May 12, 2008
Executives
S. A.
Ibrahim - CEO Bob Quint - CFO David Applegate - President, Radian Guaranty, Inc. Steve Cooke - President, Radian Asset Assurance Inc
Analysts
David Hochstim - Bear Stearns Mike Grasher - Piper Jaffray Steve Stellmach - FBR Capital Markets Howard Shapiro - Fox-Pitt Donna Halverstadt - Goldman Sachs
Operator
Welcome to the Radian's first quarter 2008 earnings call. At this time all participant lines are in a listen-only mode.
Later, there will be an opportunity for your questions with instructions being given at that time. As a reminder, today's conference call is being recorded.
I would now like to turn the conference over to the Chief Executive Officer S.A. Ibrahim.
Please go ahead.
S. A. Ibrahim
Thank you, operator. Thank you everyone for joining us today.
As always I will start off by making some opening remarks followed by Bob Quint with detail comments on the first quarter financials. David Applegate and Steve Cooke will then give more color on the Mortgage Insurance and Financial Guaranty businesses.
We will then take your questions and I will wrap up with some closing remarks. First, let me remind you that any forward-looking statements that we make this morning should be considered in conjunction with the cautionary statements set forth in the Safe Harbor statement included with our webcast slides and the statements contained in our SEC filings.
These are available on our investor relations website at www.radian.biz. As anticipated, in the first quarter of 2008, Radian along with others in the industry continued to be affected by the weak credit and housing markets we saw in 2007.
Even so, Radian was able to make significant progress, on a variety of fronts. In the first quarter of this year, Radian reported a net income of $195.6 million and diluted earnings per share of $2.44.
Excluding the impact of net unrealized gains on derivatives on hybrid securities, our net operating was $215 million and the net operating loss per share was $2.69. Net operating loss is a non-GAAP financial measure and we had provided a detail reconciliation of these numbers to our GAAP results in our press release and in the web cast slides in our website.
Bob, will give you more detail in just a few minutes. Our Mortgage Insurance paid claims were inline with our guidance while our loss reserves continued to increase, reflecting market conditions.
Across both businesses, we ended the quarter with $1.9 billion in reserves. Looking ahead, although it continues to be challenging for us to forecast the markets in the near-term, I am confident that the initiatives we are taking, will position Radian well for the long-term.
In the last few months, we have taken several steps to recruit key talent and improve operational efficiency in our business units. We have been steadily improving our business mix by taking on a higher percentage of prime loans and by making prudent decisions to discontinue business lines, which carry disproportionate risk.
Our task is to do what is right for the business, so that we are well positioned when the market stabilizes. Our past decisions to consistently grow reserves at higher rates than our peers, even with similar default rates, have enabled us to approach the hurdles that the market has thrown at us with a greater degree of flexibility.
We will continue to take this approach to reserves as current market conditions remain challenging. So while there is little Radian can do about the current state of market, we can certainly do and are doing our best to mitigate the effect of the housing downturn.
We are continuing to monitor the rate of defaults in our MI business and are taking action to help our servicing partners and homeowners, manage through difficult situations with strategies to avoid foreclosure. As we work to limit the effect of the housing downturn on old book of business we are also transforming a new MI business so that the insurance we write can deliver strong profitability in the future.
The priority for Radian Asset, our Financial Guaranty business as you will hear in more detail from Steve Cooke is to build on our strong capital position, work with the rating agencies to maintain our AA status, and take measures that enhance our franchise value. While this has been a highly volatile market for financial guarantors, our solid capital base allows Radian Asset to work at different ways to diversify our exposure while pursuing attractive market opportunities to write quality business only available to a select few in the financial guaranty industry.
As we said before, we have been evaluating the need to raise capital and alternatives for doing so. We now intend subject to market conditions and other factors to raise capital in the near-term primarily by issuing equity.
We plan to use the proceeds of the capital raised to repay amounts drawn on our credit facility and to provide significant additional capital to Radian Guaranty. Although we continue to believe that Radian Guaranty has sufficient capital to pay its claims, the additional capital infusion will allow our mortgage insurance to business to continue to write new business on favorable terms, while maintaining appropriate risk to capital levels.
Also, additional capital is an important component of our plans to regain our AA status with S&P over time and in a manner that is acceptable to us as well as to the GSEs and our lender counterparties. In conjunction with evaluating our capital option, we also announce that we are considering strategic alternatives to enhance and maximize the value of our Financial Guaranty subsidiary Radian Asset Assurance.
Our current intention is to not withdraw capital from our financial Guaranty business. We have also been working through the ways in which we can create more independence in the corporate governance of Radian Asset, for example, by appointing some independent directors.
The goal is to demonstrate through concrete actions that the capital in the Financial Guaranty business is secure. We are effectively ring-fencing the business to protect its franchise and to enhance the long-term value of its contribution to Radian Group.
That said, we will continue to evaluate opportunities as they arise overtime, particularly, as market evaluations for the financial guaranty sector recover and there is greater appreciation of Radian Asset Assurance's strong relative position in the industry. Our focus is to earn recognition of the true value of Radian Asset and to continue to enhance our franchise, so we can go out and capture business.
This, along with the ability to sell our remaining interest in Sherman, uniquely positions Radian Group to generate additional capital in the future, if necessary. As the Mortgage Industry continues to navigate through these unprecedented times, Standard and Poor's Rating Agency announced credit rating changes with regard to several companies in the mortgage insurance sector including Radian.
In response to this announcement, and months before the deadline we submitted remediation plans to the GSE's that are intended to restore profitability and an AA rating to our Mortgage Insurance business. We have recognized that returning our MI business to an AA status is a multi-year process, but are prepared to take the actions necessary to do so.
As Dave Applegate will discuss we will be maintaining a close dialog with the GSE's about managing through the market downturn and its impact on our business, since last year. The same is true about communication with our clients.
Radian remains committed to working closely with our lender partners and the GSE's to provide solutions that will improve the future of the housing industry. Importantly, Radian remains a top gear company with both Fannie Mae and Freddie Mac and we are dedicated to maintaining our partnership with them.
On the legislative front, there has been considerable speculation on several proposals that are pending in Congress. We generally support legislative and administrative proposals that create opportunities for borrowers that default to refinance their loan or modify their loan to terms that allow them to avoid foreclosure.
Since there are several proposals and they're subject to change we will continue to monitor these developments and will take a more definitive position if and when appropriate. And now I will turn the call over to Bob who will take you through our financials.
Bob?
Bob Quint
Thank you S.A. For this quarter again, I will again be updating you on the unusual item that impacted our financial statements in 2007 and so far in 2008, including the adoption of SFAS 157, as well as going over the highlights of a normal P&L activity and trends for the first quarter of 2008.
The change in fair value line for the quarter was significantly impacted by the adoption of SFAS 157 in 2008. The main qualitative difference in our mark-to-market methodology with 157 is the incorporation of the markets perception of Radian's credit in computing fair value.
This has the impact of reversing some of all of the negative spread related marks previously booked mostly on corporate CDO's in our finance guaranty business. I think it makes sense to explain exactly what our fair value calculation does on these products.
These are not assets we own. They are financial guaranty and mortgage insurance credit exposures that we took in the form of derivatives.
The fair value calculation potentially re calculates the premium we would have received in today's current credit environment compared to the contractual premium. Here is an example.
If we wrote a guaranty on a synthetic corporate CDO and charged 10 basis points per annum, than the current market price for the same deal based on the credit quality of the underlying collateral would be 60 basis points We used a 50-basis point difference to book a negative mark because of pricing when we did the deal was less than it would be in today's' market. That is the reason for the significant negative adjustment during 2007, which we said repeatedly was not credit related.
With SFAS-157 offsetting much of that large negative mark is incorporation of Radians credit spread. The isolated pretax income of SFAS-157 component of our own credit is $2.1 billion offsetting much of that large fed-related negative mark that has accumulated, with much of that actually occurring in the first quarter of 2008 when spreads widened considerably.
With all the complexity regarding the past fair value negative marks and the current quarter's positive marks, we believe our balance sheet derivative liability is currently much closer to the actual credit impairment reserve. We will have several disclosure tables in our 10-Q filing to detect the impact of SFAS-157 adoption and other mark-to-market movement, as well as including a breakup in our press release and webcast slides.
With regard to NIMS we have risk-in-force of $604 million and a mark-to-market reserve of 434 million as of December 31st, 2007. Since then, our risk has been reduced by another $82 million to $522 million as of March 31st, 2008.
The updated balance sheet liability on NIMS is $316 million, with a positive change occurring due to our implementation of SFAS–157 offset by a negative adjustment related to greater expected loss. We think the present value of future principle credit losses on NIMS will be approximately $400 million.
This quarter, we have also consolidated several other NIM trust, which doesn't change our exposure at all, but essentially, moves the net amount of about $84 million of the $316 million liability to a different place in our balance sheet. With risk-in force of $522 million, as of March 31st, our liability relating to NIM is currently 60% of our total exposure.
The premium deficiency on second lien, necessary because future projected losses and expenses are greater than future expected premium was initially booked in the third quarter of 2007, and was on the balance sheet at year-end at a $196 million. An updated projection at March 31 results in a net increase in the PDR in the balance sheet of $18 million, to $214 million, arising primarily from an update to the future projected losses to $465 million.
This increase is necessary, due to the continued deterioration of the performance of our second lien portfolio. The risk-in-force on second lien is $843 million as of March 31.
So between a loss reserve of $176 million, plus the premium deficiency of $214 million; this exposure is 46% reserved. Our traditional MI first lien loss provision reflects the higher delinquencies and claims that occurred this quarter, although, the delinquency trend was much higher in January, and up less in February and March.
Also please note, that there was a reporting change this quarter by one of our large national services to cumulatively catch-up in reporting 60 days delinquencies. This change will be made formally in April, however, we have estimated and included an additional 2,500 delinquencies with an incremental loss provision in reserve of $39 million and included these in our March numbers.
Our understanding is that this is an industry wide occurrence with respect to this servicer. Our paid claims came in at a $190 million, slightly lower than our previously forecasted number consisting of a $145 million of first liens and $45 million of second liens.
Looking forward into the balance of 2008, we expect the claims paid will be approximately $240 million in the second quarter and still in the $1 billion range for the year, which is the same guidance we gave in the previous two quarters. Both of those numbers include second lean loss payments.
The total provision for the quarter was $571 million, comparing favorably to incurred losses of $630 million for the fourth quarter of 2007 and is broken down by $462 million for first liens and $109 million for second liens. We expect a substantial recovery both captive and smart home reinsurance over the next several years, at least in the $200,000 million to $300,000 range and possibly higher.
As of March 31st most of the $36.9 million reinsurance recoverable on our balance sheet relates to smart home reinsurance. Low premiums earned have continued to grow, which reflects that low insurance-in-force grew due to good penetration and persistency.
Dave will be talking about our mix of business, which has clearly improved pretty dramatically. Please note a change in presentation on premiums owned from derivative contracts in both financial guaranty and MI, those premiums have been excluded from the premiums written and earned line and now included within the change in fair value of derivatives, in accordance with the Financial Guaranty industry change, after discussions with the SEC.
Financial Guaranty results this quarter were as expected with lower premiums written. Premiums earned were strong, reflecting heavy refunding and losses were as expected with relatively stable credit performance.
As we have said, our book-of business in Financial Guaranty contains relatively less exposure to mortgage and mortgage related credits than the rest of the industry. Claims paid in Financial Guaranty for the quarter consisted primarily of $100 million for the CDO of ABS transaction that was fully reserved for, in the third and fourth quarters of 2007.
The domestic mortgage insurance CDS business had a further negative mark this quarter of $18 million and the current mark is negative of a $105 million, which approximates the expected credit losses. The international CDS had a negative mark of $13 million.
Although the notional exposure on this business is very high, at $8.9 billion, changes in exchange rates have increased the dollar exposure. Please remember that Radian's attachment point is Super AAA and we still see no reasonable scenario in which we would incur any credit losses in such exposure.
Sherman continues to perform well with overall pretax operating income of $64.5 million of which Radian's share is $12.5 million. Sherman has an option to acquire our remaining interest and we continue to view Sherman as a potential source of additional capital.
C-BASS was fully written off in 2007. There is a possibility that we will recover some of our $50 million demand note, but that wouldn't be for many years.
Our liquidity position remained strong. As we reported, we have secured an amendment to our credit facility that removes the rating covenant and gives us more flexibility with respect to our GAAP equity covenant among other changes.
We expect this amendment to be completed shortly after receiving a few remaining legal opinion. We expect to pay down the $200 million outstanding amount under the facility as part of our planned capital raising effort.
After the pay down, we would retain a $150 million in liquidity from the facility. We still have over $100 million of Radian Group in minimal immediate need for cash from the holding company.
Operating cash flow for the quarter was a small negative. Our MI risk to capital is 17.7 to 1 at 331.08.
However, if we exclude the Super AAA international credit default swap, which need very little capital to support that risk, the risk to capital is 14.1 to 1. At quarter-end, the statutory surplus, which includes contingency reserve in our MI business, was $2.4 billion, and we have another $2.3 billion in loss and other reserves.
The rating agencies still view our MI capital as being strong, and hopefully we can demonstrate the change in business profile to gain back the AA ratings over time. Our investment portfolio continued to perform relatively well in the stressed environment.
Its extremely safe credit profile, emphasis on liquidity and our policy of our generally not investing in residential mortgages has proven sound, and the value of our portfolio held up well this quarter. Our current book value stands at $2.9 billion or $35.64 per share.
I'd now like to turn the call over to Dave Applegate, President of our Mortgage Insurance business.
Dave Applegate
Thank you, Bob. The mortgage insurance business had another very challenging quarter, posting an after-tax loss of $226 million, but outperforming Q4 '07 where we lost $335 million.
Bob did a very thorough review of our financials, so I will focus on the key operating considerations for the MI business. And I'm going to address the following areas.
The first is the impact of the ratings downgrade to our GSE status and our clients. Second is the steps we're taking to improve the mix and quality of NIW and the overall future profitability of the business.
And third is the steps we're taking to manage our existing risk-in-force exposure and the trends we are seeing in the portfolio. Let me start with the existing portfolio performance.
Bob already addressed the deterioration of our second lien book and the positive impact the implementation of FAS 157 had on our NIMS portfolio. So, I will address the delinquency and reserve trends for our primary first liens.
In Q1, our first lien net reserve build was lower than Q4, thanks to a slower increase in our default account. Q4 defaults increased approximately 10,000 or 20%, while Q1 defaults increased 8,000 or 13.5%.
And that's inclusive of the service or reporting adjustment Bob previously referenced. As a result, in Q1, we added $300 million of reserves for primary first liens, $100 million lower than the prior quarter.
Our primary book default rate is now 7.63%, and that's up from 6.8% in the prior quarter. Although the slowdown in gross defaults is a positive development, it is likely driven by traditional seasonal factors.
So, stepping back on the quarter's performance, the underlying trends that have been developing over the last six months are still evident. We continue to see the poorest relative performance in our Alt-A book, and California and Florida continue to heavily influence overall portfolio performance.
50% of the increase in defaults in Q1 was attributable to Alt-A loans, and 50% of the first lien reserves we put up can be attributed to California and Florida. The states experiencing the greatest property value declines are clearly seeing a sure pickup in defaults.
We estimate property values will fall peak-to-trough on a national basis using the OFHEO index in a range between 8% and 13%. That would be in line with the Case-Shiller approximated range of 16% to 20%.
We could clearly see declines in many areas of California and Florida that are as much as twice the national average. These challenging fundamentals make it imperative we work closely with our business partners and invest in unique strategies.
For example, we just launched a new more consumer friendly website to educate borrowers on their home preservation options. In addition, we have contracted with a third party, nonprofit consumer credit counseling fund that fosters a friendly, non-confrontational and supportive calling effort.
This agency is able to reach the consumer at a rate 25 times greater, than our standalone effort and will drive significantly more home preserving options that we could do on our own. We have also now placed Radian staff in the operations of two of our major customers to mutually facilitate loss mitigation options, and our recently launched Fast Advance loss mitigation program is getting excellent traction.
Fast Advance is where we advanced to the servicer up to 15% on the claim amount, to invest in a rate buy down or loan modification to cure a defaulted loan. We are clearly moving aggressively, to preserve our capital and increase communication with our clients and partners in this distressed times.
And now, I would like to shift to the impact of S&P down grade to our business, which has been minimal. First let's discuss the GSEs.
We have been maintaining a frequent and productive dialog with the GSEs about the market downturn and its impact in our business since last year. Fannie and Freddie previously announced that a reduction in a rating to below AA minus would not necessarily result in a loss of top tier status with the agency, but a remediation plan to regain your AAA or AA will be required.
Radian's plans were presented on April 10th, 2008 to each agency just days after the S&P actions. We have received positive feedback from the GSE's on that profitability transformation plan.
At our meetings, we outline various initiatives we were executing that make new business, very accretive, and efforts we have taken to manage our existing exposure. We are pleased that both organizations have expressed their support for our top tier status.
We and they realized it will be multi-year endeavor to return the desired AA status but we have a plan that accomplishes that goal and we will continually update the GSE's on our progress and share needed information with them to serve their needs and the needs of our lender partners. Turning to our clients, we have been meeting with all of our clients, large and small, educating them, on what the downgrade means; our confidence in our claims paying ability and strategic options relating capital.
To date we have lost no domestic clients and see no impacts to our market share. Our client base has been extremely supportive.
Our estimated total market share in Q1 is in the 14% range, which is very consistent with last quarter. They, our clients realized the unique nature of the times we are in and are supportive of the guideline changes and other initiatives we are pursuing, that will have the effect of improving each of our bottom lines over time.
However we are willing to forego some share to make sure that we get the correct mix of business. Now, I will discuss the efforts we are pursuing to improve the long-term profitability of our business.
In Q4 and Q1 we made numerous guideline changes, which are having a dramatic impact on quality. We implemented a declining markets policy, which pulls down LTV's in soft MSA, and we capped our maximum LTV at 97% in stable MSA's.
We've eliminated the alt-A business. We have raised our minimum FICO scores and have eliminated other forms of layered risk.
Based on the changes to date and shifts in the market, we are seeing a dramatic improvement in our mix of business. 90% of our production was prime this quarter.
That's up from 77% the prior quarter and up from 40% prime in the first quarter of last year. We are also seeing a significant contraction in the above 95% LTV loans.
We also announced a series of price changes that went into effect on April 1st. The goal of our price and guidelines changes is to improve our risk-reward posture and generate appropriate returns on new businesses.
I would caution that some of these changes take time to work through that system, but the $10 billion of NIW this quarter is our best book in many years. Despite these improving trends, we intend to make a second round of price changes in near future to further combat market conditions.
The combination of these price and guideline adjustments will push expected returns on new business into the plus 15% range. The mortgage industry is clearly facing unprecedented conditions and P&L pressure will continue on the older vintages.
But we feel we have taken wise and prudent steps to restore our business to long-term profitability and regain a stronger rating. With that I will turn the call over to Steve Cooke, President of our Financial Guaranty business.
Steve Cooke
Thank you Dave. Despite the difficult and challenging environment for the financial guaranty industry as a whole, during the quarter, which has caused reduced new business production, our Financial Guaranty business continue to maintain a strong its capital position with limited exposure to vulnerable asset classes.
S.A. has addressed his earlier remarks with some details, the corporate priorities with respect to the FG business related to preserving and enhancing the current and future value of the franchise.
Although new written premiums were down in both our public finance direct and structured financed sectors, there remains certain positive developments of note. Our reinsurance business remained strong during the quarter, with net written premium of $23 million only down slightly from the comparable period in 2007.
Net earned premium increased period-over-period, primarily due to an increase in net premiums earned in our public finance direct business, which offset smaller decreases, in other FG business lines. We have also experienced a high level of refunding activity during the quarter.
$11.7 million versus $6.6 million in the comparable period of 2007. We made a conscious decision at the end of the first quarter, to refocus our efforts in the structured finance arena.
Due to deterioration and uncertainties in the credit market that have significantly reduced a volume of CDO and other structured products, we have decided to discontinue for the foreseeable future insuring CDO's. We will now focus our structured finance efforts in the areas of infrastructure finance, i.e.
providing credit protection on PFI, PPP and project finance projects, involving a sincerity of purpose, financial solutions, where we act as a leading provider of soft capital solution to global financial institutions and asset backed securities involving target niche issuers, in well understood sectors and strong credit in non-traditional factors. In the public finance area, we continue to target undeserved segment of the municipal market characterized by smaller and infrequent borrowers, with a particular emphasis on sectors related to land-secured financing, education, healthcare, and senior living facility.
At March 31st, 2008 our FG net credit derivative liability was $211.7 million, primarily attributable in changes in credit spread and not to any material amount of credit impairment. We continue to vigorously monitor both our direct and assumed exposures, which has resulted in a higher provision for losses, primarily in the structured finance and the insurance business as a result of assumed mortgage exposures.
However, in general although the overall credit performance of our FG portfolio continue to show some deterioration, it still remained stable during the first quarter, given market conditions. I will now turn the call over to S.A who will make some concluding remarks.
S.A. Ibrahim
Thanks Steve. Let me summarize the teams prepared remarks as follows.
We are managing for the present while preparing and positioning for the future. At the moment, the markets in which we operate are cyclically tough but we have the ability to our pay our claims and we have an eye on the future with the business we are writing.
As we see demand, discipline and profitability return to the mortgage insurance and financial guaranty markets, we look forward to a more positive and profitable future for Radiant as the current cycle bottoms out and we move inevitably to the recovery period, a period that historically has presented participants with exiting shareholder value creation opportunities. With that operator we will now start taking questions.
Operator
(Operator Instructions). And we will first go to the line of David Hochstim with Bear Stearns.
David Hochstim - Bear Stearns
I had a couple of questions just on the SFAS-157, is that option consistent with the number, somebody, maybe Steve, explain what would happen now, as assuming spreads tighten, would you realize less of a benefit than you had if you hadn't adopted 157?
Bob Quint
Yeah. I mean, we received a sort of a big positive benefit this quarter from incorporating our own spread.
So I think in the future, you have to look at the relative spread between the underlying collateral. So that's going to go the way it goes either, plus or minus.
And then, Radians own spread would be taken as well. So assuming they go in the same direction, they would, they may offset.
If they are going to different direction, that would have a different impact.
David Hochstim - Bear Stearns
But over time, assuming you get paid the way you expect and this would all kind of washout and you recover those losses you booked last year?
Bob Quint
That's right. Whatever is left, assuming it is only spread related, no matter whether it was the underlying collateral or Radian spread over time as deals expire the marks will be reversed out to zero.
David Hochstim - Bear Stearns
Okay. Can one of you provide some more color on the service adjustments, that you referenced and, and then may be also just again on the trend over the course of the quarter?
Are we starting to see some more normal seasonality in delinquencies or is it just way too early to know that things aren't looking all worse?
David Applegate
The servicer adjustment was from a large national servicer where a previously standard processor was to report loans that were 90 days delinquent and greater. The MI industry as a whole traditionally looks for loans to be reported in 60 days.
So that adjustment had to be made. We anticipated what that number would be through a discussion with the partner and then put up another accordingly a consistent reserve amount.
The general trends in terms of delinquencies we are seeing. I think at this point you would have to describe as seasonal.
There was definitely in February and March a strong seasonal benefit, but as I referenced in my points all day books are seeing continued weakness and the areas of the country where you have seen property values decline are certainly in some level distressed. So it's too premature to say that we would pass this thing.
David Hochstim - Bear Stearns
Did you see some seasonal benefit in Florida and California or was it other places?
David Applegate
I couldn't state specifically how cures and seasonality hit California and Florida.
David Hochstim - Bear Stearns
Okay. Fine thanks.
Operator
Next we will go to the line of Mike Grasher from Piper Jaffray. Please go ahead.
Mike Grasher - Piper Jaffray
Thank you. David, a couple of follow up questions from your comments?
I think you spoke to the Fast Advance program, as a tool in terms of loss mitigation. How much of an impact, did that have in terms of cures for your book of business?
Dave Applegate
The Fast Advance in terms of number of units; I don't have the specific number at my finger tips. We have to follow up with you on that.
Mike Grasher - Piper Jaffray
Okay and then just a follow up to the question. I am just curious, as to how you are differentiating among those that are delinquent in terms of helping them cure?
Dave Applegate
Well, the way the Fast Advance program is set up, as we work with our servicer partner. And we will advance to them up to 15% of our financial claim amount.
And so what we will do is work with them, to determine if there is a loan modification option, for example that contribution with whatever the servicer may be dealing, will cure the loan. And so for us to advance the loan has to cure at the same time and then that's just an additional tool in conjunction with the other traditional loss mitigation steps we would take, but we have seen a significant to its is including a third party service, the not-for-profit counseling agencies are creating a lot of value right now.
We are just a more friendly tone to recall. We are more a switch-around like feel to it and there is a better preparation for the consumer on what some of their options could be.
Rick, we are seeing a lot of traction with that as well. So lot of new things and more aggressive postures we are taking than we would have in the past.
Mike Grasher - Piper Jaffray
Okay and I guess just a follow-up on that. My concern would be are you throwing more good money or chasing more bad loans with good money here in terms of keeping home owners in a loan or curing them when perhaps they had no business having a mortgage to begin with.
Dave Applegate
Now look the way that Fast Advance works, it's truly an advance of the potential claim amount. So if the loan goes back in a default and eventually the claim then we remit the claim minus the 15% advance.
Operator
We will now go to the line Steve Stellmach from FBR Capital Markets. Please go ahead.
Steve Stellmach - FBR Capital Markets
Hi good morning and this is for Dave. If you could, could you please sort of give some context about what we should expect in some of the growth in the book of business, if you layer in, when your capital demands?
And two, and sort of, the more competitive FHA potentially in throughout '08 and '09 and then lastly your underwriting changes, which I think obviously can be applauded but at the same time has some negative impact to the gross in the book of business.
Dave Applegate
Well I think, lot of points in there that we can address, first the overall change in guidelines has had a pretty dramatic benefit to the book of business. I think it is probably fair to say that it does shrink the total size of the conventional market to some degree.
Then what we are seeing is some surge in FHA, VA business. That the first quarter stats, I don't think are a pure indicator of what's going on but there are directionally valuable.
And my penetration it was a little bit over 17% in Q4. This quarter it is around 13%.
So FHA definitely picked up share but another driver there, there was a large amount of refinanced business down in the first quarter and that would generally lead to a little less MI penetration. So, I think we will see some shrinkage of the market that will have some minor impact on our ability to grow NIW, but I would say its probably pretty prudent in that the product that we are doing before has proven to be challenging from a loss perspective.
So I think it's a business that is wise to see at this stage.
Steve Stellmach - FBR Capital Markets
Sure. Would you expect, insurance-in-force could be a lower number in '09 than '08 or are you still think sort of incremental growth year-over-year?
Dave Applegate
We really haven't forecasted publicly what we think insurance-in-force levels are going to be for the full year.
Operator
Next we go to line of Howard Shapiro with Fox-Pitt. Please go ahead.
Howard Shapiro - Fox-Pitt
Hi. I just wanted to ask on, I guess the potential capital raised and what you are planning to do with Financial Guaranty.
Obviously a pure common raise will be tremendously dilutive at this point. Can you tell us what kind of capacity you might have for issuing preferred and then kind of may be an waterfall like description.
Your preferences in terms of preferred, com and selling businesses or what other alternatives you are looking at right now.
S.A. Ibrahim
Sure. First, it's difficult given the stage we are into comment in more specific terms, about our exact capital raise strategy.
What we have said in our statement, in terms of raising sufficient capital to pay back the bank clients, outstanding amounts, and to inject significant capital in to Radian Guaranty. With respect to Financial Guaranty, what I said in my comments was, we at this point do not have any intention of taking capital out of Financial Guaranty.
As the market valuations for financial guarantors recover we would remain open to a strategic alternative, particularly strategic alternative, that will enhance the franchise value of the Financial Guaranty business and will highlight very powerfully, the value we believe we have at in our Financial Guaranty business for the future value we have in it.
Howard Shapiro - Fox-Pitt
Okay. Thank you.
Operator
Next we go to the line of Donna Halverstadt with Goldman Sachs. Please go ahead.
Donna Halverstadt - Goldman Sachs
Good morning. Maybe I just wanted to make sure I copied the comments you made about the credit facility and liquidity at the HoldCo?
You said at that time, you did plan to pay the facility down? The $150 million you mentioned that besides the facility would be after you repay it?
Bob Quint
That's right.
Donna Halverstadt - Goldman Sachs
And you made a comment about a $100 million. Did you say that you plan to maintain a $100 million of the proceeds at the HoldCo?
Bob Quint
No, the comment was we have currently over $100 million at the HoldCo.
Donna Halverstadt - Goldman Sachs
Okay and then the last thing, I wanted to ask, you said that you have minimal holding company needs, even before you drew the facility you had roughly $50 million of interest expense. Are you calling them minimal because you are in fact continuing to get reimbursed from the OpCo through the tax and expense sharing arrangements?
Bob Quint
That's right.
Donna Halverstadt - Goldman Sachs
And you expect that will continue in the future that the regulators won't stop those payments.
Bob Quint
Well we, they're currently in place, that's what we would expect.
Donna Halverstadt - Goldman Sachs
Okay, thank you.
Bob Quint
You are welcome.
Operator
And ladies and gentlemen we have time for one final question. It's a follow-up Mike Grasher with Piper Jaffray.
Please go ahead.
Mike Grasher - Piper Jaffray
Just a quick follow-up from Halverstadt question, Bob what is the general target on debt to total cap, that rating we're looking for?
Bob Quint
I think Mike, long term in the 20% range.
Mike Grasher - Piper Jaffray
20 being the ceiling?
Bob Quint
Well, yeah. I mean I think long-term as both S.A and Dave said were, it's our target to get back to the AA level of the OpCo in MI and therefore the A level at the HoldCo and that's around where we see a appropriate debt to cap ratio.
Mike Grasher - Piper Jaffray
Okay thanks Bob.
Bob Quint
Sure.
S.A. Ibrahim
Okay. Operator that was the last question.
I would d like to thank all the participants for participating in our call and look forward to seeing you on our next call. Thank you.
Operator
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation.
You may now disconnect.