MGIC Investment Corporation (MTG) Q2 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 Timothy J. Mattke - Chief Accounting Officer, Senior Vice President and Controller Patrick Sinks - President, Chief Operating Officer, President of Mortgage Guaranty Insurance Corporation and Chief Operating Officer of Mortgage Guaranty Insurance Corporation

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division Mark C. DeVries - Barclays Capital, Research Division Douglas Harter - Crédit Suisse AG, Research Division Sean Dargan - Macquarie Research Geoffrey M. Dunn - Dowling & Partners Securities, LLC Ryan Zacharia - JAM Equity Partners, LLC Jason Stewart

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the MGIC Investment Corporation Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Mike Zimmerman. Sir, you may begin.

Thank you. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2013 are Chairman and CEO, Curt Culver; President and COO, Pat Sinks; Executive Vice President and CFO, Mike Lauer; Executive Vice President of Risk Management, Larry Pierzchalski; and Senior Vice President and Controller, Tim Mattke. I want 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've indicated in this morning's press release, we have posted on our website supplemental information containing characteristics of our primary risk in force of new insurance written, which 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 Form 8-K that was filed earlier this morning. If the company makes any forward-looking statements, we are not undertaking 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 anytime other than the time of this call or the issuance of the Form 8-K. And with that, let me turn the call over to Curt

Thanks, Mike. Good morning. I'm pleased to report that in the second quarter we had a profit of $12 million or $0.04 a share. This is the first quarterly profit we have recorded since the second quarter of 2010 and the lowest incurred loss ratio since the second quarter of 2007. The primary drivers of this result were a lower estimated claim rate on early-stage delinquencies, combined with a decreasing level of new notices. During the quarter, we continued to observe the improved credit performance in the early stage delinquencies, which caused us to lower our estimated claim rate for newly reported notices, such that, now, we believe that approximately 20% or 1 in 5 new notices received will result in a claim. Previously, we had been assuming a slightly higher claim rate, closer to 1 in 4. This change not only impacted new notices received this quarter, but also those received in the first quarter. While we are cautiously optimistic that these positive credit trends will continue, I expect our financial results for the balance of the year to be influenced by normal seasonal trends. Historically, the second half of the year has weaker credit performance than the first half, but higher new notice activity and a lower seasonal cure rate. The speed at which new notices decline from this point, and any improvement in the cure rate of existing notices, will be driven by future economic conditions, both nationally and regionally. We continue to be pleased with the performance of the business written beginning in 2009, which now accounts for 36% of our total risk in force. Our new business is of high quality, as demonstrated by the very low level of new delinquencies they produce, and is expected to have returns of approximately 20% over its life. In the second quarter, new insurance written was $8 billion, up 36% from the same period last year and our highest quarterly level in the past 4.5 years. Year-to-date, our volume was $14.5 billion, up 45% from the first half of 2012. An additional $3.3 billion of HARP refinance transactions were completed during the quarter versus $2.7 billion last year. Since the inception of the HARP program, a total of $24 billion has been completed. As of June 30, approximately 14% of our primary risk in force has benefited from HARP, or similar refinance programs, and more than 98% of the associated loans are current. The 2010 [ph] book has been the largest beneficiary, with 25% 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. As a result of the numerous changes made by both private and public mortgage insurers over the last year or so, our industry has continued to regain market share from the FHA, and we expect our industry's market share to grow from the first quarter level of 10% to 11% over the balance of the year. Relative to our industry, MGIC's market share has stabilized around 17% for the first half of the year. 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 at MGIC are dedicated to capitalize on. Given that we have the most experienced sales and underwriting organization and are the most cost-efficient producer in the industry, I would expect that, over time, we will increase our market share within the industry. However, this will not occur in 1 or 2 quarters, as we have to earn the business back. We intend to do this as we always have, through stellar customer service. It is a formula that has worked for more than 55 years and I'm confident that it will succeed in the future. As we all know, interest rates rose dramatically in the quarter, from about 3.5% for a no point 30-year mortgage in mid-March to about 4 3/8% in July. While rates have drifted a little lower of late, the increase has caused some concern that new business will dry up as refinances go away and borrowers can't afford the higher rate. I agree that refinance volume will decrease. In fact, our application pipeline for the first few weeks of July show refinances down to the low 20% range from 30% of new insurance written in quarter 2. However, without getting into specific numbers, the overall daily application volume is about 10% higher in July than it was in late March, and perhaps more telling is that our average daily purchase volume is up 34% year-over-year and up approximately 40% since early April. These higher volumes since earlier in the year are, in part, seasonal, but all of the volume figures reflect our industry's gain in market share. Typically, there is about 60-day lag between applications and new insurance written, which bodes well for new writings for the remainder of the year. And keep in mind that the Great Recession caused a great deal of pent-up demand. Household formations averaged 600,000 from 2008 through 2011, the last -- last year, nearly 1 million households were formed, of which a material portion will become homeowners. And as the economy stabilizes, consumer confidence increases and employment grows, I would expect that purchase demand will remain healthy. And let's not forget that there are some benefits from a rising rate environment. First, persistency increases and the book does not shrink as much, which helps revenues. And second, traditionally, we have seen refinance markets, as a result of the volatility and volume for mortgage originators and their desire for speed and ease of execution, result in a more competitive market of among private mortgage insurers. We think that a rising rate market may cause rethinking by some of our competitors regarding pricing and associated returns. So in summary, rising rates, if achieved without wild swings in rates, can be beneficial for MGIC. Losses incurred in the second quarter were $196 million, down 64% from last year and down 26% from last quarter. As I mentioned earlier, the lower level of incurred losses resulted primarily from a change in the estimated cure rate on early-stage delinquencies, as well as the lower number of new delinquent notices received. The delinquent inventory ended the quarter at a 5-year low of 117,105, which is down 24% year-over-year and down 7.5% sequentially. After considering claims paid, we expect the delinquent inventory to decline for the balance of the year. Paid claims in the second quarter were $433 million, down 32% from last year and down 8% from last quarter. Reflecting the declining level of foreclosures, claims received during the first half were down 29% from the same period last year. The unpaid claim inventory continues to decline, and we expect that the current claim filing patterns we are experiencing will continue and will result in both claims received and claim payments trending modestly lower throughout the balance of 2013. As we discussed last quarter, we executed settlement agreements with Countrywide regarding the recession dispute between our firms on GSE and non-GSE loans. We have submitted the GSE-related agreement to the GSEs for their approval. The process of receiving approvals is continuing and therefore, the impact of the agreements on the delinquent inventory should not show up in our monthly or quarterly statistics until sometime in the fourth quarter. The conversations with the GSEs have been constructive, and we continue to believe that it's probable that the GSEs will approve the agreements. Cash and investments totaled $5.6 billion as of the end of the quarter, including cash and investments at the holding company of $592 million. During the quarter, we repurchased $17 million of the 2015 senior note at par. Our next scheduled debt maturity is approximately $83 million due in November 2015, and we have sufficient cash to cover the holding company's liquidity needs for the next several years. Let me now take a couple of moments 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. Second, the final Basel III rule left the treatment of private mortgage insurance unchanged, which is a win for our industry. And, of course, we are still awaiting the issuance of the QRM rule, 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 low-down-payment loans. Next, the FHA and GSEs continue to discuss and develop 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 scope and timing of their implementation is still 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 that they are consulting with one another. There is no timeframe established for the NAIC effort at this time, although we do not expect anything to emerge in 2013. Finally, there's been a lot of activity of late in Washington on the role of the FHA and the GSEs in the housing market. Both have taken various actions over the last year or so to improve their capital positions or profitability. Most recently, Senate leadership has indicated that it wants to focus on the FHA, while the House leadership has also issued a proposal to address the GSE roles. We do not expect any definitive action on either of these fronts this year. From what we have learned so far, is that in various scenarios we are aware of, there is a role for private mortgage insurance. Exactly what that role is, however, has not been defined, but they all seem to be positive for our industry. So in summary, 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 new business are excellent 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 a significant growth opportunity, both in expanding the amount of the business insured by our industry, as well as growing our market share within that expanding market. So all in all, we feel our company is in an excellent position to take advantage of the housing recovery and are committed to maximize that opportunity. Operator, with that, let's take questions.

[Operator Instructions] Our first question or comment comes from the line of Jack Micenko from SIG.

So it sounds like the assumptions are really more of a frequency change, right? Less defaults on the claim base. Was there any severity impact change in this quarter on the assumption set around a rising home prices or is that something we could expect to see maybe down the road, as continually-improving home prices help offset sort of the levels of those claims?

This is Mike Lauer. Relative to severity, we didn't see any change this quarter. What you will see is the average has been changing kind of from quarter to quarter, depending on how much weight there is with respect to claims paid out of California. And I think, this particular quarter, California paid claims were down, so probably the average was down because of that. But relative to the loss reserving, we had no adjustments during the quarter on severity.

Jack, this is Mike Zimmerman. Just to add on the home price appreciation, when you think about the delinquencies, they're coming primarily right from the '07, the -- that '05 to '08 book of business. And even though there's been some price appreciation in those markets, from their peak to trough, and for those years, they're still fairly significantly underwater, certainly below our coverage ratio. So that's -- the rising tide will certainly help consumer confidence in newer delinquencies, but on those older ones, it's going to take a lot more to start mitigating severity on those books.

Got it. And then, as a follow up, obviously, the FHA take stories is a big part of thesis here, and they've been through multiple pricing and structural changes over the past, I guess, 18 months or so. One thing that's incremental that we've seen, some of the regional banks have reported increased dialogue and discussions and meetings around this HUD, DOJ investigation around the FHA. I'm curious if -- because the buyer of MI and the customer of MI are maybe a little bit different, in terms of the borrower versus the bank, are you seeing banks change behavior of late, given maybe some of those -- maybe a step up in the inquiry process there?

Well, I think we're seeing more banks participate in private mortgage insurance. The rationale for that, I think, is a combination of pricing changes, indemnification changes, all of the above. So I don't think you can tie it into one certain thing.

Our next question or comment comes from the line of Bose George from KBW. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Just wondering, can you break out the losses incurred number between the portion driven by notices received this quarter and prior notices?

I mean, so the positive development is what you're looking for there? Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, exactly. Yes.

You probably -- Tim, I don't know if you...

Yes, I mean, I think, the way to look at it, as Curt said, we're thinking closer to 1 in 5 that's going to go to claim out of this. And if you look at the average severity we've been experiencing, that would give you an indication of what we experience from a quarter. And, as Curt mentioned, our view on the cure rate on the newer delinquent notices also applies to the first quarter notices, which we'll probably put in a little bit heavier rate. So in the Q, while it gives a disclosure as far as the year-to-date, the development from prior year is now giving more information. But really, there was obviously some benefits on the first quarter notices, some positive development because of that claim rate change. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And is it -- actually, when does the Q come out? I'm just curious if that's a material number in terms of just a positive developments?

I mean, the Q is going to come out, as I said, 40 days after the quarter ends, so around the 9th or 10th of August. But the positive development, when you think about the first -- on first quarter notices and then the impact of the lower -- the second quarter notices, all in, you're probably looking at $40 million or $50 million. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Great. That's very helpful. And then on the average premium, we calculated it was down a little over maybe 1 to 1.5 basis points. Can you just discuss factors that drive that premium up and down going forward?

Well, part of that, obviously, since it's a weighted average calculation, so you have a little bit of impact due to the -- of the quarter, although not much on the quota share transaction. And in there, I think, you'll see vagaries, quarter-to-quarter, of a basis point or 2 just because of the mix of businesses, et cetera.

Yes, predominantly a mix of businesses. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: And then, just on your interest expense, I'm just wondering was there anything unusual there? Just the number was down while your -- the debt load was up. So just curious of what -- if there's anything in there?

Well, the -- we did buy back some of the 15s in the quarter, you saw that.

And we no longer have to amortize anything out of juniors, we still -- if you're looking, especially back to last year, we're amortizing the discount on the juniors when we issue them and that no longer has to be amortized to the interest expense line item because we've fully amortized it. Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And then just one last thing. The deferred tax asset at the end of the quarter, and what was that number?

It's essentially unchanged. It was right around $1 billion.

Our next question or comment comes from the line of Mark DeVries from Barclays.

So I get the 20% expected claims rate is more of an average across all new notices. I assume it's safe to assume that you'd have a much higher claims rate expectation on like an '06, '07 vintage loan than like an '10, '11 loan, correct?

Yes.

So what's driving that down? I guess, presumably, as you're getting a higher percentage of your new notices from these newer books with a lower probability of defaults, correct?

Yes. And then also there's the aging aspect of the older delinquencies and adjustments for the mix of those.

More and more of the new notices are not first time delinquents, they're repeats. So as the employment picture's been improving, home prices going up, fewer of our delinquents are first timers and more are repeats and higher -- there's a higher cure rate on repeats than there are on first time. So I'd say that's the primary driver. Fewer are first-time delinquents, more repeats, those have a higher cure rate.

Okay. If the newer vintage loans performed more in line with your historic average of like a 10% claims rate, over time, as these older books burn off, you should continue to see that claims rate assumption migrate down, correct?

Yes.

Overtime, that's right, Mark. Yes.

Okay, got it. And then, Curt, I know you kind of made a reference to the fact that, with the rates going up, you would expect to see some of your peers' pricing alter, I assume you're kind of referring to the single premium product. Is there any sign of movement yet or any word that anyone's filed for higher rates on that product or anything to report on that?

I'll let Pat Sinks respond to that. He runs our field group and is more...

Not at this point. I mean, we've obviously seen a slowdown in the refi market, as Curt alluded to, in the early part of July here, but we've not yet seen competitors take any actions.

I mean, it really does hammer the return when the persistency on those loans is extended. And I mean it's bad enough without that. So I'm just thinking logically here.

Yes. Makes sense. Was single premium still a pretty healthy part of the market in this past quarter, do you know?

Yes. I don't think -- Pat can correct me if I'm wrong, but I don't think we'd feel much change from last quarter, I mean, so it's still about 25% of the market.

That's correct.

Okay. Great. And then finally on these new potential capital guidelines out of FHA and the GSEs, do you get a sense that they're kind of circling around a specific risk to capital ceiling at this point?

Well, I would say indications from recent comments and also some of their requests for insurance on their portfolio have circled initially that they'd be at a hard risk to capital ratio of 18:1. And at a later date, adjust -- go to a risk-adjusted method without -- which we don't know the number. So I would say indications are, from comments by the GSEs, as well as proposals they've requested of our industry, they'd be in line with 18:1 initially and, longer term, one, I don't know when that would be implemented, if that indeed is the number, and then two, they've talked on something that we feel strongly about, that capital should be risk adjusted relative to the risk you're insuring, that all loans are not equal and shouldn't have equal capital held against them. So that's our indications.

Okay. Great. And then just, I mean, just one other question. Going back to your -- the '06, '07 books, would those nearing what is, I guess, normally the end of the peak loss years, would you expect to see the decline in new notices from those start to accelerate from the pace you've seen so far? In other words given the...

I really -- I'll say, hopefully. I mean, it's really a function of the economic development and the pace of economic improvement that drives that borrower's behavior, because, to your point, they're well past the traditional peak of delinquencies. So I'd like to see an acceleration of that. The trends say there's been a pretty smooth decline going down.

I think, with values improving, that also is helpful, clearly, on the margins for us, for those people that have been hanging in there and are in a position to continue making payments, that they continue to hang in there because they're seeing their values go up and it's worthwhile. And while that, as I say, it certainly is on the margins, it's very helpful for us.

Our next question or comment comes from the line of Douglas Harter from Credit Suisse. Douglas Harter - Crédit Suisse AG, Research Division: I was just hoping you could give a little color on refi activity? How much of that refi activity tends to be sort of repeat customers? So in other words, if the volume slows, you should get an offsetting increase in persistency?

Well, Doug, it's Mike. Are you talking about kind of a recapture rate, if you will? Douglas Harter - Crédit Suisse AG, Research Division: Yes.

It's a little difficult because you have HARP mixed into that equation. So absolutely, all the HARP is 100% recaptured, along the way. So if you factored that in, usually refinance is -- in a traditional market, refinances drop the mortgage insurance. Clearly, we're seeing loans from, certainly, the '09 and forward vintages that are refi-ing, '09 and '10 that are refi-ing and are probably getting some mortgage insurance again. But we don't have an exact recapture rate.

Well, we didn't look it at this quarter, but in prior quarters, we looked at the refinanced volume, the true refinanced volume, the non-HARP, HAMP stuff. And our recapture rate, to use your term, is in line with our basic overall market share. Douglas Harter - Crédit Suisse AG, Research Division: Great. And then just shifting back to your -- kind of your revenue rate. Given that you're still using about 30% of the new insurance written on quota share, should we expect that revenue rate to, all else being equal, decline modestly over time, given that higher percentage of reinsurance right now?

Premiums, yes. If you're talking about premiums written, yes. Douglas Harter - Crédit Suisse AG, Research Division: Got it.

NIW could grow based on what happened in FHA but premiums with the...

The yield will drop. And keeping in mind, though, that we are receiving a profit commission on the quota share, and that is an offset to the ceded premium.

And that's deferred and accrued. Douglas Harter - Crédit Suisse AG, Research Division: Got it. And just to be -- the net insurance written and sort of your insurance in force for any particular year would be reported as the gross number?

That's correct.

Correct.

Our next question or comment comes from the line of Sean Dargan from Macquarie.

It sounds like the change in your actuarial assumptions around early-stage delinquencies going to claims is a function of, I guess, repeat delinquencies being impacted by improvement in employment. But we seem pretty consistent, home price appreciation. Would there ever come a point where we would see a change in borrower behavior among the '05 to '08 vintages?

Sean, that's a pretty broad, open-ended question, so it's hard to say no to that. But it's a question of when and the pace of that and home price economic growth, consumer confidence and so on. But quarterly, as people get more comfortable with their economic situation, they're going to be more likely to keep maintaining their payments and take proactive action.

Yes, I mean, as I mentioned earlier, clearly on the margins, that's helping us. I mean, there's no question people are going to hang in there longer if they see an improvement in the value of their homes. So it's beneficial. To the degree it's beneficial, we just can't measure right now.

Our next question or comment comes from the line of Geoffrey Dunn from Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: As we think about the provision per new notice, it's coming down now, but obviously it's well above what the historical level would be, if you're thinking 4 or 5 cume loss, what do you need to see to start moving that number down more substantially? Is it purely the mix of the older vintage items? Or is there something else that can provide you with confidence?

Mike, again, Lauer. Yes, absolutely. It's the older stage delinquencies improving, as Larry would say, cure rates improving, and the decline, if you will, on delinquencies on this '05, '06 books. Those are the 2 largest books with delinquencies. So obviously, the '09 plus -- through '12 are significantly beneficial books and you're not kicking off very many delinquencies at all. So it's the '07 and '06 books, and some of the older books. But those 2 prominent books are the biggest factor with respect to delinquencies. And while the trends have been positive for the last 5, 6, 7 quarters, we haven't seen a significant change, although it's a steady change. And that we're, I guess, confident that might continue. But to your point, when does it rapidly change? You'd have to see some -- you'd see the significance on a quarterly basis, and even on a monthly, because we report out cures, except to you [ph] , on a monthly basis. But for the most part, the trends have been steady and chartable, and there hasn't been a significant deviation other than seasonal, and we have to see some significant event that, with respect to the economy, that I think that would stimulate that recovery.

And keep in mind, it doesn't take a lot of improvement in the cure rate to cause a big impact on the loss line, because if we're at a 20% claim rate, if that cure rate improves from 80% to 82%, the claim rate goes from 20% to 18%, that's a 10% decline. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: So ultimately, when we think about this, we're thinking that traditional business was 5 cume or less, does this -- the end game bring us down to something more like 1 in 20 provisions?

1 in 10?

Probably 1 in 10 is our historical run rate, in normal time.

Our next question or comment comes from the line of Ryan Zacharia from JAM.

So in Q4 of last year, you put out the $7.1 billion future net claim payments estimate. You've paid about $900 million since then. So is it as simple as just taking $900 million less the $7.1 billion or do you think that, that aggregate number has come down now?

You got to add the new business back in to that during the 2 dates as well, because we booked, what? $8 billion in the quarter?

Right, I'm speaking really just to the business that you had on 2012 and prior.

I think our view today is consistent with prior quarters.

And do you have any views on the Freddie Mac stacker risk-sharing transaction?

Are you talking about the 70 to 80? The one that the FHFA is...

The Freddie Mac bond that they're selling $400 million to unload about $23 billion of legacy risk?

Right. I'm not sure I'm willing -- you say view, I mean, unless FHFA has asked both Freddie and Fannie to, what? Do executions, Freddie has elected just to go to the public markets and not involve MIs, whereas Fannie is looking at some going to MIs and some going to the private sector. So we're certainly interested in playing if there's returns -- minimal returns that are involved without excess capital requirements.

But do you think that if the execution in the private markets, not using the MIs is favorable in this Freddie Mac structure, do you think that, that might be a way that the MIs don't have as big a role kind of going forward?

Well, again, that's on the legacy book that they have there, not on new originations.

Well, it's on all originations that were...

It's 70% to 80%, yes. Again, that's below the 80% LTV.

So again, you've got to remember, these capital market executions are a point in time, so you're at a low point in the cycle, the consistency of execution that's out there. Clearly, if there's a -- if a market player has a better execution than the returns that we're wanting, then they'll probably get that transaction over to the private sector.

I mean, I think that's really what you're seeing, too, as proposals are discussed in Washington relative to the future of mortgage finance, that they understand that capital transactions come and go. They're there when the markets are good and leave when they're not, and you need a product that there is long term, like our industry has been and will be. So I don't worry about that being the solution.

Our next question or comment comes from the line of Jason Stewart from Compass Point.

A quick follow-up to Ryan's question. Is it your expectation that Freddie will only execute in the capital markets where they're not currently engaged?

For this one transaction that's the only indication that we have, is the one transaction that they're working on. What they do going forward, we'll have to wait and see.

Okay. And so Fannie and Freddie could take dramatically different routes in terms of the way that they risk share. It's not necessarily driven by the FHA. And considering that $23 billion doesn't really get them to this $30 billion total, there's still other transactions that they could engage in. Is that right to think about it that way?

Yes. I mean, they're testing the markets, they've got huge books of business. FHFA has asked them, reported on their scorecard that they try laying off some of that risk. And so they're pursuing a mechanism to lay off huge amounts of risk on loans below 80% loan-to-value ratio.

And then as a follow-up to the average paid claim question earlier, can you give us any idea of what the delta is between California and the rest of the U.S.?

We'll break this out in the quarter but I have it here. In the quarter, California claims in the first quarter, were about $53 million. This quarter, about $41 million. And Florida, for example, is still about $70 million. But we break this out in the Q when we file it. So I think, that's what I meant when I meant the average change is relative to some of these states like California, et cetera. As the amount of paids in the quarter are up or down relative to California, the severity is higher and it affects the average severity.

Yes. I don't have in front of me what it was this quarter, but if you look at, say, our last Q, our California average was about $87,000 on average versus our overall average of $47,500, basically.

[Operator Instructions] I'm showing no additional audio questions at this time, sir.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.