Aug 5, 2009
Executives
Terri Williams-Perry – Investor Relations C. Robert Quint – Executive Vice President & Chief Financial Officer, Radian Group Inc.
Sanford A. Ibrahim – Chief Executive Officer, Radian Group Inc.
Teresa Bryce – President, Radian Guaranty Inc. H.
Scott Theobald – Executive Vice President & Chief Risk Officer, Radian Guaranty Inc.
Analysts
Steve Stelmach – FBR Capital Markets Joseph DiMarino – Piper Jaffray Matthew Howlett – Fox-Pitt, Kelton Mark DeVries – Barclays Capital Michael Grondahl – Northland Securities Donna Halverstadt – Goldman Sachs Nat Otis – KBW Steve Stelmach – FBR Capital Markets Connor Ryan – Deutsche Bank Scott Frost – HSBC Adarsh Mashru – Dupree Financial Group Mahmud Rezo – Brahman Capital Brian Monteleone – Barclays Capital
Operator
Ladies and gentlemen thank you standing by and welcome to the Radian’s second quarter 2009 earnings call. At this time all lines are in a listen-only mode.
Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions).
And as a reminder this conference is being recorded. I'll now 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 2009 conference call. If you do not have a copy of our press release, which contains the financial results for the quarter, 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; Dave Beidler President of Radian Asset Assurance, and Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty. Before we begin with our prepared remarks I would like to remind you that statements made in this call will include forward-looking statements.
These statements are based on current expectations, estimates, projection, and assumptions that are subject to risk and uncertainties, which may cause actual results to differ materially. For a discussion of these risks and uncertainties please review the cautionary statements set forth in the Safe Harbor statement included with our webcast slides and the risk factors included in our 2008 Form 10-K.
These are available on our Investor Relations website. I will now turn the call over to S.A.
Sanford A. Ibrahim
Thank you Terri, and thank you all for joining us. We will begin today as always with my overview of our second quarter performance, followed by a highlight of significant Mortgage Insurance and Financial Guaranty items.
I'll then offer perspectives that are high level on two major topics that we believe are on your minds. Radian's mortgage insurance capital position and what we can do and are doing to continue writing profitable new business.
And Radian's holding company liquidity position and what we can do and are doing to our address our liquidity needs in 2010 and 2011. Bob will follow with specific details on our financial position and operating performance as well as offer additional perspectives on capital and liquidity options and our Financial Guaranty business.
Then after I summarize a few key points we will open the call to your questions. Starting with the quarterly results, earlier today we reported second quarter earnings of $232 million or $2.82 million per share.
These results were driven by both our efforts in loss management and by unrealized gains on derivatives, while delinquencies continue to rise in the quarter our loss management actions offset the impact resulting in a lower than expected provision for losses. Not surprisingly loss management efforts had greater impact for the vintages of 2006, 2007 and for Alt-A loans, all of which are characterized by underwriting deficiencies.
Despite an extremely challenging economic environment over the last two years, it is important to note that Radian's book value at June 30, 2009 was $25.12 per share. Our investment portfolio remains stable at $6.4 billion and our holding company liquidity is strong with approximately $480 million available.
Bob will provide more information on these and other items including revised claims estimates for the remainder of the year. Clearly, managing losses is a top priority for Radian.
We continue to increase in-house loss mitigation staff and place experts on site at our customer servicing locations. We offer third-party credit counseling services and claim advance payment programs to help borrowers avoid foreclosure.
And we have resources focused on supporting the government homeowner affordability and stability programs. HASP and HARP, which were announced earlier this year to help troubled homeowners to sensibly restructure or refinance their mortgages.
The administration's goal is 500,000 trial modifications by November 1. We at Radian remain committed to working with our mortgage-servicing partners in support of this goal.
Again our objective is to shepherd our capital and manage our losses prudently and to write more of the high quality mortgage insurance business we have seen today. In fact, of our $5.5 billion in new mortgage insurance written in the second quarter, 99.9% was prime credit quality, 98.4% had a FICO score of 680 or above and all had LTVs of 95% or below.
The new business we have written has been showing significantly lower early defaults, which is a good indication of sound underwriting practices. 2008 represents a turning point in our book.
Credit performance improved through the year with the second half showing a lower default trend than the first half and the 2009 vintage showing significantly fewer early defaults. While we were actively improving the credit quality of our book, we were also steadily increasing our market share.
We estimate that our market share in the second quarter of 2009 was in the 25% range. This illustrates our success in transforming our mortgage insurance business away from our legacy strategy.
We are now successfully competing in the more traditional high quality mortgage insurance market. The business written in 2008 and 2009 now represents 27% of our primary risk in force, business written prior to 2005 represent an additional 19%.
Therefore, our book excluding the unprofitable vintages of 2005, 2006, and 2007 is almost half our primary risk in force is almost half our primary risk in force and will continue to increase as we write more new business. In Financial Guaranty, there were no new material credit events during the quarter, although we continue to experience a challenging credit environment.
Despite this difficult market we believe that we have a solid capital base in Radian Asset that would be largely accessible to Radian Guaranty in the future. We are enhancing this capital availability by paying regular dividends as well as by opportunistically reducing our Financial Guaranty risk.
In June, Radian Asset paid an ordinary dividend of nearly $100 million to Radian Guaranty. And in July, we commuted a $9.8 billion Ambac reinsurance portfolio, which decreased Radian Asset's total insured portfolio by 10% and importantly reduced our exposure to troubled asset classes such as mortgage-backed securities significantly.
This commutation contributed positively to our GAAP earnings and will add approximately $40 million in statutory surplus in the third quarter. Our goal is to keep managing our Financial Guaranty exposure diligently while looking for mitigation and commutation opportunities thereby strengthening the capital support for our mortgage insurance business over time.
There are two important points in our Financial Guaranty portfolio that bear repeating. First, our portfolio continues to perform better than many of our Financial Guaranty peers, even in this very challenging environment for the industry.
And second, while we currently include approximately $900 million in statutory capital for the purpose of calculating our mortgage insurance risk to capital ratio, we have an additional $1.8 billion in claims paying resources in our Financial Guaranty business that may be added to statutory capital in the future. Next, I would like to discuss our capital and liquidity opportunities, which will fuel our strategic goal for sound profitable growth in mortgage insurance.
Our objective is to reduce the long-term liquidity needs for Radian Group, our holding company, while supporting the current operating company capital needs for Radian Guaranty. I believe the key capital question is our continued ability to write new business in the future driven by a regulatory requirement from 14 of the 50 states where we write mortgage insurance business to maintain a risk to capital ratio of less than 25 to 1.
Our risk to capital ratio was 15.9 to 1 at June 30, and is expected to continue to increase in the absence of new capital or risk relief. We still believe we can write meaningful amounts of new mortgage insurance business throughout 2009 and remain below 25 to 1.
However, this ratio is very sensitive to the uncertainty around future levels of default and therefore we have a series of alternatives and initiatives underway to allow us more flexibly. First, we're actively evaluating reinsurance coverage alternatives that could potentially reduce our risk to capital ratio significantly.
Second, we've been exploring an old book/new book structure utilizing our Amerin Guaranty subsidiary, a 50 state licensed mortgage insurer so that we are prepared if we determine that we need to write new business in those states that will still have a 25 to 1 requirement. These initiatives remain subject to regulatory and other approvals, but assuming these are obtained and we decide to move forward, we believe we could have either or both alternatives in place in time to avoid the 25 to 1 restrictions.
It is also worth noting that MICA, our industry trade association is actively pursuing regulatory or statutory relief in each of the remaining 14 states that still impose a 25 to 1 limitation. Pennsylvania, our state of domicile does not have a 25 to 1 limitation.
Third, as we discussed in prior calls we have continued to actively pursue funds from the U.S. Treasury and remain open to the idea of raising private capital at the right time and if it makes sense.
And finally, we continue to pursue opportunities to commute and restructure credit exposure in both Financial Guaranty and Mortgage Insurance in those instances, where we feel that commuting risk makes economic sense for Radian and frees up capital for new high-quality business. To summarize our mortgage insurance capital situation, we continue to believe that we have sufficient capital to write business in all states through at least 2009.
With the various alternatives and initiatives we are pursuing we're also fully engaged in initiatives that secure the flexibility and capacity to strengthen our company and to write profitable business nationwide through 2010 and beyond. Now, turning to holding company liquidity, I believe the key question is our ability to address the liquidity needs of 2010 and 2011.
Again, we have a series of initiatives with the objective of meeting our liquidity needs through 2010 and reducing our 2011 liquidity needs to a more manageable level. First, we have decided to pay down and terminate our $100 million credit facility.
This will significantly reduce our 2011 liquidity needs while additionally eliminating the debt service for the facility. Importantly, this will also allow us to move forward with a series of potential alternatives for improving our liquidity and capital position.
Most notably we plan to use our equity interest in Sherman to satisfy our October 2009 tax-sharing obligation to Radian Guaranty, upon receiving final regulatory approval. This will free up over $100 million cash at the holding company while preserving any future upside in Sherman's value within the Radian family.
Bob will provide more details on the impact of this transaction as well as other initiatives we're exploring for enhancing our long-term liquidity position. In the past few weeks I have been in many meetings with our mortgage industry partners, politicians, senior administration and treasury officials as well as leading academic experts.
The feeling is that while the environment remains characterized by uncertainty we are at if not close to the bottom of the downturn. While we hope they are right our focus at Radian remains on effectively dealing with the current environment, leveraging our unique financial guaranty and Sherman assets to allow us flexibility, fully engaging in other capital and liquidity enhancing initiatives, and positioning our company to enter the financial recovery period as a high-quality mortgage insurance provider with a strong franchise.
Mortgage insurance plays a critical role in the housing market by helping first time homebuyers and with Radian's claim paying ability and track record of loss mitigation we are well positioned to continue in that role. New government program, solid lender and GSE partnerships, and our proactive capital and liquidity initiatives will help to position Radian to remain a viable component of the housing recovery.
And now I'll turn the call over to Bob.
C. Robert Quint
Thank you, S.A., and good morning. I'll be updating you on the P&L activity and trends for the second quarter of 2009 and our financial position as of June 30, 2009.
I'll also provide some more details around our capital and liquidity strategy. Our MI provision for losses of $142.8 million this quarter reflects higher delinquency counts and continued aging of delinquencies offset significantly by an increase in our assumptions related to denials and rescissions.
Our recent denial and rescission levels are much higher than historical levels reflecting our loss management efforts to review more claims and the significant concentration of loans in our delinquency portfolio that were originated in the poor underwriting periods of 2006, 2007, and early 2008 as well as the concentration of delinquent Alt-A loans. We expect our level of denials and rescissions to remain elevated only so long as these vintages and product continue to represent a significant portion of our default inventory.
Some statistics regarding recent denial and rescission levels are contained in webcast slide number nine. Such levels are built into our loss reserve estimate, which projects future claim payments on existing delinquencies.
As such, an increase in the denial and rescission estimate has the effect of lowering our loss reserve estimate. Correspondingly, mortgage insurance premiums earned have declined due to an accrual for premium refunds on delinquent policies expected to be rescinded.
Our paid claims for the quarter were $167.7 million consisting of $149.4 million of first liens and $18.3 million of second liens. Claims paid were again much less than expected due mainly to older delinquent loans being stalled before or during foreclosure proceedings, although we're still anticipating a jump in claims paid over the rest of the year and into 2010.
We expect the total first and second lien claims paid will be approximately $275 million to $300 million in the third quarter and our revised full-year estimate has been reduced to the $1.1 billion range. We expect delinquencies to increase over the balance of 2009 and if that happens, absent offsetting factors such as further increases to our loss management assumptions this would likely result in a higher provision for losses and a higher reserve for losses in the second half of 2009.
Second lien risk in force have been reduced from $384 million on March 31, 2009 to $354 million as of June 30, 2009. The loss reserve and premium deficiency reserve for second liens as of June 30 is $140 million or approximately 40% of this remaining second lien exposure, which consists primarily of older vintage more stable performing business.
We've agreed to reduce another $25 million of second lien exposure on favorable economic terms during the third quarter and we're (Audio Distortion) further second lien risk reduction. In Financial Guaranty, we experienced a continuation of the worsening credit trends that we've seen over the past year, but without any new material credit events.
With regard to the one problematic CDO of ABS transaction we still believe that based on our current expected cash flows, which are very volatile we will not be required to pay principal until 2036 or later and that the ultimate principal payment will likely be a significant portion of our total exposure of approximately $471 million. The latest expectation with regard to interest advances for which we expect to be reimbursed, could begin as early as 2011 with unreimbursed interest payments beginning sometime around 2018.
If and when any interest advance is required we would be required to post a loss reserve for the present value of future claims, which would negatively impact Radian Assets and thus Radian Guaranty's statutory capital. We paid an ordinary dividend of approximately $100 million from Radian Asset to Radian Guaranty at the very end of June.
We expect to pay another ordinary dividend in June 2010 of approximately $90 million, which is subject to adjustment. The Ambac commutation, which we announced a few weeks ago eliminates $9.8 billion of risk including significant exposure in troubled asset classes.
The impact of the Ambac computation on the portfolio is provided on webcast slide number 18. We'll be gaining approximately $40 million of statutory surplus from the transaction during the third quarter primarily due to a transfer from contingency reserve.
Our goal is to keep reducing financial guaranty exposure on reasonable economic terms in order to give ourselves more certainty of realizing the statutory surplus amount of over $900 million plus hopefully a portion of our additional Financial Guaranty claims paying resources of $1.84 billion as a means of capital support to the MI business over time. We still have substantial exposure in Financial Guaranty and there will be losses sustained in this business over time, but the Ambac commutation goes a long way towards helping us achieve our goal.
As highlighted on slide 18, the approximately $91 billion of remaining Financial Guaranty exposure after the Ambac commutation contains $43.8 billion of public finance exposure, which has some problem credits, but is generally of a high credit quality and $37.5 billion of corporate CDO exposure, $2.3 billion of troubled CDO exposure, and $1.8 billion of CMBS CDO exposure, for all of which we expect no material credit losses. Of the balance exposure to troubled asset classes, like non-CDO NBS has been reduced to $686 million, consumer ABS exposure has been reduced to $468 million, and other commercial ABS exposure to $342 million.
The change in fair value line was impacted primarily by tightening of credit spreads in the underlying corporate CDO collateral during the quarter, which contributed to our unrealized fair value gain for the quarter of $272 million. The fair value line will likely continue to be volatile, however we will point out instances where we anticipate credit losses.
Our investment portfolio had a good quarter with total return for the quarter of just over 3%. We had no material write-downs of any investments in the quarter that we consider other than temporary.
We believe that the shift we have made in our investment portfolio towards short-term and taxable investments positions us well to support the expected increase in MI claims that should be forthcoming later this year and into 2010. We currently have approximately $480 million of liquidity at or immediately available to Radian Group after having received the $105 million IRS refund in May and a $3 million dividend from Sherman in July.
Our current best estimate of tax sharing payments that we will be required to make to our subsidiaries by October 2009 is approximately $110 million and we expect that $105 million of this will be satisfied by the Sherman transfer. Our current best estimate of tax sharing payments that we will be required to make by October 2010 is approximately $220 million.
This $220 million estimate is based on 2009-projected taxable loss, which is less than we were projecting last quarter. In conjunction with our intent to transfer Sherman to Radian Guaranty to satisfy most of 2009 obligations and the improvement in the 2010 tax payment expectation and as S.A.
mentioned, we have decided to pay down and terminate our credit facility. This will be done tomorrow and will give us the option to potentially move forward with a series of initiatives to support both parent company liquidity, and Radian Guaranty's capital.
These include the ability to use Sherman for partial payment of tax obligations, potential exercise of our option to issue a $150 million of preferred stock out of Radian Asset in conjunction with our soft capital facility and the flexibility to repurchase our public debt if we decide to do so. We were also expecting to sell another small subsidiary some time this quarter, which is expected to net approximately $19 million in cash for Radian Group.
Our goal is to significantly lessen the potential holding company liquidity needs that could arise in June 2011, when our $250 million of our public debt matures. In July we filed a shelf registration, which could potentially be used toward filling any gap that will remain.
With regard to Sherman, following its transfer to Radian Guaranty subsequent dividends or potential sale proceeds will benefit Radian Guaranty and will support our capital position there. I would now like to turn the call back over to S.A.
Sanford A. Ibrahim
Thanks, Bob. Before I open the call to your questions I'd like to leave you with four key take-away points.
Our mortgage insurance business remains strong and early indications of credit quality on our new business are very positive. At quarter end almost half our primary risk in force consisted of mortgage insurance business written prior to or after the unprofitable years of 2005, 2006, and 2007.
This share will keep increasing as we continue to write high-quality new business. We are and have been working on various initiatives to ensure that we have sufficient capital to keep writing new business nationwide and to proactively address our 2010 and 2011 liquidity needs.
Our Financial Guaranty business and our ownership interest in Sherman give us unique advantages in terms of future valuation upsides while providing us with current capital and liquidity supports. Now, we'll turn the call over to your questions.
Operator, we are ready for questions.
Operator
Thank you. (Operator Instructions).
And our first question comes from Steve Stelmach with FBR Capital Markets.
Steve Stelmach – FBR Capital Markets
Hi. Good morning and congrats on a good quarter.
Just a couple of real quick questions and then maybe I'll hop back into queue. Bob I may have missed it, did you mention that the second-quarter provision included some true up of reserves due to rescission activity or is that…
C. Robert Quint
Well, the reserves always include an estimate of rescissions and denials. The point was that this estimate has gone up.
Steve Stelmach – FBR Capital Markets
Okay. All right.
And then on the premium refund that you mentioned. Those loans that were poorly underwritten they clearly took up balance sheet capacity or capital capacity over the past few years, when you calculate your premium refunds do you incorporate some opportunity cost that you lost with, otherwise would have been good loans on the balance sheet or on exposure to, does that make sense.
So in other words you have, you could have that capacity that was taken up by a bad loan could have been taken up by a good loan. Do you get compensated for the fact that, your capital was absorbed by these poorly underwritten loans?
C. Robert Quint
No, we don't.
Steve Stelmach – FBR Capital Markets
Okay. And then on the shelf offering just lastly, is that just a liquidity issue it sounds like, just liquidity it's not needed for the capital at the operating company, is that correct?
Sanford A. Ibrahim
Steve, it gives us the flexibility, we've always said that we are open to looking at external capital at the right time and if it makes sense and this gives us the ability to do so. And as Bob said it may be something we could use to leap whatever gap remains in our 2011 liquidity needs.
Steve Stelmach – FBR Capital Markets
Okay, thank you.
Operator
Thank you. Next we have Joe DiMarino with Piper Jaffray.
Joseph DiMarino – Piper Jaffray
Thank you, good morning. Assuming you don't reach a capital solution in the near term at what point would you expect to bridge the 25 to 1 risk to capital limit?
Sanford A. Ibrahim
As we've said making projections like that is frought with a lot of uncertainty because a lot of it is driven by future default experiences and the default, and impact on reserves. So we do not make those projections all we can say is that we feel comfortable we can continue writing at least through 2009.
And we also say that the 25 to 1 ceiling applies at this point only in 14 states that MICA is working on.
Joseph DiMarino – Piper Jaffray
And what is the limitation in the other states on average, I guess?
Teresa Bryce
This is Teresa. There is no limitation in those states, currently from a statutory regulatory perspective.
I'd also add that's the other reason we've been looking at how we could use Amerin Guaranty in the future if we needed it to write in those states that do have a 25 to 1 regulatory or statutory requirement, if there is no forthcoming relief from those requirements.
Joseph DiMarino – Piper Jaffray
Okay, thank you. And then on page 19, or excuse me, page nine of your presentation the cumulative rescission rate I assume that that is referring to the period in which the claim is received?
C. Robert Quint
That's right.
Joseph DiMarino – Piper Jaffray
And if so what vintages for instance would be, let's just say the Q1 2008 rescission rate, what vintage would that be stemming from?
C. Robert Quint
Well, it's going to be, all the vintages that would have claims coming in. So it's going to be, it's going to be obviously 2007 and prior and all those vintages.
So it's kind of blended vintages.
Joseph DiMarino – Piper Jaffray
Okay. On average about how long does it take to receive a claim from the time that on some of the more fraudulent business, how long does it take to receive a claim on that?
C. Robert Quint
It really depends on the state, but the average is over a year so once it becomes delinquent. So chances are stuff coming in as a claim in the first quarter 2008, is going to be from prior to 2007 vintages.
Joseph DiMarino – Piper Jaffray
Okay, thanks. That's helpful.
And then can you talk a little bit about the impact in the quarter from loan modifications, how that affected your provision?
Teresa Bryce
Well, this is Teresa. We don't make any assumptions in our model around the impact of loan modifications.
Obviously, we did have some benefit in our results based on loan modifications. And we are actively participating in the various modification programs.
We spent a considerable amount of effort being ready to launch that at the time the government requested that we all be ready to launch those programs. We're continuing to see how that activity is developing as you've seen a number of the loans are starting are in their 90-day trial period.
So, we're hopeful that we will see some real modification activity start to show up in the fall.
Sanford A. Ibrahim
But the key point here is to-date we have seen little benefit from loan modifications and our reserve numbers do not project an increase in loan modifications going forward.
Joseph DiMarino – Piper Jaffray
Okay, thanks. That's really helpful.
Then one last question, what is the biggest driver of the lower paids guidance for the year, aside from the fact that it was just lower in this quarter, I guess so what is driving it this quarter?
C. Robert Quint
I think it's the same the same thing we have seen the aged delinquencies are just getting stalled before foreclosure and even in foreclosure. Now, we do expect that some of that to clear out and that's why we have projected increases for the third and fourth quarter.
But up for the last year plus, we have seen just a lower amount of claims coming in and a lower amount of claims paid because of that and because of our loss management efforts.
Joseph DiMarino – Piper Jaffray
All right. Thank you and congrats.
Sanford A. Ibrahim
Thank you.
Operator
We'll go next to Matthew Howlett with Fox-Pitt, Kelton.
Matthew Howlett – Fox-Pitt, Kelton
Thanks for taking my question. And congratulations on the quarter.
Just getting back to the rescissions a competitor said that, I think when they released, they said the rescissions may not continue as high given a lender could essentially put it into arbitration, down the road. Is there anything to be made aware of that in terms of the way you are reserving and potentially the lender throwing the, disagreeing and throwing the case into arbitration?
Teresa Bryce
Well what I would say is that currently what we have found and we have not changed our process for how we rescind or deny loans through this timeframe. We have only increased the number of claims that we are reviewing in that regard.
So, we have been consistent throughout in that regard. And also to the extent that a lender rebuts we relook at that and respond, but we've seen a very low incidence of even rebuttals in that regard.
Sanford A. Ibrahim
Also keep in mind we have paid substantial amount of claims and are still projecting this year. We paid nearly $1 billion in claims last year, which went to the lenders and we are projecting this year to do 1.1, in the $1.1 billion range, which is a substantial amount of payments to lenders.
Matthew Howlett – Fox-Pitt, Kelton
Okay, gotcha. And I am assuming you are rescinding on claims on GSE portfolios, owned loan as well, and so far are they throwing anything into arbitration or are they pretty much going with you guys?
Teresa Bryce
As I said we've gotten a very small percentage of rebuttals on our rescissions.
Matthew Howlett – Fox-Pitt, Kelton
Okay, great. Fair enough.
And then on the modification front, one of your competitors put out their estimate of what was eligible under HAMP and then HOPE for Homeowners. Is there a percent you could give us in terms of what fits under particularly the HAMP program that will be eligible to be modified?
Sanford A. Ibrahim
At this point we do not have any such estimate although as we said we have resources available to participate with our lender partners in all of those programs.
Matthew Howlett – Fox-Pitt, Kelton
Okay, great. Okay, great.
Thank you for taking my questions, congratulations.
Operator
Thank you. We have a question from Mark DeVries with Barclays Capital.
Mark DeVries – Barclays Capital
Yeah, thanks. First I just wanted to drill down a little more on the drop in paid claims Q-over-Q.
And I think Bob you alluded to some type of a stalling in the process of claims, could you elaborate on that a little bit?
C. Robert Quint
Well there are, we know there are state moratoriums, there are efforts underway both government and servicer initiatives to try to get more loans modified. So all of that plays into the reduction in claims as well, you saw in the first quarter our number had a large payment for second liens that was really a commutation payment.
So first liens quarter-over-quarter there is not really a drop it's pretty flat, but we do expect the number to go up in the third and fourth quarter.
Mark DeVries – Barclays Capital
Okay. And I'm sorry if I missed this where do you guys stand at this point with your remaining exposure on the second lien book?
C. Robert Quint
It's $354 million and 40% of that is reserved for in loss reserves and premium deficiency. And we have many efforts underway to proactively reduce that risk even further.
Mark DeVries – Barclays Capital
Okay. And finally what's your view on kind of the shape of the loss curves on some of these more troubled books, are you seeing more of an acceleration of losses or should we kind of think in a more traditional peak loss years three through five implying that if we look at, '06, '07 books we may still have several years of really elevated claims?
H. Scott Theobald
This is Scott Theobald. I can tell you that in general there is still kind of a seasoning pattern to the claims, but they're obviously at an elevated level from here.
The good news is we're seeing an, even though things are increasing it's increasing at a decreasing rate.
Mark DeVries – Barclays Capital
Okay. All right.
Thank you.
Operator
We'll go next to Mike Grondahl with Northland Securities.
Michael Grondahl – Northland Securities
Okay. Thanks, guys.
Couple of questions. In terms of the liquidity, can you walk me through those numbers?
I think you said you had $480 million minus a $100 million on the credit facility. So that will leave you with $380 million and you will need that to service the $220 million in '10, the tax payment.
Then that will leave you 160 to address $250 million that will be due now in '011, am I thinking about that right, it seems like you've really closed that gap?
C. Robert Quint
Yes. You’re thinking about it correctly and you've hit the primary, ins and outs, there might be some minor ones as well, but you've hit the primary.
Michael Grondahl – Northland Securities
Okay. So you did make a ton of progress there that's great.
Secondly, you got this $100 million dividend from the Financial Guaranty business late June, as performance there is still challenged, but it's not as bad as it clearly could be is there any chance you can get a dividend from that before next summer or what are kind of the deciding factors there if you could ever get more than the $90 million you're expecting to get next summer?
C. Robert Quint
It's not our expectation to get anything before that. The $90 million that we mentioned would really be the next ordinary dividend in ordinary course.
And, we're not at a point where in the near term, we expect to ask for an extraordinary dividend or get more, but to remind you those dividends provide liquidity to Radian Guaranty and Radian Guaranty's liquidity position is very strong because of the claim situation. So, it's not like the cash is needed in the near term to pay claims.
Sanford A. Ibrahim
Also, Mike related to your question on slide 21 of our presentation we have shown how the CDO portfolio in Financial Guaranty runs off and starting 2012 through 2017.
Michael Grondahl – Northland Securities
Gotcha. And then just lastly, did you see any delta 1Q to 2Q when it came to loan months, I mean I think you kind of clarified, how you're not seeing much traction, but you're also not taking any benefit in your provisions yet for it, but was there any lift in activity?
Teresa Bryce
Well, I think first of all the new program, the HAMP program that the government rolled out was rolled out for an implementation date at the beginning of April. So, I think we have started to see a ramp up in activity up from the servicers and that has continued.
We are hearing from, many of the servicers as well as from the GSEs that there are quite a few loans that are in their 90-day trial period. So we're still waiting to see how that turns out because they won't be considered modified until they get through that period successfully.
So I think we saw this new program, which clearly the industry has, is working hard to work with and that's increased the activity, but we expect to see a ramp up in activity over the next few months.
Michael Grondahl – Northland Securities
Okay. And then I don't know if you've commented, I might have missed it, but did you guys comment on the new delinquents coming into the funnel, did you see any seasonality there or were they up from the first quarter, down from the first quarter, what's the new delinquents that you're seeing, how has that level been?
C. Robert Quint
The rate of increases is slowing and has continued to for the last couple of quarters.
Michael Grondahl – Northland Securities
Well, that's a good start. Okay, hey, thanks, and you guys it looks like you made a lot of progress on a lot of initiatives you've been working on it seems like it came together well this June quarter.
Thank you.
Sanford A. Ibrahim
Thank you.
C. Robert Quint
Thank you.
Operator
We'll go to Donna Halverstadt with Goldman Sachs.
Donna Halverstadt – Goldman Sachs
Good morning. I certainly had lots of news this morning, most of my questions have been asked, but I do have some follow-ups.
You made the comment that, you're getting on your recessions a very small percentage of rebuttals, do you think that that is somewhat due to the fact that lender services are just so completely overwhelmed and do you expect that percentage of rebuttals to go up as lender servicers get their sea legs back under them?
Teresa Bryce
I think there is really no way for us to really know the answer to that. I mean, as I said, we’ve maintained our same process, we're looking at recessions and denials and we've been consistent in that regard.
So, there is no change in that regard that would make us think differently, but we really can't know.
Donna Halverstadt – Goldman Sachs
Okay. And then Bob I think you are the one who said with respect to some of the claims payments just being kind of stalled out and that some of that would show up as paid claims in the future.
Is some, can you give us some size of the breadbox on some, are we talking 90% of it, 50% of it, 20% of it, kind of how much has just been stalled versus truly gone away?
C. Robert Quint
We gave our estimate of claims paid for the third quarter and the whole year, so from that you can get the fourth quarter. So I think we've told you what we think we're going to pay in the third and fourth quarters.
Donna Halverstadt – Goldman Sachs
When are you going to give 2010 paid claims guidance?
C. Robert Quint
I think we'll give next quarter, we'll probably at least start it, give maybe the next several quarters or if we have more visibility, it's very difficult, but if we have more visibility we'll give the whole year, but I think we'll certainly go out a few quarters from wherever we're at.
Donna Halverstadt – Goldman Sachs
Okay. And then with respect to the lower estimate, the $220 million that you need to pay back to the subs in 2010, it's down a lot from the previous range of 300 to 478.
Is the 220 just a point estimate or is there a range there that we should be thinking about?
C. Robert Quint
That's our current projection. The 478, which is the maximum is still, that hasn't changed, but our project, which is really based on the 2009 taxable loss, that's what drives that number.
So think about it, we have six months of actual performance and we're projecting six months that's where the number comes from.
Donna Halverstadt – Goldman Sachs
Okay. The last question I had is with respect to the 14 states where you have the 25 to 1 limit, what percent of your new business is in those 14 states?
Sanford A. Ibrahim
We would estimate between 30 and 40% of the top point and some of those are states that, have had the highest default rates associated with them.
Donna Halverstadt – Goldman Sachs
Okay. And I'm sorry you said 30 to 40%?
C. Robert Quint
It could be a little bit higher.
Donna Halverstadt – Goldman Sachs
Okay. Thank you very much.
Operator
Next we have Nat Otis with KBW.
Nat Otis – KBW
Good morning. Just a couple quick questions, just on that timeline of the 14 states, do you have any idea of how long it might take to hear back from them on any type of regulatory reform there?
Teresa Bryce
It could be a significant amount of time, we don't have an idea and in some states their legislative sessions aren't even every year, so it could be a much longer timeframe. So I mean I think while the industry is certainly working diligently on this, that's why we're looking at what other alternatives we have.
Sanford A. Ibrahim
And, Nat that's the reason why we discussed the possibility of using Amerin, which is already licensed in all 50 states to, if we get all the right approvals to use that in those states where that still remains, 25 to 1 still remains a factor.
Nat Otis – KBW
Okay, fair enough, thank you. And just one quick thing on the, I think Bob you said the rate of new delinquencies is slowing.
Is that across all of your segments and pretty much more specifically, how is that prime book coming in, is it slowing with the prime book there as well?
H. Scott Theobald
This is Scott Theobald. What I can tell you is in the prime book, what we're seeing is even though we're seeing increases in new defaults on a comp basis, on a percentage basis, it's no different from last year.
So, we're seeing kind of a stabilization in terms of trends, in terms of new defaults and cures.
Nat Otis – KBW
All right, great. Thank you.
Operator
Next we have Steve Stelmach with FBR Capital Markets.
Steve Stelmach – FBR Capital Markets
Hi guys. Just a quick follow-up, can you breakdown of GAAP equity for the three operating segments, Financial Guaranty, Mortgage Insurance and Financial Services?
Sanford A. Ibrahim
We don't really disclose that any more.
Steve Stelmach – FBR Capital Markets
Okay. All right.
Thank you.
Operator
Okay. Then we'll go next to Connor Ryan with Deutsche Bank.
Connor Ryan – Deutsche Bank
Hey guys. Congratulations on a great quarter, just wanted to get a sense for, to the extent that in the future you guys do go above 25 to 1 in some of the states that it applies to, do you have a plan for how you can continue to write new business when that happens?
Teresa Bryce
Yes, the. Well first of all with respect to the states that don't have that requirement, which is the majority of the states, we could continue to write business in Radian Guaranty.
Amerin Guaranty is how we are looking at being able to continue writing business in the remainder of those states. So, while we continue to manage the business to try to stay below that threshold, we are doing this, taking the steps that we believe are necessary to allow us to have that flexibility if that were to happen.
And there were still states where we had not been able to obtain any regulatory or statutory relief.
Connor Ryan – Deutsche Bank
Okay, great. And is there a level in any of the states where say your risk to capital reached or say that things continue to worsen from here, a level where your claims paying resources would reach where the regulators would step in or is that just more of an art than a science?
Sanford A. Ibrahim
It would depend on the regulators judgment more than anything else and we hope, based on the fact that the new business we're originating is of a very good quality and profitable they may be more flexible.
Connor Ryan – Deutsche Bank
Okay, okay, great. And then just the last question there is to the extent a claim is not met at the Radian Guaranty subsidiary, does that trigger a default or is there a capital support agreement from the holding company?
Sanford A. Ibrahim
Bob?
C. Robert Quint
No, not, not per se there is a cross guaranty with Amerin Guaranty. Amerin Guaranty and Radian Guaranty have a cross guaranty, but there is no support agreement from Radian Group to Radian Guaranty.
Teresa Bryce
I think it's also important though to iterate that, Radian Guaranty has adequate claims paying ability. So we're not projecting any necessity to have that kind of support.
Connor Ryan – Deutsche Bank
Right, no, yeah, I understand. I'm just saying, to the extent we did go through another kind of softening of the economy.
Just wanted to kind of get a sense for how that could actually play out?
Teresa Bryce
We…
Connor Ryan – Deutsche Bank
Thanks for your time, guys.
Sanford A. Ibrahim
Sure.
Operator
Thank you. We'll move onto Scott Frost with HSBC.
Scott Frost – HSBC
Hey. How are you doing?
Going over the liquidity points that you are very helpful with, one of the previous questions, I just wanted to make sure that you go through the cash you have less what's to the bank, less what's for tax, less what's for the debt outstanding in 2011 with about a $90 million in shortfall and to fund this, the plan is to issue prefs or converts or access capital markets. In other words we're not expecting any operating company support, this is to be funded through asset sales or capital markets issuance or some other method.
Is that, if I said that is that would that be accurate?
Sanford A. Ibrahim
What we said was our goal is to reduce the 2011 liquidity needs to a manageable level. And we said we would look at various alternatives to achieve that and then Bob talked about one alternative out of many that we may look at and consider to meet the gap.
And Bob also talked about a small contribution coming in from a subsidiary sale we anticipate that will net us just shy of $20 million.
Scott Frost – HSBC
Okay. But other, but, okay, so other than that no other OPCO support and the alternatives are what's available to fund the shortfall, whatever they may be that's correct right?
C. Robert Quint
We're not anticipating dividends from Radian Guaranty…
Scott Frost – HSBC
Okay.
C. Robert Quint
To the parent company at this time.
Scott Frost – HSBC
And just to make sure on slide seven when you showed Financial Guaranty derivatives when you break down the change in fair value derivatives, does that represent changes in your own credit spreads or is that something else?
C. Robert Quint
Partially. So, it's going to be changes in the credit spreads on the underlying collateral and the FAS 157 impact of our own credit spreads.
Scott Frost – HSBC
And could you remind me what the FAS 157 impact was, I am sure you said its somewhere, but I just didn't pick it up?
C. Robert Quint
We didn't break it down this quarter, but in our 10-Q you'll see the balance sheet gross and net with the underlying collateral and then offset by our credit spread.
Scott Frost – HSBC
Could you just tell us what it is?
C. Robert Quint
I don't have those numbers in front of me, sorry.
Scott Frost – HSBC
Okay. Thank you.
Operator
Your next question is from Adarsh Mashru with Dupree Financial Group.
Adarsh Mashru – Dupree Financial Group
Yes. Good morning, guys.
Sanford A. Ibrahim
Good morning Adarsh.
Adarsh Mashru – Dupree Financial Group
Have you made or are in the process of making any significant changes to your investment portfolio or how is it is invested given your outlook for the economy?
C. Robert Quint
The portfolio has always been in very high credit quality investments. The shifts we have made over the past several quarters have been toward shorter term investments because the expectation is that we're going to pay more MI claims in the near future, as well we have shifted a lot of our municipal portfolio, our tax advantaged portfolio to taxable securities because of our loss position.
So those are the shifts we've made, we don't anticipate any material shifts from here.
Adarsh Mashru – Dupree Financial Group
Okay. So, would you say that the portfolio is positioned to weather say a very adverse environment like, say much higher inflation?
C. Robert Quint
The portfolio is really positioned to meet the liquidity needs of the MI business and we think it's pretty well positioned.
Adarsh Mashru – Dupree Financial Group
Okay. All right.
Thank you.
Operator
Thank you. And next we have [Mahmud Rezo] with Brahman Capital.
Mahmud Rezo – Brahman Capital
Hi guys, how are you.
Sanford A. Ibrahim
Hi Mahmud.
Mahmud Rezo – Brahman Capital
So, just, I wanted to understand one point, I think that Steve had asked earlier. I think the response was that you had factored in some of the rescission activity into the reserves, which was kind of the primary driver of the quarter-over-quarter improvement.
Is there is it possible to quantify what that was or, what the recession assumption was relative to what it was before?
C. Robert Quint
We haven't quantified that, the loss reserve estimate takes into account a variety of factors of delinquency rates, loan sizes, average claim paid, aging of defaults, rescissions going through it and we did point out rescissions are a big component currently of it, but we haven't broken down the components and what each component means to the numbers.
Mahmud Rezo – Brahman Capital
Okay, fair enough. And then in the data that you guys have disclosed in your quarterly presentation, I know you anecdotally said that the rate of new delinquencies is slowing.
Is there a way for an outside investor to actually demonstrate that in the numbers that you've disclosed on a quarterly basis?
C. Robert Quint
I don't believe so. The delinquency rates have gone up because, there have been some new defaults and because a less loans have gone into the claim process, but you can't get that from the information we've provided.
Mahmud Rezo – Brahman Capital
Okay. All right.
Thank you very much.
Operator
Thank you. And our final question will come from Brian Monteleone with Barclays Capital.
Brian Monteleone – Barclays Capital
Thanks. I think you guys mentioned that you might use Amerin as a good book to write new business.
I think as of the end of the first quarter there was about $40 million of assets and $4 million of surplus in that entity. How would you plan to capitalize that?
C. Robert Quint
Well the whole process, if we were to need Amerin the process would be several steps and one of those steps would be adequate capitalization. And there is a cross guarantee between Radian Guaranty and Amerin Guaranty.
So that would come into play as well.
Brian Monteleone – Barclays Capital
Do you think you could use internal resources from Radian Guaranty or would you need external resources for that given that Amerin is not owned by Radian Guaranty?
C. Robert Quint
It's conceivable that we would be able to use internal resources.
Brian Monteleone – Barclays Capital
Okay. And then just one other question on reserves, I think the last question I was asking about, we can't and can't see from the outside, based on the number of defaults in the average paid claims, it kind of implies there is about $6 billion of delinquent risk on the books, there is only about $2.3 billion of reserves for primary risk, which implies there is basically 60% of the defaults there is no reserve for, which looking at the same data a year ago was maybe a 40% number.
We haven't really seen that kind of a shift out of any of your peers. So I wonder maybe what are you guys seeing that the peers aren't seeing and then what are you seeing that to make that change so dramatic.
C. Robert Quint
I mean I think all we can do is talk to the way we do our loss reserve estimate. And we've been very consistent in the way we estimate the loss reserves.
However, the rescission rate, which is a component and has always been a component of the calculation has gone up and has become a bigger part of it. So that's what happened with ours and we can't really comment on other parties.
Brian Monteleone – Barclays Capital
Thanks.
Operator
And we have no further questions. Please go ahead with any closing remarks.
Sanford A. Ibrahim
Well thank you all for participating. And as always if you have any follow-up questions or comments take them up with Terri Williams-Perry.
Thank you.
Operator
Thank you. And ladies and gentlemen that does conclude our conference for today.
Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.