MGIC Investment Corporation Q1 2008 Earnings Call Transcript

Apr.17.08 | About: MGIC Investment (MTG)

MGIC Investment Corporation (NYSE:MTG)

Q1 2008 Earnings Call

April 17 2008 10:00 am ET

Executives

Mike Zimmerman - SVP, Investor Relations

Curt Culver - Chairman and CEO

Mike Lauer - EVP and CFO

Larry Pierzchalski - EVP Risk Management

Analysts

Steve Stelmach - Friedman, Billings, Ramsey & Co

Donna Halverstadt- Goldman Sachs

Ken Posner - Morgan Stanley

Howard Shapiro - Fox-Pitt Kelton

Scott Frost - HSBC

Jordan Hymowitz - Philadelphia Financial

David Hochstim - Bear Steams

Nick Solano

Joshua Smith

Eric Wasserstrom - UBS

Jason Regero

Michael Grasher - Piper Jaffray

Matt Ulrich

Peter Herran

Ron Bobin

Operator

Good day, ladies and gentlemen and welcome to MGIC Investment Corporation first quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Mike Zimmerman. Sir, you may begin.

Mike Zimmerman

Thanks, Dave. 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 first quarter of 2008 results are Chairman and CEO Curt Culver; Executive Vice President and CFO, Mike Lauer; and Executive Vice President of Risk Management, Larry Pierzchalski.

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 have indicated in this morning's press release, we have also posted on our website supplemental information pertaining to the characteristics of our primary risk in force, 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 quarterly earnings release as well as prior SEC filings.

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 parties 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 press release.

Now with that, let's turn the call over to Curt.

Curt Culver

Thanks Mike and good morning. For the quarter, we reported a net loss of $34 million with a diluted loss per share of $0.41. Claims paid in the quarter totaled $371 million and losses incurred were $692 million reflecting the increase of 6500 loans and the delinquency inventory as well as the increase in loss severity.

In addition during the quarter, the premium deficiency reserve declined by $264 million from $1.2 billion to $947 million. Now, we are worth $19.1 billion of new insurance in the quarter up 50% from last year of which $18 billion was flow and $1.1 billion was bulk. The bulk (inaudible) of misnomer, however is approximately 85% of the $1.1 billion was one lender paid MI transaction of high quality prime business and the remaining 15% was GSE related business again on high quality.

The loan characteristics of the bulk transactions as well as the flow business loan characteristics are shown in our portfolio supplement and indicate the high quality of loans insured in the bulk sector as well as the significant improvement made in the mix of our flow business. Please note that most of the flow underwriting guideline changes were just implemented in March and as a result you will see even more dramatic improvement in mix characteristics of the flow business as the year progresses.

Market penetration of our Mortgage Insurance products continue at high levels although on a commitment and volume bases as our loan quality improves anecdotally we are hearing of the growth of FHA. The persistency continues at elevated levels totaling 82.2% on a quarterly run basis and 83% for the flow quarterly run rate.

On an annual basis, persistency grew to 77.5%. The average premium yield in the quarter fell to 63.8 basis points from 65.8 basis points last quarter reflecting the elimination of new Wall Street Bulk business and the fact that we are insuring fewer loans above 95% LTV, Alt-A loans and loans classified as A minus.

Our expense performance in the quarter was positive with underwriting expenses totaling $79 million with $3.3 million of that resulting from onetime fees associated with our capital raise. By way of comparison, we spent $76 million a year ago to underwrite 50% less volume of new insurance written. Relative to the remaining year with significant changes made in underwriting guidelines, we expect NIW to slow with the total for the year to approximate $50 billion and while the S&P action taken recently has not reduced our writings of GSE business.

It will reduce our new insurance written with various state housing finance authorities by approximately $1 billion. It will also impact our ability to do business in Australia and get licensed in Canada and we are actively looking at our business alternatives in both countries.

Relative to the GSE business, we have been in constant communication with both Fannie Mae and Freddie Mac and we will meet with the GSEs in the near future to discuss our capital adequacy to meet their needs going forward.

We feel good about these discussions given our strong existing capital base coupled with the addition of $840 million from our capital raise, our underwriting and pricing changes, our discontinuance of insuring Wall Street Bulk business, our negotiations to sell our remaining interest in Sherman back to them as well as our discussions to possibly reinsure a portion of our new writings going forward.

The changes in captive reinsurance that have been announced by the GSEs from the premium sessions to 25% will also be positive for our company as an added benefit in growing our revenues is approximately 29% of our flow business is in excess of 40% premium seeds and 10% is in 50% quota share transactions.

Finally, let me reiterate our claim paid guidance for the year remains at $1.8 billion to$ 2 billion. Our quarterly performance would certainly total to a lower annualized number, but our expectations for continued weakness and high dollars states and the resulting growth in loss severities is what should drive the quarterly numbers higher for the reminder of the year.

And with that operator, let take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Steve Stelmach.

Steve Stelmach - Friedman, Billings, Ramsey & Co

Hi, Good morning.

Curt Culver

Good morning, Steve.

Steve Stelmach - Friedman, Billings, Ramsey & Co

Can you just walk through some of your assumptions that you guys use for the change in premium deficiency reserve for the quarter, and then also talk a little bit about what we can expect in terms of some of the go-forward run rate in that number? Is the first quarter a good run rate or is there going to be pretty strong volatility around that?

Mike Lauer

Well, this is Mike Lauer. Let me go through, again at the beginning of the year we estimated that the run-off for that liability account would be somewhere in the range of 500 to 700. Based on the first quarter, I think now I would say its closer to the 700 range, relative to the run rate going forward. I would think in the second quarter it may be somewhat less than this amount, and then probably going down somewhat in the third and fourth to get somewhere around that 700.

With respect to the calculation, we again did the same calculation we did at year-end and on a net present value basis the premiums and losses were down approximately $137 million, and then also offset by an increase in the reserve by 127 to get to the net 264. So, the premiums are running down pretty much on schedule as are the losses and the reserve change also. So, it’s pretty much on track given it's only the first quarter, but I think as I mentioned relative to the total year forecast, our earlier estimate was 500 to 700, I think now it’s closer to the 700.

Steve Stelmach - Friedman, Billings, Ramsey

Got it. Okay. Thanks. And then just real quick, Curt you mentioned the FHA?

Curt Culver

Yeah.

Steve Stelmach - Friedman, Billings, Ramsey

Can you give us a little bit color of what you see in the political side of things, if it's just going to be more aggressive, if that’s going to really impair your ability to grow the book at any meaningful degree?

Curt Culver

Yeah. Well, two things. One, it’s being aggressive relative to proposals from Senator Dodd and from Congressman Franks as well as the administration as well as recent proposals from Senator McCain relative to being a take-out vehicle relative to the foreclosure process that many loans are looking at or instrument risk involved in preventing those foreclosures from happening. So, I would say on that basis it is being used, they are looked at as an aggressive tool to be used at very high loan dollar amounts, which frankly would help our entire industry, and that's indeed the case.

On a new business basis, it is more reflections Steve that our industry as well as Fannie Mae and Freddie Mac have backed away from certain loan risk relative to very high LTVs and lower FICO scores and combination, and as a result the FHA will grow from that basis. So that's where I messed that. It is more reflection, I think of the improvement in loan quality that our industry and hence Fannie and Freddie are looking at than on aggressive stance in looking at new business at a higher FICO scores.

Steve Stelmach - Friedman, Billings, Ramsey & Co

Okay. So on a net basis would you say that the MI industry is going to be better off, given what you're hearing on Capitol Hill and in the FHA?

Curt Culver

That will be positive for our industry. And as we went through the capital raise, I got asked that questions a lot. I don't know how to quantify that, I just know it would be positive for us, as we look at the FHA and their secure program. And there are number of people that have instrument risk that will be a good tool to get them out and then also others that are looking at the possibility for closure at their current loan payments or by FHA could be a take-out vehicle on a fixed rate basis. That will be helpful.

On the other, relative to the new business that our industry doesn't desire, again I always had mixed emotions relative to people insuring business whereby longer term, they may not be in their homes. So I struggle with that as a tax payer.

Steve Stelmach - Friedman, Billings, Ramsey & Co

Yeah. Okay, thank you very much.

Curt Culver

You bet.

Operator

Our next question comes from Donna Halverstadt.

Donna Halverstadt - Goldman Sachs

Good morning.

Curt Culver

Good morning.

Donna Halverstadt - Goldman Sachs

I have a question for you, it's only to the downgrades, and you mentioned, you made some comments about house holding authority business in Australia and Canada?

Curt Culver

Yeah.

Donna Halverstadt - Goldman Sachs

But within the US, what's the reaction of vendors been. Have you seen any shift in market share related to either downgrades, or any difference in terms of trade that are being offered by vendors to companies that have A versus those that still have AA's across the board?

Curt Culver

Well I can only speak to our company. I mean our market shares remain very strong at levels that we were last quarter. The deal has relative to acceptance with Fannie Mae and Freddie Mac and that I think they've given the signals there relative to how they feel about this matter and our strong capital structure that we've at MGIC.

So, as a result we've not seen any change other than those that I noted with the Housing Finance Authorities as well as some in Australia but even that has been frankly more positive than I thought it would be. But we've not gotten any indications from any if you will customers of our flow business, traditional business that they've any misgivings about doing business with MGIC and relative to the other companies that have gone through their process again our share is holding up at a very high number.

Donna Halverstadt - Goldman Sachs

Okay, great. And I also wanted to ask with respect to your pay loss guidance of the $1.8 to $2 billion, what sort of unemployment rate are you assuming when you give that guidance?

Mike Lauer

$5.5 to $5.8 and I think it's what 5.1 up. So, I'd say a modest deterioration in the unemployment rate, Donna.

Donna Halverstadt - Goldman Sachs

Okay. And then I had one other question and I'll get back in line. I wanted to ask relative to the capital raising, are any of those proceeds going to be retained longer term at the old curve, or they all going to go downstream, and what was the level of cash and short-term investments of the old curve at the end of the quarter?

Curt Culver

At the holding company, we've got 448. We expect we'll probably have of the total proceeds we'll retain, about a 100 at the holding company, and that at the end of next week, when we get done allocating funds to some of the MGIC subsidiaries. MGIC has in addition to the writing company has two or three sister reinsurance companies, whereby it reinsure some excess cover over 25% regarding certain states.

It's still MGIC business, but they are reinsurance subs and we'll allocate some capital to them and we haven't finished all that yet. So, at the end of the day of all the proceeds there will be a $100 million left at the holding company for interest rate coverage, which we talked about really on the road show.

Donna Halverstadt - Goldman Sachs

Right, right. And you still plan to seek up streaming of $60 million of dividend this year?

Mike Lauer

Yes. That's a normal dividend that we'd have from the writing company to the holding company to cover the previous debt.

Donna Halverstadt - Goldman Sachs

Okay, great. Thanks, I’ll get back in line.

Curt Culver

Operator, next question. Hello.

Operator

Our next question comes from Ken Posner.

Ken Posner - Morgan Stanley

Good morning. I had a couple of questions if I could. One, just a quick question on the yield, the premiums relative to the balance of insurance in force seem to dip down a little bit from fourth quarter to first quarter. I'm trying to remember if there are seasonal or other factors or the question will be how should we thinking about the yield going forward as your new book of business evolves?

Curt Culver

Ken, its probably driven two main clauses. One, the bulk as a percentage of in force is declining and the bulk has a higher premium yield. And two, and this will be more of a factor going forward now that the guidelines are in place and that is with regard to the flow, the hundreds and some of the other A minus Alt A product lines, which carry higher premium rates the volume from that should be little to none. And as a result between the bulk and the product mix going forward, that should continue to decline. Now that will be offset somewhat by what happens on the captive front.

Ken Posner - Morgan Stanley

Right. The captive you'll get some more revenues back from that.

Curt Culver

Right.

Mike Lauer

So, you should see it declining throughout the year Ken. I think in the neighborhood maybe average 60 basis points for the year.

Ken Posner - Morgan Stanley

Okay, great. Thank you. My second question is on the line of credit and which is something as equity types have to sometime struggle to get straight. If I'm correct you've got the net worth covenant waived temporarily, and it resets back to $2.25 billion if I read the press release properly, your net worth is at $2.9 billion, so that would seem to put you in fine shape for now. I guess the question is what would be the biggest risk to you the line of credit as we stand right now?

Curt Culver

Well, obviously if there were significant watch development over the next two years that would reduce that equity. So, I think, as I stated last month when we are on the road that become such a critical issue that we elected to work with our lenders and get the wavier extended out to July to take that issue off the table. Our plan is to meet with them shortly and discuss that facility and then relative if we need to make any changes we'll look at that right now it's not an issue obviously.

Ken Posner - Morgan Stanley

Okay, great. And then my last question is more strategic, I know this whole MI industry has struggled given the chart to the system the growth initiatives, whether they were in guarantors space or international. All these growth initiatives have turned out to be frustrating and I know that MGIC and the other companies or eager to work for growth opportunities where possible.

But I wonder, if a different strategy would be appropriate now, given the stock price relative to book value. Is there a strategy that says look growth is not appropriate for this industry, what's appropriate is simply to fulfill initiatives for the GSEs and operate efficiently and protect that book value, and therefore potentially create shareholder value just by narrowing the gap overtime between the stock price and the book value amount. It's a different mindset and perhaps it involves pulling back from international and other possible growth ventures. What do you think about that?

Curt Culver

Well, I mean I think you're right on Ken. Basically I think what you're seeing certainly from our company, and I would say the industry, is that we're hunkering down and we are going to grow but on a profitable basis. I mean, it is back to underwriting 101, back where we are in charge of underwriting our own product that we don't delegate that out and I think you've seen that throughout our industry, everyone has made that decision. And that to do business doesn’t make sense if we're not going to make money on the loans that we're insuring.

So you're seeing a low return to credit quality, lower LTVs, fullback amended loan, high FICO scores, the stuff that made this industry 50 -- or our company 51 years old. I would say in the international basis, I think there are some opportunities to do something differently there than what we're originally looking at, that we think this is still a basis to grow on a very profitable basis not quite as quickly, but that we do so. And even as we look at reinsurance, that's a case whereby we are going to disperse some of our risks relative to getting a partner, and that it gives us 200 million to 300 million more annual capital that we can utilize in the company.

And while we feel very, very good about the credit quality going forward and some would say well why reinsurance that? We just think it's good to have a partner as we move forward. So we are looking at that. So I think your basic premise is right on, but I do think there is a little more opportunity international. I think in the coming months as you see how we lay that out. You'd say that's a good way to do business.

Ken Posner - Morgan Stanley

And can you just explain a little bit about the reinsurance, that would -- I don't use the word captive, but that would have the effect of reducing premiums and reducing losses right but it would have no effect on GAAP equity is that so?

Curt Culver

Right.

Mike Lauer

Yes.

Ken Posner - Morgan Stanley

Thank you.

Curt Culver

Yeah.

Operator

Our next question comes from Howard Shapiro.

Howard Shapiro - Fox-Pitt Kelton

Hi thank you. I wanted to just ask a few questions on credit. When I look at your statistical data here broken out by prime, A minus sub-prime and so forth. What I am saying is that the number not the percentage, but the number of delinquents sub-prime loans seems to have stabilized over the past three months. The number of delinquent A minus loans seems to stabilize, but the number of prime loans delinquent continues to increase.

Is it fair to say that maybe we've seen the peak or close to the peak in terms of delinquency development for sub-prime and A minus, but there is still more to go on prime, or am I looking at this incorrectly? And then just as a secondary question, can you give us a sense of where we are in terms of severity migration, how much more it could increase, are we kind of close to that or that would be peaked out as well?

Mike Lauer

The sub-prime probably was impacted quicker sooner than the prime impacted by the slowing in the housing market. On top of that, the bulk business which was a major component of that type of business we stopped writing a lot of that towards the end of ’06. So basically you don’t have that bulk, sub-prime component to those degrees they had it in prior books in ’07. So, you put those together, and sub-prime being impacted quicker by the events, and the bulk decline in writings. And then on the prime side ’07 was a large book for us, and a lot of that was prime, and in this housing, those prime loans are even been impacted. So it's size and timing I guess.

And your question was regarding severity. The high cost areas are the ones that are the weakest and we see the inventories in those states continue to build and as a result the mix of claims on those higher cost areas will grow, so that’s why Mike said, the severity is expected to grow through the year.

Curt Culver

But we are on a percentage of the loan, we at probably a 100%. Are we not?

Mike Lauer

Right

Curt Culver

So there would be no growth in that aspect Howard

Howard Shapiro - Fox-Pitt Kelton

Right, okay

Mike Lauer

Howard, and with respect to the severity of the total claims paid in the quarter $82 million was paid in California, that versus four year ago, and Florida $30 in the quarter versus two year ago. So, you'll see the impact of California and Florida and the severity very high. In addition to that, California and Florida with highest contributors to the delinquency, Florida was up 3100 for the quarter and California 1600 that's of the total 6500 or 6700 change in delinquency. So, California, Florida still driving a lot of delinquencies and severity.

Howard Shapiro - Fox-Pitt Kelton

Okay, great. Thank you very much.

Mike Lauer

Yep.

Operator

Our next question comes from Scott Frost.

Scott Frost - HSBC

Hi in S&P's recent rating action they said you expect medium home price deprecation would be 20% versus the previous estimate by 11%. I wanted to ask if you agree with this estimate if not what do you expect medium home price depreciation to be?

Mike Lauer

I think the 20% you're talking about is peak to trough.

Scott Frost - HSBC

Right '06.

Mike Lauer

No, we don't agree with that. That number I think largely is in lying with some of the Case-Shiller rise in the season what not. But we think for our business the OFHEO home-price index is more appropriate and it reflects the Freddie Fannie portfolio conforming loans, conforming underwriting guidelines if you will and weeds out the upper hand and other types of transactions in the OFHEO home-price index, peak to trough is I think around 9%. So, we think that is more inline.

The other thing as they came across there, was a chart out of moodyseconomy.com and it showed the nation, and it showed peak to trough throughout the country, and a lot of the major price declines, the pick to troughs in excess of negative 10% were Florida, California, Arizona and parts of the northeast. But by and large a lot of the rest of the country was flat slightly down. So, you may want to pull that out. It's a chart shows peak to trough, house price declines across the nation and it was putout by moodyseconomy.com.

Curt Culver

Even though within that Scott, whether it's 10 or 20 ultimately, we're reserving 100% of our severity, which is where it would really impact us. It does not cause, if you will more people to walk away from their homes that have an ability to repay their mortgages.

It doesn't happen in our space nearly as much as the media portraying. And so as a result, I mean, again that's an academic debate and whether you want to use the Case-Shiller index, where they'll fail. But I'd (inaudible) as much that is the business reinsured. But I don't think either number has nearly the impact that people give it, because we're reserving at a 100% of our loss severity.

Scott Frost - HSBC

Right. I was just trying to get a picture of what you think kind of the mortgage market generally hold since you're pretty close to it?

Mike Lauer

Yeah. I think nationally we've more deterioration. This year, you'll see stabilization in '09 maybe a slight deterioration nationally, but I think in all and all pretty much flat. And then we start moving up slowly from there in a couple percent, 2%, 3%, which frankly is really our sweet spot as the company relative to our persistency.

Scott Frost - HSBC

Okay. I just want to talk to you about how are you just generally speaking, not to use specifically, but how would you sort of characterize the current market in the sense of whether or not we're getting better line of sight with respect to how bad losses are going to be? I mean, is it clearing up pretty much. Do you have A loan on how the stuff is actually playing out near the end of it or I mean what's your sense to that?

Curt Culver

We've a good sense. I think of the pays that we see this year, and what we're looking at next year clearly on the delinquency side that I mean, I wish we've more visibility relative to that I think we've a good quarter relative to delinquency performance and hopefully that holds.

But we traditionally in the first quarter we get a good quarter relative to delinquencies. I don't know what the tax rebates that people receive here shortly. What impact that will have? But it will be positive I know that.

So, relative to pays I think we've good visibility relative to how the reserves may play out this year. We still think delinquencies will go up and so reserves will be at levels, Mike has talked about. And then in '09, if you've higher pays, but you'll see interest start coming down.

Scott Frost - HSBC

Okay. Thank you.

Operator

Our next question comes from Hymowitz Jordan.

Jordan Hymowitz - Philadelphia Financial

It's actually Jordan Hymowitz. Hey guys first of all congratulations on an excellent quarter.

Curt Culver

Thanks.

Jordan Hymowitz - Philadelphia Financial

Second a couple of questions. First of all your bulk loans, which are a large part of your license you are reducing the balances dramatically. You are down to $35 million, how lower that go by the end of year in terms of risk in force?

Curt Culver

$35 million.

Mike Lauer

$35 billion.

Jordan Hymowitz - Philadelphia Financial

Billion sorry.

Curt Culver

(inaudible).

Mike Lauer

I wish we're at that $35 million.

Jordan Hymowitz - Philadelphia Financial

Okay.

Curt Culver

Not $35 million above that.

Mike Lauer

The insurance in force is 35ish.

Jordan Hymowitz - Philadelphia Financial

Outside the insurance in force.

Curt Culver

The risk is I think $9 billion, $10 billion.

Jordan Hymowitz - Philadelphia Financial

Well, you're right. The insurance was at $35 billion, which is below what most models added. How long do you think that transpire at the end of the year/

Curt Culver

I don’t what we had a run off on --.

Mike Lauer

Regarding the persistency on the bulk, this last quarter was in and around 70% or so. So it's going to be more a function of that and think how these programs whether it could impact that but

Curt Culver

So, 30% around

Mike Lauer

I mean that’s about 3a 0% prepayment rate.

Jordan Hymowitz - Philadelphia Financial

And you are not really adding much to that business so just 30%?

Curt Culver

No. As we said the 1.1 billion we did was basically a large MI customer that does business on a lender paid basis after the fact, and that was 85% of what we did and the other was a few GSC transactions which was all prime business too. So we aren’t really adding, if you will, at all to the Wall Street that’s running off so quickly.

Jordan Hymowitz - Philadelphia Financial

So that number could be mid to high 20s by the end of the year?

Curt Culver

That seems aggressive, but

Mike Lauer

Yeah, if you use the 30% repayment rate then that's what you would get, but that would be a function of what that repayment rate is going to be?

Curt Culver

Yeah, that's seems reasonable.

Jordan Hymowitz - Philadelphia Financial

Okay. Second is, from your marketing deal in February, the number of defaults went down from February in March which was kind of surprising. Any comment on that in any way, I mean just to see an improvement in the number of defaults?

Curt Culver

Well, again, March because of tax refunds generally is a very month for us. And so you would – yeah, we are hopeful that that would indeed happen given everything going on you didn’t know what might happen, but we expect March to be a good month relative to improvement. Again, what will be a swing factor for us I think will also be the tax rebates that are coming out here shortly in May I believe.

Jordan Hymowitz - Philadelphia Financial

And next question. It seems like there are an increasing number of regulatory agencies or targets who've seen you guys as part of the solutions in anyway. I mean only you guys in general seem to be well capitalized and there is no more second to get. So what seemed like and increasingly your business is more and more profitable on the margin you are getting more and more of it. With the regulators increasing, they realize your necessity to the market?

Curt Culver

Well, I think our partners at both Fannie Mae and Freddie Mac realize that we are important part of their future success, which is very important to our company. And I think regulators I mean our industry has been a voice of reasons relative to - although I guess financially you wouldn’t know that but lot of the input that we gave or failed in the Fed and the others in the banking side relative to the performance of second mortgages and other things that have indeed played out as our industry suggest that they would, and that you should be looking at third party credit enhancement rather than letting that risk pile up on the books of banks. And so, I would say our industry does have, for a small industry does have tremendous credibility relative to the regulators.

Jordan Hymowitz - Philadelphia Financial

And a final thing is I model you guys, your marginal bid this is coming out at about 15 ROE with 13 to 14 to one leverage. And when I look at just '09 it would seem to be that you guys should at least makes some profit at least with the high single digit ROE in '09. Is that reasonable? A lot of people have got losses in '09 I can’t seem to be get there?

Mike Lauer

I can’t comment on it.

Curt Culver

Again we are trying to avoid that conversation relative to predictions on earnings that we find it much better not to talk about that.

Jordan Hymowitz - Philadelphia Financial

But can you predict why the book will draw that?

Curt Culver

What?

Jordan Hymowitz - Philadelphia Financial

The valuer draw that when losses stop do you think?

Mike Lauer

It’s same thing…

Curt Culver

Do you want to ask it a different way again.

Jordan Hymowitz - Philadelphia Financial

Alright. Thanks guys.

Curt Culver

Thank you.

Operator

Our next question comes from Michael Nannizz.

David Hochstim - Bear Steams

Actually it's David Hochstim. But I wonder can you tell us where captive balances were at the end of the quarter?

Mike Lauer

$687 million or in the trust fund.

David Hochstim - Bear Steams

Okay. And then on the bulk that lender paid, bulk that you ordered, are the premiums pretty similar to flow business or how different are the economics on those transactions?

Mike Lauer

The transaction was very high quality as Curt said, but the other major factor was, the coverage was only 8% because they were just ensuring for capital purposes. So our average coverage on flow is 25ish, this is eight so the premium on this deal was less than flow because of the coverage.

David Hochstim - Bear Steams

Okay. But it's, I guess, proportion it to coverage, it's not a lot.

Curt Culver

Yeah, it's in proportion to the coverage. I mean, we're not in the business of selling -- given everyone's capital, I don't think anyone they're selling something for less than what it's worth.

David Hochstim - Bear Steams

Okay. And then, I wonder if just, could Larry or somebody talk a little bit more about the delinquency development and I guess the trends in the prime business. Are those loans performing normally or are you seeing accelerated deterioration as we have with Alt-A and sub-prime because of home price declines are --?

Mike Lauer

I think it's more of a market vintage. I guess looking at the first quarter number, first half as Curt and others have mentioned. First quarter is a seasonal quarter, you have a lot of seasonal impact both in terms of slightly lower new notices particularly in March and a rebound slightly in the cure rate. And we saw that type of development lower losses, higher cures on most of the vintages, and most of the geographies the two that we didn't see it would be the California, Florida '06, '07 vintages.

So, aside from those two geographies those two vintages things look pretty good. Now, it's hard to sore it out the seasonality versus the underlying trends and the declines in the new notices and the improvement in the cure rate that's why we'll no more here in the second quarter when it's less seasonal activity then we'll get a better read on the true underlying fundamentals.

David Hochstim - Bear Steams

I mean is there anyway to say that conditions deteriorate at a slower rate than a year ago. I mean last year you didn't see the normal seasonal pattern in the first quarter. We're at a point where we're starting to see the real sustainable deceleration and deterioration that are not?

Mike Lauer

The seasonal pattern has always been there, but sometimes it gets masked by the overwriting fundamentals size of books and the performance of the books.

David Hochstim - Bear Steams

Right.

Mike Lauer

As I said earlier I think the subprime stuff was impacted soon as and we're seeing some signs maybe that stuff is peaking in a downward trend. But I think the major comment would be it's California, Florida newer book seem to be I wouldn't say getting any worse, they just are not get any better, and we saw some improvement from the other vintages, other geographies but we don't know at this point how much of that is seasonal versus true improvement.

David Hochstim - Bear Steams

Okay. And then I guess sort of following up on Jordon's question but not asking the earnings question but just the return question I mean, he was suggesting that maybe pricing just for kind of a mid teens return on equity. I mean is it really that low and you've have got much higher premium rates and tightened the underwriting standards and does not writing as much risky business. Clearly, you've to assume that home price is down, keep declining forever but if they stabilize or as you suggest start to rise by a couple of percent two or three years, shouldn't the returns on capital be better than?

Mike Lauer

Yeah, I mean, again as we're on the road a month ago we talked about that the returns that we think on the '08 book are more in the neighborhood of 15%. It maybe higher given the captive cutbacks. But the '09 can or probably closer to 20%, which is a reflection of the improvement in credit quality as well as us operating the company at higher capital leverage ratio. So, indeed I'd say the ROEs are improving.

David Hochstim - Bear Steams

Okay. And then finally, could you just I guess Mike I know you talk about the severities in Florida and California and how much different they were in the first quarter than the fourth quarter by the average claim I guess?

Curt Culver

Do you got that Mike?

Mike Lauer

Well, California, let's see more on the bulk side because we don't do that much -- didn't do that much in the flow side. But bulk and flow, California was up. We're probably in the first quarter California severity was about 118,000 up from a 113,000 a quarter ago on the bulk business. Florida 73,000 to 74,000 on the bulk and Florida on the flow 58,000 64,000, 65,000 on the bulk.

David Hochstim - Bear Steams

I mean is it reasonable to see that as a reflection of some again what you're talking about before sort of slower rate of the deterioration, I mean compared to what happened over the course of 2007 this was not that much worse?

Mike Lauer

No, but we're looking at these newer books where the delinquencies are still growing and the cure rate is still quite low. And we'll see more from California and Florida newer books that will have a higher average balance than some of the Florida prior books. And so that's going to feed the severity through the remainder of the year.

David Hochstim - Bear Steams

Okay.

Curt Culver

The average balance on the 2006 flow, NIW was 161,000. In 2007 the average balance for flow NIW was 178. So, I mean, if those work their way through there normal seasoning patterns still you see that be reflective in them.

David Hochstim - Bear Steams

Okay.

Curt Culver

Okay.

Operator

Our next question comes from [Nick Solano].

Nick Solano

Hi, guys. How are you?

Curt Culver

Good morning.

Nick Solano

I've a question to try and sword through and it has to do with severity. So, if I look at the coverage of the book and I'm talking about the total book and just increase that by 10% for foreclosure cost and so?

Curt Culver

Yeah.

Nick Solano

I guess roughly 29%. But then when I look at average claim paid over average loan size, we've seen that grow but now it's sort of 34%, so what's the disconnect there?

Curt Culver

The claims are coming from the higher cost areas.

Mike Lauer

As I mentioned for the quarter of the primary page -- of the $370 million that we paid, we paid $82 million in California and $30 million in Florida. So, that weights pretty heavy on those averages.

Curt Culver

Your assumption on the coverage was proper. Of the 29%, 26 coverage and then 3% if you will for add-ons. But as Mike said, it's just --

Nick Solano

Okay. So when I think about a kind of, when I start thinking about paids, I mean, how do I model that 34 coming back to that 29?

Mike Lauer

Well, what we've done in the queue, we gave you the high state, 15 highest states and we will have to further, break that out in the quarter. So you get some indication of where the delinquencies are, the higher percentage states and where the severity is with respect to, so obviously you can weight the model to some extent that way. In another words, you could probably run as I look at it, sometime I look at Florida, California, Michigan, Texas etcetera and Ohio and where is that relative to the rest. And it's heavily awaited for those top 15 states. We broke that out in the Q for the K rather, and that's if we continue to break that up, that will give you some more information.

Nick Solano

Okay. And again, just so I understand. It's not because the severity is higher because we're running at roughly a 100% severity, it's because the loan size in California, Florida are larger than the average?

Curt Culver

Yeah, I think Mike just told me average loan in California, we insured is 293,000.

Mike Lauer

293 and so combined total bulk, bulk flow off in to just 293 as the average balance in California, 180 is the average balance in Florida, and then now it's compared to the average balance of the total portfolio of just under 150.

Nick Solano

Got it. It's a big difference. Okay and then the other question I had was and I guess this probably has to do with the same answer was, while delinquencies are ticking up, claim rate and I'm just saying they are percent delinquent by default really ticked up in the last quarter.

Curt Culver

Can you say that again?

Nick Solano

So, okay. Delinquency rate on the whole book was 7.7% right? Because the claim rate percent delinquent that actually ultimately default. I calculated, it's sort of 38%?

Curt Culver

Right. You seem to have taken the average pay, or our total pay by the average claim payment.

Nick Solano

I'll tell you exactly what .

Curt Culver

Right and then back to this on a trailing basis. So I mean that certainly would be. You've taken the average calculating the percentage of loans, number of the claims that we paid and divide it back into inventory number.

Mike Lauer

Once again I mean the California and Florida influence may screw up that calc to.

Nick Solano

Right I'm basically looking at delinquent loans, looking at average claim paid.

Mike Lauer

So we can spend some time with.

Nick Solano

Okay why won't talk about later.

Curt Culver

Okay. Good idea. Thanks

Nick Solano

Thanks.

Operator

Our next question comes from [Joshua Smith].

Joshua Smith

Hi thanks for taking the question. I wanted to get a little more detail on the premium deficiency reserves, since it's a sort of a new and we are all trying to work through it. Can you concisely talk about the buckets, meaning you've got an expected present value or future claim payments? You guys expect present value or future premiums, and you've got a reserve and the difference between the three is your deficiency reserve.

Mike Lauer

Correct.

Joshua Smith

So over the course of the quarter you pay some down, you take some premiums in, which I would, I understand how that would reduce both the first two buckets.

Mike Lauer

Right.

Joshua Smith

Now why did reserves go up?

Mike Lauer

Delinquencies and the factors.

Joshua Smith

So the delinquencies went up which caused you to increase reserves.

Mike Lauer

And the factors, we’ve raised severity and that we talked about California, Florida specifically but there were some others but that was the major.

Joshua Smith

So, that wouldn’t have included in your original expected?

Mike Lauer

Sure.

Joshua Smith

But it just seems…

Mike Lauer

But you remember from the earlier conversations, we’ll continue to record this business through our normal lines, premiums and losses etcetera. And then the only adjustment is obviously whatever happens to the ending reserve and in this particular case delinquencies went up - even though the book is running down, delinquencies went up., and we increased reserves for those new delinquencies and maybe made some adjustment for existing.

Joshua Smith

Okay, so the underlying intricacy of mortgage insurance where you can't actually reserve until you see the delinquency.

Mike Lauer

Right

Joshua Smith

That's still going through…

Mike Lauer

And still going forward, right.

Joshua Smith

Okay. So, when I’m looking, are you taking down this pure deficiency reserve.

Mike Lauer

It goes for two things. It goes down for the reduction in future premiums obviously. It goes down for our estimate of future losses, because we have paid some losses and we haven’t re-estimated higher losses if you will. So that's a positive. And then plus whatever the reserve adjustment is to back it up. So the net of those [237] for the net premium values or the premiums losses, and the increase in the reserve of 127.

Joshua Smith

And the increases reserve should track typical factors like delinquency.

Mike Lauer

Exactly.

Joshua Smith

And severity on the delinquency, okay. That’s helpful. Second question, Barney Frank's proposal, a lot of these proposals talking about the lenders writing down the mortgages to 85% of appraised value and then selling that to the government? Have the MIs, I haven't heard the MIs talked about at all in these discussion and clearly you've just taken the game given that you could be making a full MI payment or if it doesn't go to foreclosure there is no MI payments. So, can you talk about your involvement in those types of discussions?

Mike Lauer

Well, we've been informed of what those proposals are and obviously from the individuals involve the Barney Frank and Senator Dodd and the administration has a similar proposal. And as I said today is [Senator] McCain has a similar proposal. We're part of those discussions relative to what they want to do.

But we haven't, I don't, from that we'll still have to see what plays out. As it stands now again that they have claim down the principal which everyone of these has. I mean that is the center piece of everyone of these at the lender/investor would take that drop in value. There is not an insurable event relative to that. But that doesn't mean we won't participate in some form of fashion as we get down the line now.

To the extent then I would expect these would only be offered and this is really where the (inaudible) and always I think it would be in case as where you think the loan has a high probability of ultimately going to foreclosure. And so our participation as an industry will be wanted I think on that basis given that ultimately we'd have a larger loss. But otherwise I mean, it's hard, I think for anyone to stomach that just the borrower will be able to write-down the value where they have the ability to pay the mortgage as it exist today.

Joshua Smith

Okay.

Mike Lauer

So, if I'm answering your question Josh. I mean there is a lot --

Joshua Smith

I guess the answer I'm looking for is that ultimate you've exceeded the table and this can't hurt you, it can only help you, or it could be a nonevent, is that fair?

Mike Lauer

Well, again, I think any of these proposals would help us relative to as we look at and everyone of these proposals they are borrowers that clearly are on the margin relative to their ability to make their payments at the current level. And there are some participation, I mean we're doing it right now on loss mitigation whereby if we can do a short sale with the borrower, where we think we've a pending claim coming at a loss less than what we've paid that we'll do that.

So, I think each one of this is positive for our industry. I don't know if anyone has to exit that table we give our input but those political decisions seem to come out regardless of what anyone decides and what's most popular that day. So, we do have exit at the table Josh relative to giving our input for what value that's taken, I don't know.

Joshua Smith

Thanks a lot.

Operator

Our next question comes from Eric Wasserstrom.

Eric Wasserstrom - UBS

Thanks, good morning.

Curt Culver

Good morning.

Eric Wasserstrom - UBS

Curt, I know that you mention that you're going to sit down with the GSEs and discuss with them what your capital position and your claims paying resources and all that kind of same. I guess what I'm wondering is, according to what Freddie has put up publicly is that the remediation plan that is required from the MI industry in the event of a downgrade which is obviously now occurred was it revolved around the intent of the MI to return to it's prior credit ratings?

And yeah when I try to look at that relative to what S&P is using at the basis of its downgrade, it's basically looking -- S&P is basically looking at a forward looking economic projection and relating that to the loss experience. But it's not necessarily relating it to the capital levels because the capital levels remain in excess of what's required for AAA rating. I guess, the essence of my question is in that context, how does that get reconciled between what Freddie Mac wants in terms of a return to AA ratings over some timeframe, and what S&P is stating about future loss experience?

Curt Culver

That's a good question to them. But from our perspective and our conversations and we've had been in contact with them for a couple of months relative to what we saw happening in the business. Their real concern is the capital adequacy to pay their claims going on the existing book and ability to insure loans going forward on a capital basis, and from that aspect I think that's the disconnect if you will, what S&P did and why we feel very good relative to how the GSEs are looking at the situation.

Currently it is our goal as a company to continue to push forward on a very profitable basis and regain a AA rating that is the goal of our company. But our long-term goal as you've heard from I think from the S&P call that will be a couple of year process I think relative to how they're looking at our industry. But I think the GSEs concern is their ability to meet their needs and that's relative to the capital and the claims paying ability of the companies, which is indeed their capital adequacy and the risk to capital ratios, which seems to be a departure from how S&P is looking at the business at the current where operating margin is more important today than capital.

And again we had a fundamental difference with S&P over that given our capital strength. We disagreed strongly with what they did with our company and probably some of the other companies.

But I think again back to the GSE that’s a question to be answered better by them. I feel very good relative to our conversations. We have meet them in person and will meet with them in person again and as I say we talk to them weekly relative to sharing information on a strength of our capital and from them I feel very good relative to those conversations.

Eric Wasserstrom - UBS

Okay, great. And if I could just follow up one element of the prior question about the key element of the Frank plan and the other plans that will resolve the issue of negative equity through a cram down. In the text of those bills that I've read, it seems that in each case it's effectively the servicer or the body that's responsible for determining the overall economic value, or in other words towards the economic interest in the loan to determine which loans will be eligible for this within the broader criteria.

And it would seem then that if a holder alone has MI on that loan and is facing the element of the cram down versus just letting it go to foreclosure and then getting part of their loss mitigated by you, they were choose to do the later. So doesn't had effectively compelled the MI industry to participate to some degree in order to avoid being in versus selected?

Mike Lauer

Again, that was my -- I guess general comment was that, while it’s not a claimable event, they would be certainly part of something we discussed going forward, because paying 25% of 15,000 versus 50 makes great economic sense for our company relative to that cram-down. As it sense right now again, we don’t have a claimable event because there is not a title property as they can present as a claim to us. But it would be short-sighted on our industry’s part not to be part of that discussion relative to doing what’s in the best interest of all of us.

Eric Wasserstrom - UBS

Alright. Just so I understand you. When you are saying that you think it would be a benefit, it's just because the loss that you would suffer …

Curt Culver

Yeah, it would be smaller…

Eric Wasserstrom - UBS

Or it would be Less than, okay.

Curt Culver

Yeah.

Eric Wasserstrom - UBS

Okay. Great. Thanks very much.

Operator

Our next question comes from [Jason Regero].

Jason Regero

Jason are you there?

Operator

(Operator Instructions)

Jason Regero

Hi, sorry. I have no question. Thank you.

Mike Lauer

Okay.

Operator

Our next question comes from Donna Halverstadt.

Donna Halverstadt - Goldman Sachs

Hi. Wanted to get an update from you on captives. If you could update us of your view on how much benefit you expect to see in each of '08 and '09. And at the end of the year the captive trust fund asset were about $630 million, I was wondering if you could update that number for the end of the quarter?

Mike Lauer

The end of the quarter that is 687 to get on the schedule, so those have grown and will continue to grow as those captive treaties continue on. And as far as the benefit on a paid basis this year, around $100 million or so.

Curt Culver

[On page].

Mike Lauer

[On page]. But on incurred basis it would be higher than that. But paid would be about a 100 and it’s a sensitive forecast and that there are no losses right up until it gets into their layer and there is losses at 100%, so by and large about $100 million this year.

Curt Culver

Okay. And next year?

Mike Lauer

Little higher.

Curt Culver

Somewhat higher. We expect, I think over the life of those loans that we'd have over $1 billion in those trust funds that we could qualify on that, I think it was the number that we're utilizing Donna that that should grow too relative to those books. Again we don't expect to utilize those dollars given our outlook on the future, but they are there. And again while you know, I am not a fan of that product through this cycle anyway it's helpful relative to limiting our exposure half of our book to four or five per 100.

Donna Halverstadt - Goldman Sachs

Okay. The other thing I wanted to ask you about is, prior to your capital raising, you had said that, given the expected increase and risk to cap, you wouldn't be able to fully participate in the opportunities you see without raising capital. The amount of capital that you've raised, is that going to allow you to participate fully in opportunities kind of '08, '09 or do you -- would you like to have gotten more or would you expect to possibly be back in the market again in the near term?

Curt Culver

We don't expect to be back in the market. Again we are reading in to the sale of Sherman which we're negotiating, as well as the addition of the reinsurance which we're talking about. Then also looking at our international opportunities, we don't see a reason to be back in the market. As far as the opportunities, I think we're really meaning the opportunities that are presented by the market, given the size of that or the contraction within it.

And then also relative to, if you will, the cutback and the size of volume is based on our underwriting changes and pricing changes. So the only area where we won't fully meet what I'd like to be doing or what our company would like to be doing more or less somewhat with the HFAs because that's been a very profitable business for us as well as the international. We'd have like to grown that faster but we're not going to do that.

So, that's the two opportunities and the HFAs is a billion dollars not that we sneeze at that but we'd like to have done more there and clearly international longer term, I think is a very strong aspect for growth for our company. It just won't be as fastest as we once planned.

Donna Halverstadt - Goldman Sachs

Okay. And the last think I wanted to ask you about just a quick detail question on the credit facility as far as I can tell, it looks like there was three maintenance covenants two of which there has been some good disclosure on. But there is one that says your policyholders' position, which is described is including stats or pause in contingency reserve must be not less than the amount required by those Wisconsin insurance?

Mike Lauer

Risks to capital 25 to one.

Donna Halverstadt - Goldman Sachs

No risk to the cap is I found that but the dollar amount of policyholders' position required by the Wisconsin regulations. What is that dollar amount?

Mike Lauer

We've haven't done the calculation.

Curt Culver

No. I haven't done the calculation.

Larry Pierzchalski

I mean it's not an issue at all Donna. I mean that's why we haven't done that and it is not something you even need to worry about.

Donna Halverstadt - Goldman Sachs

Alright.

Larry Pierzchalski

I mean, we can get it to you and you (inaudible) and get that item, if you don't play.

Donna Halverstadt - Goldman Sachs

Okay that will be great. I'd just love to mark that one off later.

Larry Pierzchalski

Sure.

Donna Halverstadt - Goldman Sachs

Okay. Thank you.

Larry Pierzchalski

Mark it off the list.

Donna Halverstadt - Goldman Sachs

I knew you'd say that but I like the number. Thanks.

Larry Pierzchalski

Okay Donna.

Operator

Our next question comes from Michael Grasher.

Michael Grasher - Piper Jaffray

Good morning. Just a couple of questions here. Can you give us Mike any details around what's left in the '06 and '07 vintages in terms of risk in force or insurance in force as a percent of the total? I don't know if that in the supplement?

Mike Lauer

Mike this is Mike. On the last page we've a supplement on the left side. But I'll tell you for flow I mean, is still predominantly there it's because of the Wall Street bulk transactions '06 was 65% and the remaining risk. We only wrote less than a billion of risk in '07 Wall Street bulk at 95%. 72% for the remaining bulk for '06, and nearly all of it for '07. They are pointed to the supplement will give you a bio-vintage 2004 and prior '05, ’06, '07 and ’08 for so, you get the total risk in force characteristics there.

Michael Grasher - Piper Jaffray

Okay, great. And then, just can you talk about what you're doing on the mitigation front in terms of trying to limit the paid losses?

Mike Lauer

We’re doing a number of things. One of which is to work with the servicer and a borrower to potentially refinance the loan into some of the FHA programs. Two

Curt Culver

Which are available today…

Mike Lauer

Yeah.

Curt Culver

Whether it doesn't take into effect whatever might happen with the Dodd Frank or McCain or administration programs.

Mike Lauer

And then another would be to modified loan buy down the rate and what not should lower the payment to the borrower to keep them in the house for those borrowers that would work for. And then as Curt mentioned it earlier, to a degree the borrowers in a situation where even with the loan buy them down, they are not in a position to continue to make the payments, then they try to move that loan along the foreclosure and short sale front to mitigate our loss.

Larry Pierzchalski

They were just steering the Wall Street today and short sales and I've to tell you that we're being more proactive than the borrower perusing and we're perusing it as the mortgage insurer and then with constant conversation with the borrower and the servicer and trying to make arrange those short sales in happening. So, that it happens a little more often when you proactive added and we're trying to be very proactive in that area.

Mike Lauer

And then up to this point we've kind of thought about the program start to [deserve] reserves and gotten things in place laid the groundwork. So, I would say to this point some of that mitigation is not reflected in numbers hopefully these programs further reduce losses going forward, now that we've them in place.

Michael Grasher - Piper Jaffray

Okay. Thank you.

Mike Lauer

Yep.

Operator

Our next question comes from [Matt Ulrich].

Matt Ulrich

Good afternoon gentlemen. All my questions have been answered thank you.

Mike Lauer

Thank you.

Operator

Our next question comes from Howard Shapiro.

Howard Shapiro - Fox-Pitt Kelton

I must have pressed it by accident, no question sorry.

Mike Lauer

I love it.

Operator

Our next question comes from Jordan Hymowitz.

Jordan Hymowitz - Philadelphia Financial

Hey, guys. One more thing despite reserve losses being lower than expected you continue to build your reserves and they are over two time paid claims at this point or 1.5 times if you go $1.8 to $2 billion in page for the year. At what point do you say that's enough reserve building. I mean, do you have to see the fall starts to comedown. I know you don't tend to look at it reserves to paid claims but it's much higher than its been in the past few years at this point you're just starting to look a little over reserved?

Mike Lauer

I think the key would be, Jordan what happens with delinquencies. As Curt talked, we have a reasonable quarter, we would expect that in the first quarter. And in the events that delinquencies continue to rise, you'll continue to see the reserve build over page. And generally speaking you would anticipate because of the size of the specialty the '07 book that we should see an increase in delinquencies.

That's why we said earlier on a macro basis, that we thought we'd continue to see the delinquencies increase this year. The level at which they increase that maybe a difference, but we continue to expect that delinquencies would increase throughout the year and we have a normal build in the reserve over-page subject to that.

Jordan Hymowitz - Philadelphia Financial

Do you think sub-prime delinquencies were increased or just overall?

Mike Lauer

Overall, I think, primary the flow book, the bulk book is running down and I think the biggest part of that is going to be delinquencies out of the '07 book because of a such a large book.

Jordan Hymowitz - Philadelphia Financial

Because your average claim payment is almost double on the flow both and there is the flow. So to the extent that the sub-prime and the A minus slowdown a lot or get reduced, it could make up for an increase in the prime you know what I'm saying?

Mike Lauer

That maybe a mitigating factor, right. The mix could be a mitigating factor, but it's really -- as Larry said, it's a little bit too earlier in the year to call those. I think we need to see a couple of more quarters develop.

Jordan Hymowitz - Philadelphia Financial

If you had the guess estimate, do you think that sub-prime will be relatively stable from here or it's actually come down last quarter?

Mike Lauer

When you say stable, do you mean the paid level or the delinquency level?

Jordan Hymowitz - Philadelphia Financial

The number of delinquent loan level?

Mike Lauer

Well, certainly on the Wall Street bulk we expect that to run down.

Curt Culver

Because that really, I mean, as Larry mentioned we really stop writing that at the fourth quarter of '06.

Jordan Hymowitz - Philadelphia Financial

Thank you.

Mike Lauer

Okay, yeah. Operator we have just two more questions in the queue, so let's take those two questions and call it a day.

Operator

Our next question comes from [Peter Herran].

Peter Herran

All my questions are answered thank you.

Curt Culver

Okay Peter. Last question.

Operator

Our next question comes from [Ron Bobin].

Ron Bobin

Hi thanks a lot for taking my question I appreciate it. I had a question about Sherman. Your investment agreement or whatever sort of evidences the relationship and the original deal, does it have in effect tag along rights, so that if you reach an agreement with Sherman management that sort of Radian comes along presumably at the same terms or vice versa. I know both you and Radian have discussed the prospect of selling it and now the specific mention of negotiations. Just had a question along those lines? Hello.

Mike Lauer

Yeah it does have a tag along rights.

Ron Bobin

Okay. And then…

Mike Lauer

But you probably need to talk more directly to Radian about how those apply.

Ron Bobin

Okay. And then would you give us any sort of conservative timeline. You are optimistic that you are - if you reached the agreement you are two weeks away, two months away, or it's way too early to determine at this point any sort of statement about timeline?

Curt Culver

In quarter two.

Ron Bobin

Q2, okay. Best of luck and thanks a lot.

Curt Culver

Yeah thanks Ron. Operator that did it as far as questions, and again I will thank all you for your interest in our company and your investment within our company. Thank you all.

Operator

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

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