginning in June of 2013, which means the cost to the consumer for an FHA loan will be significantly higher than that for a loan with private mortgage insurance. And hence, we expect our industry will continue to regain share from FHA. So in summary, we feel our company is in an excellent position to participate in the improving housing market, as our financial position has significantly improved as a result of the capital raise. And unlike new entrants to our business, we are an established company with a national sales and underwriting organization in place that averages 18 years with our company and a management team that has been part of the business for an even longer time. Returns on the new business are very strong and should continue to be so, given the outstanding credit quality of the business today, and more importantly, expected in the future due to the implications of Dodd-Frank and the qualified mortgage definition. And as I discussed, we have significant growth opportunities, both in expanding the amount of business insured by our industry or expanding the pie, as well as growing our market share within that expanding market. So all in all, I love the operating trends that played out in the first quarter and feel our company is in an excellent position to take advantage of the housing recovery. With that, operator, let's take questions.

[Operator Instructions] And our first question comes from Mark DeVries.

Sorry if you covered this, but could you talk about what caused the average premium to decline on a quarter-over-quarter basis?

This is Mike Lauer. It's still -- the book is still running off. The new business is less than the runoff of the older books, number one. So you've got declining book of business. Secondly, we still have a negative impact on rescissions, which is contrary [ph] to that amount. And then the second -- and last part would be just mix of business. And then, Mark, too, don't forget in the fourth quarter, it was probably a little bit higher, the trend, as we made adjustments, as we put that charge in relative to the rescission settlements that would affect things going forward, too.

Okay. That's helpful. And on the new business you're writing, are you seeing any mix shift at all towards slightly higher LTV that might lift the average premiums on new or is that going to continue to be kind of a...

I think it's pretty constant, Mark.

Okay. Got it. And then, Curt, would you mind elaborating on kind of your thoughts of where you think, if you've got enough clarity at where you think that some of these new capital requirements may end up being set?

Mark, we've heard all kinds of things relative to both the FHFA effort and the NAIC effort. What -- our own input, I mean, as an industry, we also gave input, we'd love to see the capital standards risk adjusted and premium adjusted, and taking into effect the high quality of business that we have. I mean, it makes no sense that the same capital is required, if you will, for a 95% loan versus an 80% loan. There's clearly different claim statistics involved within that and capital should reflect that. And so we hope that those standards take the risk and the premium rates into affect when they are introduced. I think the only thing we probably have heard for sure is that they plan -- the FHFA plans on introducing to the market, not for implementation, but for comment, late this summer, what the standards might be. And as far as an implementation, we have no idea.

Okay. Got it. And then finally, can you talk about what you observed in your raw [ph] rates of the delinquent loans in the quarter? Was it all surprising that it looked like almost all of the decline in your claims paid came from the 12-month-plus bucket with the claims and kind of your 4-to-11 month bucket being more or less unchanged on a quarter-over-quarter basis?

This is Mike Lauer, again. One thing I point out is with respect to the delinquency of the older buckets of more than 12 months is a higher percentage than it's been in the last couple months. Now it's a lower number, almost 76,000, down from 82,000. But the percentage is still increasing. So that gives light a little bit for the average increase because if you think about it, the shorter-term notices went out faster and what's left is a higher percentage of the older books with higher claim rates and higher severity assumptions. So that's probably the major reason for the overall average in the increase. But relative to the trends, I'd turn that back to Larry to talk a little bit about what's happened with respect to claim rates and cure rates.

One trend we are definitely seeing has to do with the new -- the claims received coming in the door from the judicial states. That average time is probably from delinquency to time -- claim receipt, that average time period is up 5, 6 months from where it was a year ago. So the -- they're taking a long time for the judicial states to go through that process and result in a claim received from us. Whereas on the nonjudicial states, that timeline has been pretty flat.

And our next question comes from Bose George. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Just to follow-up on that last question. Given that increase, has the dollar amount that you reserved per loan for new notices changed much over the last couple of quarters, and do you expect that to change much going forward?

Well, the dollar amount changes with respect to the mix. And for the most part, the claim rate went down overall. We had some adjustments for the, as I mentioned, the newer notices that tiered out. But slight increase on severity. So the average is up because of the mix. But underneath that, what's happening is claim rates have flattened, which is positive, and we've made some adjustments for severity that deals primarily with the aging. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And so just to be clear, the outlook for the dollar amount per loan is really going to be driven by mix than by other factors?

That's correct. I think what we're seeing now, we'll probably see continuing. As Larry talked about, some of these older delinquencies will stay on longer. So the average may go up because of what's left, not necessarily because of any deterioration. As a matter of fact, the severity, as you noted, over the past, really, the past 4, 5, 6 quarters hasn't changed much. So -- and, in fact, the claim rates have stabilized. So the mix will change that average. And I think it will be driven primarily because of the aging and the mix of those older books and older delinquencies. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: And then you guys noted that, I mean, most of the incurrence was driven by the new notices. Do you have the dollar amount of the incurrence that was driven just by changes in the delinquent inventory?

We don't have that tabulated here, but we do have a new disclosure in the supplemental information that we've broken out for you that gives you the new delinquencies by book. I think it's on Page 13 of the delinquency data by books of business. So we've broken out the delinquencies received in the quarter by book for you, which is a new disclosure.

And Bose, in the Q, where we'll publish the developments due to history, but as Mike said, it's almost all driven by new notices coming in, in the quarter there. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Great. And then, actually switching to a question on the GSE, their new streamline modification program that will require reduced financial documentation, do you think that gives sort of increase to cure activity once that's up and running?

It should help. How much materializes, we'll have to wait and see.

Yes, it will help.

And our next question comes from Jack Micenko.

Looking at the persistency rate, little lower than we had modeled, and we're hearing some of the '09 and '10 books are refinancing maybe a bit earlier. Is it possible to sort of think about a floor to persistency as the '12 and '13 volumes are sort of added in? Or is there a way to talk about average interest rate on the -- by book on the insurance in force?

Jack, this is Mike. We can certainly provide that, but I think if you just take the average for the year, basically [indiscernible] formally, but in the supplement, what you're able to do is piece together -- we give you the percentage remaining of each book here. While it's not a cumulative total, you'll be able to look at the trends relative to those prepayments feeds [ph] and the cancellation rates on the book on a quarter-to-quarter basis. And I think you're right, we're experiencing what the general market is, those are a little bit higher coupons and certainly it's a 3.5 market that we're in. And those that are eligible for current guidelines are taking advantage of the refinance market that's out there.

Okay. And then curtailments ticked up year-over-year, it wasn't a big number increase but on a percentage basis, is it fair to think about curtailments as maybe the next evolution of, I guess, the rescission activity around -- you get through, you get to claim and then you look at the servicing process, or is that more of a concurrent process, in the way to think about sort of the next stage of things?

Well, I'm not sure of putting it -- this is Mike again, [indiscernible] as far as stage, but there's been a consistent approach taken when we're looking at curtailment activity where primarily, it's interest payments and additional expenses that occur outside of normalized guidelines for a given state. So for example, Florida is running at close to 36 months between the original delinquency being reported to us and the claim being filed. The average for that state is significantly less than that. We'll certainly take into account loss mitigation efforts and things that are trying to mitigate loss. So I think the uptick maybe you're seeing there in percentage is really a result of the aging claims that are coming in, not so much an evolution or a next step or next phase as you describe it, I think it's just more a function of the older claims coming in.

Okay. Great. And then on the FHFA requirements, kind of hearing 18 to 20, I know it's anybody's guess, you said earlier, but do you have a general sense on where you think that sort of shakes out? And with the successful capital raise you just had, is there anything that would maybe preclude you from thinking about another raise, potentially more growth capital or something reactionary to some sort of guidelines that could come out later this year?

Well, I mean, when they come out and when they are implemented are 2 different dates. So the implementation is the significant date. There will be comments on them, so we'll see how that plays out. There's nothing to preclude raising more capital if that's necessary. The reinsurance transaction, I think, is very helpful for us as we move forward also in helping us deal with them and also, I mean, it establishes relationships that we could use on back books of business, I think, also to help get those -- whatever those may -- whatever the standards may come out at relative to capital. We have $670 million also at the holding company, so we've got some money there we could downstream. So -- what we're trying to do is create an environment of flexibility to deal with whatever may come out and put us in a good position to compete going forward relative to our industry, because the opportunity is so significant when you look at the quality of the business that's being written. And as I said, I think that will be somewhat mandated because of Dodd-Frank and QM and the share that we're recapturing as an industry from FHA, which is very, very positive. And then you look at the macro housing factors and they certainly are, coupled with the other things I mentioned about our operating trends, are very positive. So we're about maximum flexibility here to deal with whatever may come down.

And our next question comes from Sean Dargan.

I think I heard that the average direct reserve per default may increase over the course of the year as you see the time to claim judicial states increase. Do you have any sense of magnitude where we could see that go?

Well, no. But my only comment was that if in theory the newer notices continue to come in and out faster and obviously, have less claim rate, and what's left would be older, that may be a higher average. In other words, the inventories coming down faster overall, that kind of trend would drive that if you follow my math there. So what we're saying is the newer notices clearly are coming in and going out faster, so lower claim rates for those, what's left is much older, as Larry talked about. And higher severity, higher claims rate on an average basis. So that would be the combination of seeing a trend lines where the notices are dropping at a steady rate but not the older notices and the ones that you would have more on, so to speak. So the average would be higher.

Okay. Got you. And given increase in cash and invested assets in the quarter, I would've thought that investment income might have been a tad higher, I know you've shortened your duration of the portfolio.

I'd like to think that, too, but if you're in the same market we're in, it's pretty tough looking at high-quality investments and trying to get any kind of yield, so it's all driven by what's available for us and trying to put it to work, but [indiscernible].

And can you just remind us what you're buying?

Well, right now, we're buying A or [ph] quality securities. Right now, the average yield on the portfolio is about 1.3. And we're buying not munis now as much as we had, but higher quality securities, governments. The shorter-term portfolio at the holding company is more or less laddered out to what our maturities are. And the money that we drop down to MGIC, $800 million, is on a longer-term basis, it's short-term U.S. Treasuries and agencies and corporates. But putting that money to work is obviously taking some time but -- I mean, obviously, the market is not helping us. So the yield is going to be low for some time.

And, Sean, [indiscernible], which I know you know, but just remind to everyone, it's really close, 2 weeks in the quarter, for the [indiscernible] months, so you didn't have a whole lot of time to earn on it.

And our next question comes from Douglas Harter. Douglas Harter - Crédit Suisse AG, Research Division: I was hoping you could walk through your thought process as to why to do the reinsurance contracts now? And then also, sort of how you're thinking -- sort of how you think about doing those versus using some of that cash that you still have at the holding company to keep all the business yourself?

On the reinsurance, one, it's a very attractive transaction for us when you look at the ceding commission and profit sharing that we have on it, the cost of capital is very favorable relative to what we'd like to do. It gives us a flexibility. It's not being done for risk reasons. It's being done for capital management in the future. And also, I think the establishment of relationships, as I mentioned earlier, that may be beneficial in reinsuring other parts of our business if we need to relative to capital standards. We do have parent money at the holding company that we mentioned that we can downstream also. So if you look at the combination of a very cost-effective reinsurance transaction that creates flexibility for us, along with the capital that we have, it just presents a good situation whatever may come out of the FHFA and NAIC relative to new capital standards. So it was all about capital flexibility.

This is Mike Lauer. Also remember that we're not only looking at an unknown with respect to what new requirements will be, but maybe a given that we have increasing volume potential. So the combination of the FHA opportunity that Curt covered earlier, possible share increases, so the opportunity to write more than...

And industry share increases.

And industry share. So there's some other things to factor in.

And our next question comes from Geoffrey Dunn. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Curt, can you go into a little bit more detail on the reinsurance deal? I think you said it's effective April 1 and runs through '15?

Right. I'll let Larry.

The business covered starts with business written April 1 of this year with -- through the end of '15. And the -- on that chunk of business, from April of '13 through December of '15, the reinsurance agreement is in place, so the sharing of premium and losses occurs through the end of '18. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: So does that mean there's a cap on the duration of shared claims?

Well, they share in the premium earned and the losses incurred from inception through '18 on the business of April '13 business through '15 business. So at the end of '18, they will not participate in any more premium earned beyond that date, nor will they participate in any losses incurred beyond that date. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And can you disclose the ceding commission and is there any kind of cancel-ability included in the contract?

There are some options on either side subject to certain events.

And the ceding commission is 20% of the risk premium. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. Shifting gears, for the consolidated operation, if that goes above 25:1, is MIC established structurally as a legitimate reinsurance option for the greater-than-90% LTV business? Or would you have to look at putting capital into some of the reinsurance entities?

Geoff, this is Mike. You're asking about MIC, could we use MIC again if the risk to capital got... Geoffrey M. Dunn - Dowling & Partners Securities, LLC: I'm specifically asking about -- for the internal reinsurance for the above 90% policies if the consolidated goes above 25:1, meaning that the reinsurance entities are above 25:1?

Yes, the one thing -- it's Tim speaking. Consolidated seating to MIC wouldn't help us on a consolidated basis because that would come into the calculation. If you're talking about standalone basis, seating to MIC would've helped that. That's obviously something we look at, but it's a matter of whether you're looking at the consolidated or the standalone risk to capital. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: And the last question. Can you spell out the details in terms of what -- when these Countrywide, BofA settlements are effective in 4Q, what are the financial impacts, income statement balance sheet and delinquency counts? What should we be watching for in terms of that impact when it does occur?

Geoff, it's Mike, first, from the financial impact, we've already seen that and that was in the fourth quarter. So operationally, what will happen is it's going to take, let's say, sometime in the fourth quarter. We're going to continue to build those held rescissions. And then sometime in the fourth quarter, we will begin to reverse certain rescissions and pay. And then on these held rescissions, we will pay those at a reduced rate. So you'll see operationally, what you'll see is the delinquent inventory will decline, the number of pays will increase. And you should see -- this is going to be broken out so that you'll be able to follow it, as far as the number impact, but it'll all be -- income statement balance sheet has already been impacted, so it's really just the operational statistic, the inventory, the delinquency rate, the unit counts relative to pays, number of rescissions, et cetera. And we'll break that out accordingly so you could follow it from the -- if you will, this settlement versus the normal activity of that given month. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. But effectively we'll see a deceleration of R&P [ph] temporarily followed by a pickup in claim activity?

Well, we've already suspended. So relative to Countrywide, no, you won't see any change of behavior relative to the last several quarters because we've been suspending those. And you can see in the statistics, we're processing 94%, 95% of the claims get resolved within 6 months and less than a 5% rescission rate. So yes, overall, you'll continue to see that decline, but we're already at fairly low levels of rescission activity.

And our next question comes from Craig Perry.

Just a couple of quick questions. The first is just, what is your dialogue been with the rating agencies post the capital raise? Obviously, they have you, I think, on triple hooks. Just curious what the process is there going forward? And then my second question relates to, can you just help us understand the sensitivity associated with -- obviously, the Case-Shiller data came out this morning, in a rising home price environment, how, if at all, we may be able to think about improvements impacting your ability to lower claims paid? I wouldn't think it would be high, but potentially, their sensitivity at different parts of the capital stacks? So those are kind of my 2 questions.

Tim, I'll handle the first question on the rating agency. Obviously, we've been engaged in dialogue with Moody's and S&P who rate us. I think it's safe to say that they viewed it as favorable. As with everybody else, they're looking at what continues to happen with the current operating environment and sort of loss pattern and we continue to talk to them about that and they're obviously interested in what will happen with any capital standards, as well as what our volume is. So I think there's sort of been a little bit of a holding pattern to see how everything develops, but generally, I would say it was viewed favorably from the rating agency perspective.

And this is Mike. Let me start. One of the reasons we give you in the new disclosure in the supplement, you'll start to see that the units, new delinquencies are coming from these legacy books, so primarily the '07 books, let's say, as an example. And those have had pretty significant price depreciation peak to trough. So while we're certainly seeing a recovery, you're moving from maybe a market down 50%, peak to trough, and it's up from its lows, but it's still significantly below underwater relative to our coverage range. So while it'll help the overall economy in that marketplace relative to economic health, the specific borrower who gets into trouble whose [indiscernible] are underwater in this employment market is still going to see a slower return to cure rates, off the newer ones though.

Right. I would presume on business written '09 and onwards, that new delinquencies, your ability to kind of cure those would be better in a rising house price environment because anybody who has...

No question. And it also helps on the older books, I mean, at the margin, there's people slugging it out relative to dealing with the employment situation in this country and holding on, and as they see the values increasing, it just helps them hold on longer. So at the margin, it's certainly going to help us on claims relative to the old books, too.

Right. I'm sorry, and actually, I apologize, there was one question I forgot to ask, which is just related to the MGIC 9s, is there any reason, when they were issued, that those were not registered? Those are kind of a weird security, whatever, I think that there's a pretty deep -- there would be a pretty deep retail market for those bonds? But unfortunately, because they're 144A-issued, it's not really something that private wealth guys can sell to their clients? So I'm just curious, is there any plan to, now that you're now current on those, to register though securities?

No plans on that. And the unique part about that was that the way they were structured, we got rating agency credit for those, which didn't last long. But that was one of the reasons it was structured the way it was, at the time, we actually got credit for it in the rating agencies' credit analysis. But no, we don't have any intention of doing that.

. And the reason for that, being just the cost associated with registration or...

I think it's -- first of all, it's a very complicated security. And if you noticed, it has the deferrability feature and we've used that a couple of times and we like that aspect of it. And to go back and open that up and renegotiate those terms, I think it would have to be, I think, 100%. And that might not be easy.

I'm sorry, why would you have to renegotiate those terms just to register securities? I mean, there may be something I'm not familiar with. I'm aware of the deferrability feature, but just registering them so that a retail person could buy a cumulative preferred, that wouldn't seemingly require a renegotiation of the debt, it's literally just...

Craig, this is Mike. More to the point is that, I mean, they're freely tradable, we understand the private placement versus registration may change some of that liquidity and some of the friction in there, but I guess our view is that they're freely tradable in the marketplace.

Okay. Well, I would just encourage you guys to revisit whether or not you'd like to open it up to a wider range of investors because I think that it certainly has the potential to be something similar to sort of the AIG hybrid, which was a big coupon bond that went from 100 to 140. And obviously, you want to have the lowest cost of capital you can. So anyway just something to think about.

We will.

And then our next comment comes from Conor Ryan.

I just had a couple of questions. We saw a 10% increase year-over-year in the reserve for delinquent. And then, we saw another 5%, that was as of yearend 2012, and we saw another 5% increase in the first quarter. Noted that you intend to potentially increase that reserve throughout the rest of the year. I mean, what scale of an increase could we see in the reserve for delinquent through '13?

Mike, again. First of all, I didn't say we intend to increase it, I just said it could happen based on what we saw in the quarter. And by that, again, I mean, as the delinquencies continue to decline and the mix, if it were to continue to stay as it is or stay in the same trends and that is all that would be left would be the higher, then the average case per case maybe higher, not the reserve itself higher. I don't know -- you are talking about the average case, are you not? The reserve per case?

Yes, that's right. So like on an average basis throughout '13, it sounds like there may be scope for further increases?

It could happen if the trends would continue. That -- what was happening is that the newer delinquencies were coming in and going out faster and obviously using less claim rate and severity. But what was left would be the older delinquencies and they would have higher averages. And so the mix is changing. As I pointed out, at the end of this quarter, that 12 months or more were almost 76,000 or 60% of the delinquencies. It hadn't been that high over time. So it's been 58%, 59%, 56%, it's 60% now. So the mix is changing and that's what drove that this quarter. If those trends would continue, you might see that continuing.

Okay. And then, can you just give me a quick breakdown on the incurred losses number, what percentage was associated with existing and what percentage was associated with new? Because given the jump that we saw in reserve per existing, it looks like the incurred number is relatively modest?

This is Mike Zimmerman. Almost all of it is associated with new delinquencies, percentage of less than 10%. I mean, I think you'll see probably positive development on the [indiscernible], but it's minor. So it's almost all -- incurrence is almost all related to new notices.

So even though you increased the average reserve...

Yes. And that's the algebra Mike was kind of getting to is on the mix, when you apply with the newer notices going on at slightly higher cure rates or [indiscernible] or claim frequency, the older notices still have the higher claim rates associated with them and since they're older notices, they have a higher [indiscernible] at higher probability. So that mix shifts within the delinquent inventory, the headline answer, if you will, will change, but not necessarily due to worsening conditions of those portfolios.

Yes, no, absolutely. So I think what would be helpful, is that's sort of what I thought you were doing, and what was the cure associate -- or assumption associated with new defaults this quarter? Have you talked about that?

In the past, we've said it's about 1 in 4, it's improved from there. So it's a little bit better, 1 in 4.

That claim rate, so cure rate will be in the inverse of that.

So 1 in 4 defaults of the new defaults?

Well, that's where it's been at and it's improved from there.

It's improved from that.

Okay and then just on...

Probably 1 in 5.

One in 5. Okay. And then just on that front, what percentage of new defaults are re-defaults?

Actually, in the table in the supplement, we gave that to you, I think, net overall, it's about 75%, but we give it to you by book here in the back, in Pages 12 and 13 of the supplement. So like from the '07 book, below 75% of those were repeat delinquencies.

Okay. And then just one thing on sort of future profitability. Assuming NIW stays relatively constant at current run rate, what's sort of a reasonable persistency assumption going forward given that we have seen a decline in persistency?

80%, I would think, would be a good.

In the short term.

Did you hear that?

Yes, I heard that. I appreciate it.

In average there, you're going to see the weighting of the '09 and '10 books as these newer books come in but the 80% is a good assumption.

Yes, overall, it's good.

Yes. Okay. Because that -- it just -- as you go from sort of low 80s to high 70s, the math on insurance in force starts to change so. I appreciate it.

Right.

And then our next question comes from Chris Gamaitoni. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Could you give us a little bit more detail on the impact of the premium income from the deal with Countrywide? I just wanted to get some more details around the decline quarter-over-quarter, and you said there was some noise last quarter because of that adjustment.

It's Tim speaking. The noise related to that is the expectation changed related to those that we'd no longer be rescinding. In that case, if we're refunding all of the premium associated with those loans if we're rescinding. In the case where we are set paying them, we're only refunding a portion of the premium. So that's really the change that would have occurred in the fourth quarter relating to the premium. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: And what was the relative impact? I'm just trying to figure out the difference between kind of the new yields going on lower versus that change and kind of what a core future rate is going to be?

From a core -- it's Mike, you want to look around 60 basis points as kind of where the new business is being booked. Certainly, it feels 7, but these older books, because of a higher mix of LTV and the different pricing is higher but the new business being put on has high credit scores, we've got the credit to [ph] pricing but I think it's hard to match -- how do you weigh in the older books running down and where the new books take over, but new books for the last 2 years get right around 60, 59, 60 basis points. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Sure. And I guess that goes to another question on profitability. How do I think about kind of the reserve book -- reserve build that you'll have on these higher credit quality relative to lower? It's kind of we think about the provision ratio historically over time and try to blend that in, but it seems like it would be maybe significantly lower than, say, the 2002 to 2003 time period?

This is Mike Lauer, again. Sure, if you look -- even if you look at the exhibits on primary new notices, you'll see that there's a significantly difference between the pre-'07 books and the newer books. There's no delinquencies at all. So obviously, the incurrence on the newer books are insignificant. It's still the run off, if you will, of the '07 and bad books. And so as we continue to reduce those notices and have very little to incur on the newer books, that's the positive trend. Even this quarter, the incurs were 2 66, we have haven't been at that level since '07. So that's a significant development in itself. So it's all a reflection of the overall trends, everything is trending positive. The question is, to your point, when does it turn? And it's going to be a function of increasing, first of all, the point you made before, about NIW growing the book positive because it's still in a runoff. And then secondly, the runoff of these older delinquencies and the less need for incurrence on those and the minor amount that we're incurring on the newer books because of the quality. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: Okay. And then, I guess, my last question is, can you just let -- clarify how the accounting will work with the quota share? Do you book the gross total insurance in force or just your portion?

For the total insurance in force, we'll get to feed off the 30% related to that. Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: So it won't be included in the income or the denominator?

It won't. We will get -- as far as the actual, are you talking about the capital impact as well? Christopher Gamaitoni - Compass Point Research & Trading, LLC, Research Division: I'm just really just trying to figure out revenue whether like there'll be a decline in the revenue yield because the insurance has grossed up relative to -- or if you just take 80% of what you wrote and you get 80% of the premium that you wrote and it's net neutral to that ratio?

Well, we'll feed off the premium of 30% on these books of business. But we will get back a profit commission, which I think likely will actually offset to see the premium amounts that are going out and then the ceding commission will come through along with our expenses. So a reduction to our expenses because of the ceding commission.

And that was our last question in queue.

Okay. I thank you all for your interest in our company and have a wonderful day. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.