Aug 11, 2008
Executives
Terri Williams-Perry -- IR S.A. Ibrahim -- CEO Bob Quint -- EVP and CFO Teresa Bryce -- President, Radian Guaranty Inc.
Scott Theobald -- SVP of Risk Management
Analysts
Steve Stelmach - FBR Capital Markets David Hochstim - Buckingham Research Group Michael Grasher - Piper Jaffray Donna Halverstadt – Goldman Sachs James Gilligan – Equity Group Investments Connor Ryan – Deutsche Bank Maria Panganiban – New York Life Jay Abrams – FMS Bonds Pamela Brill -- Allstate Mike Grandall – Key Colony Fund Peter Lardis [ph] – Trident
Operator
Ladies and gentlemen, thank you for standing by and welcome to Radian's second quarter 2008 earnings conference call. At this time, all phone participants are in a listen-only mode.
Later, there will be an opportunity for your questions. Instructions will be given at that time.
(Operator instructions) As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Terri Williams-Perry of Investor Relations.
Please go ahead.
Terri Williams-Perry
Good morning and welcome to Radian's second quarter 2008 conference call. By now, you should have all received our press release which contains the financial results for the quarter.
If you have not yet received this, you may obtain it from our Investor Relations website at www.radian.biz. During this morning’s call, you will receive prepared remarks from S.A.
Ibrahim, Radian’s Chief Executive Officer; and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce, President of Radian Guaranty; Steve Cooke, President of Radian Asset Assurance; and Scott Theobald, Senior Vice President of Risk Management.
Before we begin with our prepared remarks, I would like to remind you that any forward-looking statements that we make this morning should be considered in conjunction with the cautionary statement set forth in the Safe Harbor statements included with our webcast slides and the statements contained in our SEC filings. These are available on the Investor Relations website at www.radian.biz.
I would now turn the call over to S.A.
S.A. Ibrahim
Thank you, Terry. Good morning and thank you all for joining us today to review Radian's second quarter financial results.
I am going to share some views on Radian’s position and will comment on our second quarter. As always, Bob Quint will follow with more financial details after which we will take your questions.
Before anything else, I would like to discuss our capital situation. As I said on last quarter’s earnings call, we were exploring various internal and external capital raising alternatives.
We continue to believe that we have adequate claims-paying resources in both our mortgage insurance and financial guaranty businesses. So, the objective of the capital raise was to take advantage of opportunities to write profitable new business, improve our risk-to-capital ratios, address counter-party perceptions about our capital strength, and to position us to better manage through the prolonged economic uncertainty.
I am pleased to say that we now believe that Radian can meet these objectives by moving our financial guaranty entity Radian Asset under our mortgage insurance entity Radian Guaranty. Radian Asset has significant excess capital.
Additionally, Radian Asset is writing minimal new business and this means that more excess capital will likely be released over time. As of June 30, 2008, Radian Asset Assurance had just under $1 billion of statutory surplus and just under $500 million of contingency reserves for a total of $1.5 billion of qualified statutory capital and an additional $1.5 billion in statutory claims-paying resources for a total of $3 billion.
Moreover, Radian has minimal exposure to vulnerable asset classes in its Financial Guaranty business. This internally generated capital support that is incremental over time to Radian Guaranty significantly exceeds the capital we were considering to raise externally with the additional benefit of not diluting our shareholders and will translate into a strongly capitalized mortgage insurance entity.
We have discussed our proposed action with our stakeholders and they have reacted positively. We have now received all the regulatory and bank approvals to proceed with our capital strategy.
I would now like to highlight five key points regarding Radian. First, we believe Radian has adequate capital levels in both of its businesses.
Radian Guaranty, our entity that writes mortgage insurance, has strong risk-to-capital ratio of 14.9 to 1 as of June 30, 2008 and 10.3 to 1 after adding Radian Asset on a pro forma basis. These ratios compare very favorably with our industry peers.
Additionally, Radian has a 22% ownership interest in Sherman Financial. Sherman provides Radian with a potential source of future capital and in the interim represents a solid source of dividend.
Second, following the transfer of our financial guaranty business to our mortgage insurance business, we do not believe Radian will need additional capital in the near term. Radian Group does not have any near-term liquidity needs beyond our modest dividend payments which were recently reduced.
That said, we remain opportunistically open to raising capital to further strengthen us in dealing with prolonged economic uncertainties as well as new mortgage insurance opportunities. Third, Radian’s financial guaranty business has the lowest exposure to mortgage risk as compared to its peers.
This point was echoed in a recent rating agency call on the financial guaranty industry. Its strong capital position is further demonstrated by a recent action to take an ordinary dividend of $107 million from Radian Asset.
Importantly, our financial guaranty business also continues to be profitable. Fourth, we have successfully improved the mix of our new MI business to 93% prime during the second quarter of 2008.
We have accomplished this while maintaining a stable market share position. At the same time, we have benefited from our captive arrangements and our unique Smart Home risk transfer deals and stand to benefit even more in the near future.
Fifth, we view mortgage as our core business going forward and will continue to back up this commitment with ongoing investments in sales and marketing, technology, and loss mitigation. Having already demonstrated that we can successfully adjust our business mix and strategy, we want to position the business to take advantage of future opportunities.
Our significant investment in loss mitigation over the last two years has paid off and we remain committed to working closely with our servicing partners to explore strategies to keep more people in their homes and reduce losses. We believe that our loss mitigation capabilities today are second to none.
We also focused on operational enhancements to improve the profitability of the new insurance we write. To that end, we continue to take strong measures to improve the quality of the 2008 and future books through several pricing and guideline changes.
As part of these changes, we maintain a declining markets policy which requires a higher down payment in soft or declining MSAs. We have seen a steady decrease in overall industry MI penetration from nearly 18% in the fourth quarter to 11% during the second quarter and believe that increases in FHA business were a major contributor to this trend.
At the same time, low levels of mortgage refinancing have contributed to higher persistency. Our industry has endured another quarter characterized by difficult economic conditions including continuing depreciation of home prices, deteriorating credit performance of mortgage assets, and reduced liquidity for many market participants.
We do not see these conditions abating in the near term. However, despite these many challenges, my focus and the focus of the management team at Radian remains very steady and very clear.
We are managing through the downturn and taking prudent deliberate action today that will best position Radian to be a strong and viable player for the longer term. That is our objective.
Throughout the market challenges of the past year, our people here at Radian have remained incredibly attentive to the day-to-day details of operating the business and most importantly, serving our clients. We believe that remaining focused on creating long-term value without being distracted will prepare us well for a recovery.
We have updated our loss projections as of June 30, 2008 and as a result, have established a pre-tax premium deficiency reserve of $422 million for our first-lien portfolio. Bob will take you through the details of the premium deficiency reserve and other results.
In summary, I would like to emphasize that we continue to remain focused on managing our businesses in this challenging environment while positioning us to enjoy the benefits of a more profitable tomorrow. We engage in frequent productive discussions with the GSEs, regulators, and rating agencies.
We prudently shepherd our assets including our strong investment portfolio of $6.5 billion. We continue to make new investments while being disciplined about our expenses.
While the near-term environment still remains challenging, we have now come through an extremely difficult 12 months for the industry with a book value of $30.54. In essence, we are strategically managing through this downturn.
And with the capital strength of Radian Guaranty, we will continue to be a strong partner to our MI customers and counterparties and expect to benefit as they reallocate their new business in a prudent and balanced manner. Now, I will turn the call over to Bob and he is going to provide detail on the financials for the quarter.
Bob?
Bob Quint
Thank you, S.A., and good morning. I will be updating you on the P&L activity and trends for the second quarter of 2008 and our financial position as of June 30, 2008.
For the last several quarters, due to the deteriorating credit environment, we have been performing an analysis of our first lien book of domestic mortgages insurance business to test for a potential premium deficiency. We had booked a premium deficiency on our second lien book back in the third quarter of 2007.
Premium deficiency exists when the present value of the expected future results of the existing business is negative, i.e., future expected premiums are less than the sum of future excepted losses and expenses offset by our loss reserve. This exercise includes our best estimate of future losses in an unpredictable environment.
This quarter, we updated our loss projections using cumulative HPA decline of 8% nationally on an OFHEO basis over 2008 and 2009. These assumptions are consistent with those that set forth by economy.com.
Based on the resulting projection, we booked a GAAP Premium deficiency of $421.8 million on our first lien book in the second quarter. This premium deficiency front loads to the current period much of the expected P&L impact of future projected losses.
Based on the fact that we believe 2008 will be the peak year for incurred losses, the P&L impact of such losses would likely have been booked in the third or maybe fourth quarter of 2008 anyway. Of course, the results are subject to change if our projections change, which would generally be due to changes in our macroeconomics expectation.
To put further context to the loss projection that led to this premium deficiency, we are expecting a total of approximately $5.9 billion of gross losses on our existing first lien domestic MI portfolio as of June 30, 2008. Those amounts are offset by expected future premiums of $2.8 billion, captive and smart home recoveries of approximately $740 million and our loss reserve of $1.8 billion.
These amounts are then present valued to arrive at the current premium deficiency of $421.8 million. This loss projection translates to an overall claim frequency of 10% on our existing prime business and approximately 23% on our Alt A and A Minus business for an overall claim rate of about 14%.
In other words, we are projecting that approximately 14% of all the first lien loans on our book today, net both current and delinquent, will ultimately become acclaimed. Implicit [ph] in the projection is an unemployment rate of approximately 6.2%.
Even if losses are significantly higher than these projected levels, we believe Radian has a more than enough claims and resources to pay all claims. We believe that the contribution of Financial Guaranty to MI will provide us with enough capital to continue to write future profitable business.
Importantly, this premium deficiency has no impact on statutory capital for our risk to capital ratio, which I will address later on. In conjunction with the booking of our premium deficiency is the write off of deferred acquisition costs related to our first lien business of $51 million, which clearly distorts the expense line during the quarter for all reduced future quarters amortization amount.
Other operating expenses this quarter are also higher than last quarter primarily a result of a $10 million accrual for contract underwriting remedy expenses. Our traditional MI first lien loss provision reflects the higher delinquencies and claims that occurred, this quarter although as we previously noted, the delinquency trends showed slower increase in the second quarter.
Paid claims came at $209 million, lower than our previously forecasted number $240 million, consisting of $161 million of first lien and $48 million of second lien. Looking forward into the balance of 2008, we expect the claims paid will be between $275 million and $300 million in the third quarter and still in the $1 billion range for the year, including both first and second liens.
The total provision for losses for the quarter of $449 million compares favorably to incurred losses of $571 million in the first quarter. While gross losses for the quarter were very similar to the first quarter, the substantial amount of losses recoverable booked during the quarter created a significant reduction in net losses this quarter.
While the pace of increase in delinquencies slowed this quarter, we have seen historically that seasonal delinquencies are usually greater in the second half of the year. And when coupled with the uncertainties in the economy, we cannot project that pace to continue to slow during the balance of the year.
With regards to NIM, we had risk-in-force of $522 million as of March 31, 2008. Since then, our risk has been reduced by another $37 million to $485 million as of June 30.
The updated total balance sheet liability on NIM is $225 million, with a positive change occurring primarily due to further impact of FAS 157. We expect that future principle credit losses on NIM will be approximately $469 million.
The claim payments are expected to begin in 2010 and will occur mostly in 2011 and 2012. Because these future expected credit losses are greater than our liability due to the FAS 157 impact, the balance of the liability is expected to be booked in future quarters.
Our premium deficiency on second lien, which was initially booked in the third quarter of 2007 was on the balance sheet at March 31 at $214 million. Our loss projections in second have stabilized resulting in a $52 million release of the premium deficiency on the seconds in the second quarter to a current balance of $162 million.
This essentially offset the $51 million of incurred losses relating to second liens of the quarter. The risk in force on second liens is down to $772 million.
So, between our loss reserve of $179 million, premium deficiency reserve of $162 million, this exposure is 44% reserved. The reserves approximate our current credit loss expectation.
The domestic mortgage insurance CDS business had a further negative mark this quarter of $32 million and the current mark at quarter end is negative $139 million, which approximates our expected credit losses. The international CDS had a negative mark of $19 million as of June 30, 2008.
Although the notional exposure on this business is very high, at $8.6 billion, Radian's attachment [ph] point is Super AAA and we still see no reasonable scenario in which we would incur any credit losses in such exposure. This risk is contained within Radian insurance which is a Pennsylvania only licensed credit insurer which we believe has more than enough capital to satisfy all its future claims.
Financial Guaranty results this quarter were as expected, with lower premiums written due to the significant slowdown in new business and this trend should continue. Premiums earned were very strong, reflecting heavy refunding and losses were as expected with relatively stable credit performance.
As we have said, our book of business in FG contained significantly less exposure to mortgage and mortgage related credits than the rest of the industry. We paid $107 million ordinary dividend in July and $100 million cash with subsequent currently downstream to Radian Guaranty.
Sherman continues to perform well with pretax operating income this quarter of $77.8 million, of which Radian's share was $15.7 million. Sherman has an option to acquire our remaining interest that expires on September 19 this year and we continue to view Sherman as a potential source of additional capital, be it dividend and/or sale in the future.
We received $19.5 million of dividend from Sherman during the second quarter. Change in fair value line was significantly impacted by the adoption of FAS 157 in the first quarter of 2008, but much less so in the second quarter.
We will continue to have several disclosure tables in our 10-Q filing to depict the impact of FAS 157 and details around our changing fair value of derivatives. We will still have over $50 million cash at Radian Group after the anticipated pay down of $50 million of our bank facility in conjunction with the move of Financial Guaranty to MI, which will reduce our bank commitment to $150 million.
We have minimal need for cash from the holding company. As S.A.
mentioned, Radian Guaranty's risk-to-capital ratio at June 30, 2008 was 14.9 to 1. This a regulated entity in which we write our MI business subject to the regulatory requirement of 25 to 1 and is the counterparty to Fannie Mae, Freddie Mac, and our lender customers.
Importantly, after the Financial Guaranty contribution, the pro forma risk-to-capital of Radian Guaranty would be 10.3 to 1. In addition to the $960 million in debt surplus, the Financial Guaranty company has another $2 billion in claims-paying resources, including unearned premium, the future value of installments and contingency reserves, for a total of approximately $3 billion in claims-paying reserves.
These numbers should leave no doubt that Radian Guaranty's capital position is among the strongest in the industry and in no danger whatsoever of violating the 25-to-1 risk-to-capital requirement for the foreseeable future. At quarter end, the total statutory surplus which includes contingency reserves in our MI business was $2.1 billion and we have another $2.6 billion in loss and other reserves.
Our investment portfolio continued to maintain its value in this stressed environment. It's extremely safe credit profile and emphasis on liquidity and our policy of generally not investing in residential mortgages has proven sound.
I would now like to turn the call back over to S.A.
S. A. Ibrahim
Thank you, Bob. Operator, we are now ready to take questions.
Operator
(Operator instructions) We’ll go to Steve Stelmach with the FBR Capital Markets. Please go ahead.
Steve Stelmach - FBR Capital Markets
Hi, good morning.
S. A. Ibrahim
Good morning.
Steve Stelmach - FBR Capital Markets
S.A., you mentioned that you potentially may opportunistically raise capital in certain environments. Can you just give us an idea what it would take for you guys to actually contemplate a capital raise of some sort and then what sort of form will that take, is that just monetizing Sherman or are there other avenues that are available to you at this point?
S. A. Ibrahim
Steve, when I said that we would be opportunistically open to raising capital, first of all, I also said that we believe that we are strongly capitalized based on the move of our Financial Guaranty entity into our MI entity, Radian Guaranty. So we do not have any immediate pressing need for capital based on the way we look at the picture.
That said, the environment is fraught with uncertainty going forward and we believe that there may be opportunities for us to write more profitable MI business. And that said, until the environment out there is fraught with uncertainty, I think it’s wise to say that we have to be opportunistic in looking for capital.
Steve Stelmach - FBR Capital Markets
Okay. That’s helpful.
But then on Radian Asset, presumably that is sort of -- is in hibernation right now. Can you give us an idea what sort of capital relief that is going to provide if it’s stops writing business or it’s sort of hibernating?
Is there an annual number we should be thinking about in terms of capital available to Radian Guaranty?
Bob Quint
Well, Steve, from a regulatory standpoint, the company has $960 million in debt surplus. Now, we took the ordinary dividend recently of $107 million and there is an expectation that if things continue the way they have, there will be a regular ordinary dividend capacity that we would look to achieve.
And the other thing that may happen is that maybe proactive management of the current risk enforced that may enable us to take further dividend.
Steve Stelmach - FBR Capital Markets
Okay, so maybe just to clarify, the $960 at Radian Asset, that is all included in Radian Guaranty's risk-to-capital ratio currently, is that correct?
Bob Quint
No, but it will be once the --
Steve Stelmach - FBR Capital Markets
Once it moves?
Bob Quint
Contributes, yes.
Steve Stelmach - FBR Capital Markets
Got you. And then presumably risk-to-capital ratio will improve further if Radian Asset exposures wind down?
Bob Quint
As the stat surplus grows and that stat surplus can grow generally by earnings or the release of contingency reserve, that ratio will be helped by that surplus, yes.
Steve Stelmach - FBR Capital Markets
Okay, so it migrate higher is what I'm trying to get to, the capital?
Bob Quint
Well, obviously there are a lot of components to that. That component will go up, but the risk-to-capital is -- it can be driven by the MI results as well or the risk in MI.
Steve Stelmach - FBR Capital Markets
Okay, but all else equal, the Radian Asset should be helping going forward. It should be an additional benefit going forward.
Is that fair to say or no?
Bob Quint
That's fair if all things perform as expected.
Steve Stelmach - FBR Capital Markets
Got you. Okay, great.
And then what was – Bob, you mentioned minimum capital need, I'm presuming minimal cash needs at group. Could you just sort of quantify minimal relative to the current $50 million in cash?
Bob Quint
Yes, negligible. We reduced our common dividend to an annualized amount of about $800,000, so that's the only need for cash at the holding company that is evident in the near term.
Steve Stelmach - FBR Capital Markets
Great. Alright guys, thanks very much.
S.A. Ibrahim
Thank you.
Operator
We'll go to David Hochstim with Buckingham Research Group. Please go ahead.
David Hochstim - Buckingham Research Group
Hi. I wonder is it possible at this point to say provide any color on the ALT A claims that you're reviewing in terms of underwriting lapses or the legitimate problem loans, is it pretty dramatic increase in delinquencies and obviously claims that you're looking at there?
S.A. Ibrahim
David first of all, congratulations on your new company, and I will ask Teresa Bryce, the President of our MI business to answer your question.
Teresa Bryce
David, good morning. First of all, I would say that we've done a lot in the loss management area and I think that's what you're getting at here.
And it's not related to Alt A claims, although that certainly got a significant component of it, and we are actively looking at claims as they come in. We have doubled our staff in the loss management area over the last year and we have increased the number of revisions [ph] and denials that we’re seeing as a result of the significant focus in what we call a special investigative unit on those claims.
S.A. Ibrahim
And David, I can't let your question go by without commenting that we have been the only company over the last two years to disclose our Alt A exposure. And if you look at our Alt A exposure and the default associated with our Alt A, they compare favorably to some of our peers.
David Hochstim – Buckingham
esearch Group
S.A. Ibrahim
And it should also be viewed in the context of where Alt A is prevalent, which is California, Florida, Nevada, Arizona. So there's an interplay of both geography and underwriting.
David Hochstim – Buckingham
All right, thanks.
esearch Group
All right, thanks.
Operator
And we'll go to Michael Grasher with Piper Jaffray. Please go ahead.
Michael Grasher - Piper Jaffray
Good morning everyone. I just wanted to follow up with a couple of questions here.
Bob, you were talking about the peak losses, I think it was $5.9 billion with a 6.2% unemployment worked in. Where does that get you in terms of your peak risk-to-capital, everything else I guess given as you model?
Bob Quint
It's a little bit higher than it is now, Mike, but it is well within any of the regulatory requirement and it is at levels that we think are very appropriate and conservative.
Michael Grasher – Piper Jaffray
Okay, so you’re talking mid-teens or lower?
Bob Quint
Yes, in that range.
Michael Grasher – Piper Jaffray
Okay, fair enough. And then S.A, I wonder if you could give us a little bit more detail or background on some of the conversations you’ve had with both the rating agencies as well as the GSEs.
S.A Ibrahim
I’d be delighted to, but I will give Teresa Bryce, who's the President of our mortgage insurance entity and in close and frequent conversations with both the GSEs and the rating agencies the opportunity to answer the question.
Teresa Bryce
Good morning. We’ve been having continuous dialog with the GSEs, our regulators and the rating agency, and we think those have been very productive conversations.
We continue to keep them up to speed on the activities that we’re doing around the business, around underwriting guidelines, around pricing and we believe that those continue to be fruitful conversations.
S.A Ibrahim
And in addition to the MI business, we have conversations with regulators for our financial guaranty business and you can be the judge of the result of those conversations based on our dividend that we pulled out of our financial guaranty business.
Michael Grasher – Piper Jaffray
Fair enough. And then would you characterize the conversations or the agencies as having different concerns or are they pretty much the same both ways?
Teresa Bryce
I would say that generally the concerns have been pretty consistent.
Michael Grasher – Piper Jaffray
Okay, thank you.
Operator
We got Amanda Lynam with Goldman Sachs. Please go ahead.
Donna Halverstadt – Goldman Sachs
Hi, it’s actually Donna Halverstadt. Two quick questions for you.
You said that the only cash needed at the whole co was really for your common dividend which presumes that the tax and expense sharing arrangement continues to work as it has been. What have the regulators said about that?
Are you comfortable that that will continue to work?
Bob Quint
Well, the regulators are aware of the agreement and have approved them, so we’re expecting them to continue.
Donna Halverstadt – Goldman Sachs
Okay. And the other thing I wanted to ask about was the amendment to the credit facility?
Your release said that it’s effective upon satisfaction of certain conditions, just curious what those conditions are. And then secondly, I was curious if any of the financial covenants have changed and if you could update us on where you stand relative to each of the financial covenants?
Bob Quint
The financial covenants did not change with this amendment and what is required are just a couple of minor items that we think will be completed very shortly.
Donna Halverstadt – Goldman Sachs
Okay, one quick follow-up. With respect to the net worth requirement that was 1.75 billion [ph] plus or 75% of sales of securities, it was supposed to be without giving effect to any gain or loss of sale on Radian Asset, does the move of Radian Asset to underneath Radian Guaranty play into that at all?
Bob Quint
No, that shouldn’t create any kind of gain or loss.
Donna Halverstadt – Goldman Sachs
Okay, great. Thank you.
Bob Quint
Sure.
Operator
We'll go to James Gilligan with Equity Group Investments. Please go ahead.
James Gilligan – Equity Group Investments
Yes, hi guys, a couple of questions, just some clarifications on some of your points here. On your HPA assumption, in your supplement materials, you say negative 8%.
Where is that today?
Bob Quint
On a scale basis, there’s only been a very small negative so far, James.
S.A. Ibrahim
And James, as you would expect, that 8% is nationally, so it clearly varies from geography to geography.
James Gilligan – Equity Group Investments
Okay, that’s great. Another clarifying question, on your second loss, you said you had about 772 risk in force.
In a prior call, I think it might have been either the first quarter or the fourth quarter, you talked about the seconds in kind of two buckets, one performing well and one performing not so well. Is that 772 still divided into two buckets, and if so, what’s the sort of relative size of those two groups?
Bob Quint
It’s about half and half, it’s been half and half. But I think the good news on seconds is we’ve really seen sort of all around the performance stabilize in terms of delinquencies claims, so we’re pretty confident that we’re in the range that we have booked right now.
James Gilligan – Equity Group Investments
Okay, and then just one more. Post amendment, you might have answered this and I apologize if I missed it, what’s the liquidity in the bank agreement?
Bob Quint
Well, the total commitment will be $150 million and it'll be fully drawn. So, we are going to pay $200 million down to $150 million and then the commitment gets reduced to $150 million.
James Gilligan – Equity Group Investments
Okay. Thanks guys.
Operator
We'll go to Sean Farad [ph] with Deutsche Bank. Please go ahead.
Connor Ryan – Deutsche Bank
Hi, this is Connor Ryan calling. I was just curious to what effect you guys are seeing from potential recapture or what effect you could see going forward?
Bob Quint
Are you talking about financial guaranty recapture?
Connor Ryan – Deutsche Bank
Bob Quint
Well, to date, [ph] majority of our assumed business is subject to downgrade and was subject to downgrade once we were downgraded by the agencies. To date, there has been only a minimal amount of recapture, although that is an open-ended option that the entities that we reinsure have retained.
S.A Ibrahim
As Bob pointed out earlier, should a recapture event occur, it would release capital faster.
Bob Quint
Yes. What would happen if there was a recapture is we pay back on our premium reserve so it wouldn’t affect capital in that regard, but it would potentially free up contingency reserve, which would in turn improve our dividend capability sooner.
So, that would be the impact. But as Steve said, we're not counting on that happening, although it’s open-ended, the other financial guarantors have their own issues and we’re not sure that any of the recapture will happen.
Connor Ryan – Deutsche Bank
Okay. Just to follow up on that real quick though, not assuming that this is what would happen, but I was just curious, could there be a situation where you could be left with the risk that was not performing as well or was not expected to perform as well going forward whereas a lot of big good business could be recaptured?
Bob Quint
Our teams have reinsurance agreements specifically structured so as not to permit adverse selection or cherry picking in that regard.
Connor Ryan – Deutsche Bank
Okay.
David Applegate
It’s really all or non-proposition in large part.
Connor Ryan – Deutsche Bank
Okay, great. Thank you very much.
Operator
We’ll go to Maria Panganiban with New York Life. Please go ahead.
Maria Panganiban
New York Life
Bob Quint
The Sherman dividend that we received in the past, yes.
Maria Panganiban
Is there an expectation of further dividend from Sherman this year?
New York Life
Is there an expectation of further dividend from Sherman this year?
Bob Quint
There may very will be more dividend from Sherman over the rest of the year, yes.
Maria Panganiban
But is there like a set number or is that something that they declare on a quarterly basis?
New York Life
But is there like a set number or is that something that they declare on a quarterly basis?
Bob Quint
It will be declared. It's not set, yes, but there is an expectation that if things continue as they have, there will likely be a dividend paid.
Maria Panganiban
How much have they paid this year in total?
New York Life
How much have they paid this year in total?
Bob Quint
We've got $19.5 million so far.
Maria Panganiban
Now, in terms of -- if you could just remind us what the annual interest payments are at the holding company for debt service?
New York Life
Now, in terms of -- if you could just remind us what the annual interest payments are at the holding company for debt service?
Bob Quint
About $55 million or so, but that gets charged out to the sub, so it’s not a holding company obligation.
Maria Panganiban
And then the final question is, is there still existing dividend capacity from the financial guaranty business for 2008?
New York Life
And then the final question is, is there still existing dividend capacity from the financial guaranty business for 2008?
Bob Quint
Not for 2008.
Maria Panganiban
And is there difference in the calculation of -- in terms of the formula, calculation of what you may be eligible for in 2009? If you could just remind us what the formula is in terms of calculation of potential dividend payment?
New York Life
And is there difference in the calculation of -- in terms of the formula, calculation of what you may be eligible for in 2009? If you could just remind us what the formula is in terms of calculation of potential dividend payment?
Bob Quint
Typically [ph] dependent basically based on the lesser of 10% of your policy holder surplus or your net adjusted net income and it depends on what the company's situation is at that point in time, which is the driver.
Maria Panganiban
I’m sorry, net investment income and --?
New York Life
I’m sorry, net investment income and --?
Bob Quint
Adjusted net investment income and policyholder surplus, those are the two measures and it's the lesser 10% of surplus you’re adjusting.
S.A Ibrahim
So if you think in terms of where the surplus is now at $960 million, 10% of that would be $96 million.
Maria Panganiban
Okay. Thank you very much.
New York Life
Okay. Thank you very much.
Operator
We’ll go to Jay Abrams with FMS Bonds. Please go ahead.
Jay Abrams – FMS Bonds
Hi. I’m interested how the Radian Asset move, how that and the dividends that you’re taking from there, how it’s going to affect the ability of Radian Asset to meet any future claims?
And also what kind of capability are you retaining there to monitor and remediate their insured portfolio?
Bob Quint
Well, let me answer your questions in two parts that was posed. First, the taking out of any dividend from the company assumes that there is sufficient capital that remains to support remaining business within the company.
So there’s nothing about the dividend that will be taken out over a period of time that will compromise that at all. Secondly, with respect to surveillance or remediation, we still maintain a large risk management department within the company.
It's our largest department out there and will continue to actively survey and engage in active remediation and loss mitigation on the financial guaranty side as we have always done.
Jay Abrams – FMS Bonds
Do you expected anytime that Radian Asset will start to write new business or is it going to be mostly a run-off scenario?
Bob Quint
We are writing very little new business now, not inconsistent with many players within the industry, and expect that to continue.
Jay Abrams – FMS Bonds
Okay. Thank you.
Operator
We got Pamela Brill with Allstate. Please go ahead.
Pamela Brill -- Allstate
Good morning. You have provided the reinsured progression towards attachment in Exhibit O of your release.
Could you provide, with respect to Smart Home, any more detail of which deals fall into which progression bucket, which deals do you expect to attach and how much offset each deal has provided?
Bob Quint
We provided the information in summary form and I think that’s what we would expect to provide.
Pamela Brill -- Allstate
Okay. Thank you.
Bob Quint
You're welcome.
Operator
And we’ve go to Amanda Lynam with Goldman Sachs. Go ahead please.
Donna Halverstadt – Goldman Sachs
Just one other follow up on credit facility related to defined terms. Can you tell us where the ratios of debt-to-cap and fixed charge coverage ratio as defined in that agreement stood at the end of the quarter?
Thank you.
Bob Quint
We’re in compliance. The exact number we can get for you, if you like, but we're in compliance on all financial covenants.
Donna Halverstadt – Goldman Sachs
Yes. That will be great.
We'll call you back later for that. Thank you.
Bob Quint
Okay.
Operator
Let’s go with Mike Grandall with Key Colony Fund. Please go ahead.
Mike Grandall – Key Colony Fund
Yes, two questions please. Could you explain in relationship to your paid deficiency reserve or premium deficiency reserve, what bucket of your business or segment of your business that applied to and why it stopped there and didn't go further or how that decision was made, and could you also help us understand with the claims paid coming in below your expectations, what were are some of the drivers there?
Bob Quint
I'll do the premium deficiency and then Teresa can do the claims. This is our entire first lien domestic mortgage insurance book of business.
So, it’s not splitting it up into any buckets or anything like that. This is a whole book of business as of June 30, 2008 and we do this future projection on estimated losses and premiums and expenses, and that’s how that calculation is done.
Mike Grandall – Key Colony Fund
By saying it's your entire first-lien book of business, do you mean your flow business, your Alt A business, your A minus business, all of that?
Bob Quint
Everything on the books as of June 30 on a first-lien basis domestic.
Mike Grandall – Key Colony Fund
Okay. Thank you.
Teresa Bryce
And then with respect to the other part of your question, I've spoken a little bit earlier about what we’ve done in terms of loss mitigation. And just to go into a little bit more detail about that, we’ve been working actively with the servicers to try to decrease the amount of claims or the amount that we have to pay out.
And as a result to that, we’ve increased our retention workout significantly. We’ve been involved in more loan modifications.
We've been involved in an increase in short sales which is also been a benefit. We have taken on activities that have increased borrower contact which is a big driver of trying to do successful loss management including our partnership with consumer credit counseling services of Delaware Valley, which has significantly increased our ability to contact and make contact with customers.
We’ve also put out a borrower website, we notify borrowers that are in default about that website and it tells them information about what possible steps can be taken to try to re-mediate their situation. In addition to that, we've recently joined the Hope Now initiative so we're continuing to take a very active position in loss management and that has had a significant impact on the reduction in the actual claims paid.
Mike Grandall – Key Colony Fund
Did you mention the increase in rescissions year-over-year sequentially due the fraud or anything?
Teresa Bryce
It's hard to actually say a number with respect to fraud. What I can say is that we have added up the number of claims that where we are dealing with respect to both fraud and whether or not they met the underwriting criteria at the time, and we have seen an increase in the number of rescissions as a result of that.
S.A. Ibrahim
From a broader perspective, I think I believe maybe two years ago, on one of these calls, we had talked about the fact that we were starting to make significant investments in our loss mitigation capability because we wanted to position ourselves for the market that was coming. And we, in that period, both added significantly, we about doubled our staffing in that area, we upgraded their capabilities, we brought in new talent, we pioneered partnership relationships with servicers and outside agencies.
And all of that was very timely and we believe has resulted in significant loss reductions and we are very pleased with that.
Mike Grandall – Key Colony Fund
Great. Thank you.
Operator
Then we'll go to Peter Lardis [ph] with Trident. Please go ahead.
Peter Lardis – Trident
Hello. Actually I was interested in your experience in terms of the major problems there at California, Florida, Arizona and Nevada.
What kind of delinquency ratios are you seeing because the concern I have is that when you listen to what Fannie Mae and Freddie Mac and the others have said, they've said that the last quarter has been one of the worst they've seen, and if anything July is actually worse than the last quarter was. And I know that in terms of the way your system works, as you're paying claims that basically arose from mortgages that went delinquent maybe six months ago or longer.
What exactly has been the first window of payment, has that shrunk at all, are you seeing claims coming into the pipeline faster? And second, what is your experience now with delinquency rates in your portfolio in these problem states?
S.A. Ibrahim
Peter, I'll ask -- I'll turn the answer over to Scott Theobald who is the head of our MI risk management.
Scott Theobald
Good morning. Consistent with other participants we're finding that California, Florida, and Arizona of course are driving our portfolio of default rates as well.
These are all states that are correcting after a rapid house price appreciation and use of alternative mortgage products. There is some good news in this though.
We're seeing in the 2005 to 2007 vintages, we are actually seeing deceleration in default rate in these states. Of course the 2006 book still hasn't shown any signs of peaking, but overall, we're seeing a deceleration in these states.
Peter Lardis – Trident
In terms of the window for claims payment, because clearly there is six-month delay or something before you actually have to pay claims. Has that window changed very much?
Teresa Bryce
I don't believe that that has changed. The process for these things to move through the system has stayed pretty consistent.
If anything it may have moved out a little bit in terms of loss mitigation efforts that the servicers and others have tried to be engage in, but I don't think we've seen significant movement.
Peter Lardis – Trident
Okay, thank you.
S.A. Ibrahim
Peter, as you would expect, I think there's a lot more pressure on the servicers to try and avoid foreclosures. So each -- and as well as there's a lot of pressure on everybody in the system to subject defaults or delinquencies to a lot more analysis and that takes more time.
So as a result of that, there may have been some lengthening out of the process but for good reasons.
Peter Lardis – Trident
Okay. Thank you.
Operator
Mr. Ibrahim, I will return the call back to you for closing comments.
S. A. Ibrahim
Okay. Thank you operator.
At this time, I would like to thank all of you for participating in our investor call. We look forward to seeing you on our third quarter call later this year.
Thank you.
Operator
Ladies and gentlemen that concludes your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service.
You may now disconnect.