Nov 2, 2010
Executives
Emily Riley, Investor Relations S.A. Ibrahim - CEO Bob Quint - EVP & CFO Teresa Bryce - President of Radian Guaranty Dave Beidler - President of Radian Asset Assurance Scott Theobald - EVP & CRO of Radian Guaranty
Analysts
Steve Stelmach - FBR Capital Markets Mike Grondahl - Northland Capital Markets Mike Grasher - Piper Jaffray Donna Halverstadt - Goldman Sachs Douglas Harter - Credit Suisse Conor Ryan - Deutsche Bank Matthew Howlett - Macquarie Nat Otis - KBW Chris Owens - EpicQuest Conor Ryan - Deutsche Bank
Operator
Ladies and gentlemen, thank you for standing by and welcome to Radian’s Third Quarter 2010 Earnings Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session with instructions being given at that time.
(Operator Instructions) And as a reminder today’s conference is being recorded. I would now like to turn the conference over to your host, Ms.
Emily Riley. Please go ahead.
Emily Riley
Thank you and welcome to Radian’s third quarter 2010 conference call. Our press release, which contains Radian’s financial results for the quarter was issued earlier today and is now posted to the investor section of our website at www.radian.biz.
During today’s call, you will hear 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, I would like to remind you the comments made during this call will include forward-looking statements.
These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our first and second quarter 2010 Forms 10-Q.
These are also available on our website. Now, I would like to turn the call over to S.A.
S.A. Ibrahim
Thank you, Emily, and thank you all for your interest in Radian. Today I will provide highlights of our quarterly performance and also discuss several industry trends.
Bob will then cover the details of our financial position and we will then open the call to your questions. Before we discuss our results, I would like to highlight two important points for today’s call.
First, as we have said for the past several quarters, we continue to operate in a challenging and uncertain environment. Second, we were pleased with several positive developments in the quarter.
The news headlines each day remind us of the difficult housing market and economy. Just last week, the CoreLogic Home Price Index showed a decline in home prices for the first time this year while the FHFA cited an increase.
During the same week, the Consumer Confidence Index jumped to its highest level in six months and sales of existing homes rose all while stories of foreclosure suspensions multiplied. In the business sector, there have been positive signals throughout this earnings season as several leading companies reported healthy third quarter results.
Clearly, we’re operating in a challenging environment. At Radian, however, there were several improvements in the quarter worth noting.
For mortgage insurance, we saw a promising increase in new insurance written as well as a decline in our delinquency account for the third consecutive quarter. For financial guaranty, despite a challenging environment for the industry, we continued to see signs of credit trend stabilization including in our TruPs CDO portfolio.
Turning to the quarter’s results, earlier today we reported third quarter net income of $112.2 million or $0.84 per diluted share compared to a net loss of $70.5 million or $0.86 per diluted share for the same period last year. Our results once again reflect the accounting impact of fair value adjustments in the quarter, which included a pre-tax gain of $230 million or $1.12 per share on an after-tax basis as well as gains on other financial instruments.
The gain on derivatives resulted mainly from the tightening of credit spreads within our CDO portfolio in the quarter. We continued to benefit from our strategic efforts to reduce risks that is non-core to our MI business and to utilize our financial guaranty business for important capital support.
There are two notable examples in the quarter. First, we terminated two structured mortgage insurance transactions that consisted primarily of modified pool exposure.
This eliminated 4,325 loans from our delinquent inventory and reduced primary risk in force by $188 million. These deals consisted almost entirely of off day option-ARM loans from 2006 and 2007 vintages with default rates significantly higher than the Radian average and the $143 million termination payment was slightly less than our loss reserve.
Importantly, the terminations helped to partially reduce the uncertainty associated with our aged default inventory. Second, the New York Insurance Department again approved the release of contingency reserves for Radian Asset based on the reduction in our net par outstanding.
This $42 million was added to statutory surplus in the quarter and strengthened Radian Guaranty’s capital position. As I mentioned earlier, despite a challenging environment for the industry, our financial guaranty business generated $187 million in income, which included gains of derivatives and other financial instruments.
More importantly, absent these fair value adjustments, our financial guaranty business was profitable in the quarter. And the company is expected to pay an ordinary dividend of approximately $65 million to Radian Guaranty in June of next year.
In mortgage insurance, new insurance written increased to $3.2 billion this quarter from $2.7 billion in the second quarter and our new business again consisted of loans with excellent credit characteristics. We maintained our 21% share of the market in the third quarter.
As we have said, while market share is important, it is not our driving objective and our goal remains to continue to write high quality profitable mortgage insurance business as our industry slowly regains share back from the FHA, which raised its pricing just last month. In order to illustrate the performance of our new mortgage insurance business, we have added a chart on slide 14 that shows year-to-date 2010 performance by vintage.
While this is clearly only an early indication of performance for the newer 2009 and 2010 books, we believe this chart will help you better track the progress in these vintages, as well as in our legacy books. The risk-to-capital ratio for Radian Guaranty was 17.2 to 1 on September 30, 2010, which was an improvement to the 17.9 to 1 ratio at June 30.
Again, we are encouraged by the third consecutive quarter of decline in delinquencies, which represented a 6% drop in our primary delinquency inventory and a 3% drop, without the impact of the two structured mortgage insurance terminations. You may find the details in our default roll forward chart on slide 17 of our webcast presentation.
It is also important to note the slight decrease in our delinquency inventory in October, which is similar to the third quarter delinquency patterns and represents 10 straight months of declines this year. Going forward, a continued reduction in our overall delinquent inventory is important as we envision a future with a diminished legacy book and increased opportunities to benefit from Radian’s strong competitive position.
With regard to loan modifications, more than 20% of our (inaudible) reported in the quarter with a result of a loan mod. While the reporting we received from servicers on loan mod activity remains limited, we have been seeing the same trend noted by others in the industry where non-HAMP or private loan modifications are on the rise.
HOPE now recently reported that more than 90% of loans modified in August involved a reduction to the borrower’s monthly payment, which typically means a lower incidence of redefault. Also as we mentioned in recent investor meetings, we have begun to proactively investigate a portion of our late-stage delinquencies through on-site borrower visits.
Although it is still very early in the process and the activity has been limited so far, there have been circumstances where we found opportunities to help modify a loan or where we could eliminate or reduce the claim amount. Again, while this is too early to quantify the ultimate impact, there has been nothing in our analysis that leads us to believe our loss reserves are not appropriate.
Now I would like to address the foreclosure suspensions, which have been the subject of news headlines in recent weeks. Based on what we know today, we believe that this issue is mainly one of timing.
Therefore, we do not expect a material impact either positive or negative for Radian because of these suspensions and it is important to note that the maximum interest we will pay on a defaulted loan is cap for Radian at two years, and we also have the right in our insurance policies to adjust claims for improper servicing practices. At this point, we do not expect any delay in claim payments to affect our claims paid guidance for 2011, although the new suspensions add greater uncertainty to this estimate.
Before I turn over to Bob, it is important to recognize several examples of Radian’s financial strength and prospects for future growth. First, Radian’s book value at September 30, 2010 was $14.53 per share and our investment portfolio remains strong at $6.4 billion.
Second, we believe that our existing book of business as of September 30 contains an embedded value of $1.1 billion in our first-lien domestic portfolio as shown on slide 11. And finally, despite an uncertain economy, we are pleased with the signs of credit trend stabilization in our businesses, including the continued decline in mortgage insurance delinquencies, and in certain areas of our financial guaranty portfolio.
We believe that these trends are paramount to Radian’s future strength and success. And now, I’d like to turn the call over to Bob for details on our financial position.
Bob Quint
Thanks, S.A. I’ll be updating you on the P&L activity and trends for the third quarter 2010 and our financial position as of September 30, 2010.
The MI provision for losses was $348 million this quarter, which demonstrates an improving trend but it’s still at an elevated level. As we do each quarter, we updated our loss reserve assumption to reflect our most recent experience, including roll rates, severity, and the net rescission denial estimate.
None of these updates individually had a material effect on our reserves and the overall net impact of the update was a modest reserve increase, substantially all of which was contained in the pool insurance product. The severity of pool insurance claims has increased significantly this year as you can see in the average pool insurance claim paid and the reserve for default that we have disclosed this quarter.
The two terminations that we completed during the quarter reduced delinquent loans and primary risk in force significantly and had a slightly positive P&L impact. Importantly, we believe such terminations confirmed the accuracy of our loss reserve estimate with respect to those deals as our payment of approximately 143 million was a little bit less than our loss reserve.
The dollar amount of loss avoided related to denials and rescissions for the third quarter of 2010 was approximately 256 million, compared to 203 million in the second quarter of 2010. Much like claims paid, these numbers can be very volatile from period-to-period.
So trends are very hard to identify and predict. Claims paid in the third quarter were 494 million, 351 million excluding the termination payments.
We expect claims paid in the fourth quarter to be approximately 420 million, bringing us close to 1.4 billion for 2010, excluding termination payments and receipts. And for 2011, we believe that claims paid will increase to the $1.7 billion range although the potential delays caused by the recent foreclosure moratoriums add further uncertainty to that number.
In September, we completed another significant purchase of our insured NIM bond in which we reduced risk in force by approximately $111 million by paying out 96 million in cash, producing both a modest statutory and GAAP gain. This was a further reduction to our non-traditional MI risk enforcement unfavorable economic term.
Other risk in force was down to 635 million from 4.2 billion a year ago. The change in fair value line was primarily impacted this quarter by a significant tightening of credit spreads within our CDO collateral, helping to produce a fair value gain on derivative instruments for the quarter of 230 million.
Another 17 million of fair value gains included within the gain and other financial instrument volume, which also contains other positive items related mostly to the sale of trading securities at a gain during the quarter. For those of you, who compute operating earnings by backing out our entire fair value line, please be aware that the fair value line for the third quarter includes approximately 11.5 million of financial guaranty premiums earned on derivative contracts and year-to-date, this earned premium on derivative contracts is 35.6 million.
Despite the fair value gains this quarter, there is still a large unrealized fair value loss year-to-date and the total of our September 30, 2010 balance sheet amount related to our derivative exposures and consolidated transactions is a net GAAP liability of approximately $800 million. This liability relates to our CDO of ABS, remaining NIMs and TruPs as well as the corporate and other CDO exposures.
In contrast and is outlined on webcast slide 19, we have updated the estimate for the net present value of future credit loss payment at 500 million, leaving an approximate gap of 300 million that would be recognized into income over time, absent any additional credit loss payments. That differential represents approximately $1.50 per share of after-tax book value.
In calculating the NPV we use an approximate discount rate of 3%, which is our investment rate. In financial guaranty there continues to be signs of stabilization or improvement with regard to certain credit trends.
Our public finance portfolio continues to reflect the general economic stress; deterioration in the portfolio has been relatively mild. With regard to the CDO of ABS transaction, there were no significant changes from last quarter’s expectations.
Updated details of our TruPs exposures presented on webcast slide number 28, also with no significant changes from our second quarter update. Details of our CDO of CMBS exposure is on webcast slide 27 with some modest further collateral deterioration but still no expected material future credit loss.
We believe that receiving approval for the $42 million contingency reserve release this quarter demonstrates confidence in our capital position relative to our exposures. And as S.
A. mentioned, our updated estimate of potential dividends to rate and guaranty from Radian Asset in 2011 is $65 million.
In conjunction with the reduction in the mortgage insurance business volumes, we have taken steps to reduce the overall operating expenses at Radian by approximately 10% in 2011. As of September 30, 2010, the net deferred tax asset on our balance sheet was approximately $728 million.
Each quarter we perform an analysis to determine the recoverability of such assets and we have concluded that only a minimal valuation allowance has so far been required. Given the significant size of the asset and the prolonged economic uncertainty, there’s a possibility that addition to our valuation allowance will be required some time in the future.
Our projected holding company cash resources after subtracting all expected payments through 2011 including inter-company tax obligation and the maturing debt of $160 million and adding the amount that we can redeem from our CPS securities is estimated to be approximately $440 million. We anticipate using some of this available liquidity to make a contribution from Radian Group to Radian Guaranty to maintain strong capital position in the fourth quarter of this year and/or during 2011.
We would now like to turn the call over to the operator for questions.
Operator
Thank you. (Operator Instructions) Our first question will come from the line of Steve Stelmach with FBR Capital Markets.
Please go ahead.
Steve Stelmach - FBR Capital Markets
Just real quick on, if you guys could give some color on Florida, what your expectations have been for that market? Historically, you know, what you’re seeing currently and then how that’s trending versus your expectations?
S.A. Ibrahim
Steve, Scott Theobald, who is the Chief Risk Officer for our Mortgage Insurance business, is going to answer the question.
Steve Stelmach - FBR Capital Markets
Okay.
Scott Theobald
All right, Steve. Our Florida portfolio, our reserves already take into account the unique characteristics of the Florida portfolio.
For example, the number of payments behind in that portfolio is greater on average than the rest of the portfolio, but that’s already taken account of in the reserves. In addition, our investor concentration in Florida is similar to our investor concentration across the rest of the United States.
In terms of new business, we’re actually seeing Florida actually starting to show the positive results that we’re seeing across the rest of the country. As far as the legacy book, Florida is unwinding just like we would expect it to.
Steve Stelmach - FBR Capital Markets
So from your expectations, nothing out of the ordinary, it sounds like?
Scott Theobald
Nothing out of the ordinary.
Steve Stelmach - FBR Capital Markets
Perfect, great. And then just, on slide 13, and maybe splitting hairs at this point, but the weighted average on the vintage 2001 to 2004, it looks like it’s trending higher.
Is that just related to the job environment or is there anything else going on in that portfolio that we need to keep an eye on?
Scott Theobald
Steve, this is Scott again. Again, the credit turnout has obviously already occurred in that book, so what you’re seeing there is a slight increase in first-time defaults and we attribute that to the back rate economy and unemployment.
Operator
Thank you. Next we’ll go to the line of Mike Grondahl at Northland Capital Markets.
Please go ahead.
Mike Grondahl - Northland Capital Markets
Yes, a couple of questions, guys. S.A., if you could comment a little bit on your 21% market share and kind of how you think you’re maintaining that?
You’re one of the few companies that have taken share during this downturn. And then Bob, if you could comment a little bit on the future potential for more terminations, just how we could think about that?
And then maybe what is the next milestone you guys need to accomplish to kind of release some more contingency reserves in that financial guaranty business?
S.A. Ibrahim
Okay. Mike, on your first question, basically, as we’ve said, you know, market share is not our driving objective.
However, we do focus on meeting our customer needs and engaging in making sure that we have a dialogue with customers. So the way I look at it is, you have to look at our market share in terms of two segments, our traditional segment at Radian, which has been the large customers which today coincidentally happen to represent a stronger or a larger proportion of the overall market in terms of originations.
And we have maintained and continue to maintain a strong relationship with them and a strong share of the business from them. In addition, over the last couple of years, new to Radian, we have made a significant and successful foray into serving the needs of smaller and more specialized mortgage lenders such as community banks and credit unions and that has been a big success at Radian and we continue to expand on meeting the needs of that segment as well as adding customers.
And I’ll turn to Teresa if she wants to add more color to that.
Teresa Bryce
I think that overall that is the right answer. What I would just add is that we have also been very focused on kind of marketing to sort of increase the amount of business that we’re doing particularly with the focus of trying to move volume over from the FHA.
And we launched, I think we talked about it before the Radian Is Ready campaign, which we started in May and it was very focused on not only making sure that our customers understood that we were ready to write more business, but also helping loan officers with tools to also encourage them to use a conventional execution for borrowers rather than FHA.
S.A. Ibrahim
And so far in achieving these results we have maintained our pricing.
Bob Quint
And Mike, you know, with regard to terminations, it’s something that we continue to look at. I think we have gotten a lot of the terminations behind us.
So I wouldn’t expect the same kind of volume you have seen over the past few years, but it’s something that we continue to look at and if it’s something that we can do on economic favorable terms and/or removal of uncertainty, which is critical in this environment, we would certainly look to do more of that. And with regard to the contingency reserves, it’s really related to the reduction in exposure.
So I think if you see, you know, there’s normal runoff, which is going to reduce the exposure. But if you see an accelerated reduction of expose based on walk-away terminations or something more unusual that reduces the exposure quicker than our normal runoff, that could be something that is a catalyst for further contingency reserve releases.
But we’ll continue to follow that and we have seen the insurance department be amenable so far, which is a very good sign.
S.A. Ibrahim
And Mike, as you know, further on the market share point, our market share currently is substantially higher than our legacy market share range of say, around 13% right now to the 21% range. And that means we have a larger share of market of the new high quality business than we have of the old legacy book.
We only wish we were writing a lot more business than we are today.
Mike Grondahl - Northland Capital Markets
Right. And then maybe just one quick follow-up.
I kind of heard it but S.A., did you say that delinquencies dropped again in October and by how much?
S.A. Ibrahim
What I said was delinquencies dropped slightly in October and the pattern was similar to what we have seen in the previous quarter.
Operator
Thank you. Next, we’ll go to the line of Mike Grasher with Piper Jaffray.
Please go ahead.
Mike Grasher - Piper Jaffray
Thanks very much. Just a couple of questions.
First on the premium yield moving around here looks to be higher here in the quarter. Is that driven mostly by the FHA taking their own rates higher, therefore you can increase your own to become more competitive or as competitive?
Bob Quint
No, Mike. I mean I think you’re going to see that jump around some time you know, the premium refunds that come from not denial, rescissions, if that changes during the quarter, the premium accrual could change and that could drive the yield, you know, somewhat.
So that’s more noise than anything.
Mike Grasher - Piper Jaffray
Okay. So that’s more of an acceleration when you have that circumstance?
Bob Quint
If we, yes, we decrease the rescission estimate then that, in turn, decreases the premium refund accrual that is associated with that.
Mike Grasher - Piper Jaffray
Okay. And then what would be your outlook on rescissions as we head out into 2011?
Bob Quint
I think over time we’ve said that we expect them to go down as the legacy book works through. So there’s no change there.
However, because most of the existing delinquencies are within the, ‘06, ‘07, ‘08 book, they will still remain at an elevated level for the foreseeable future.
Mike Grasher - Piper Jaffray
Okay. So net, net, we can expect to see sort of flat?
Bob Quint
Over time, they’re going to go down.
Operator
Thank you. Next we’ll go to the line of Donna Halverstadt at Goldman Sachs.
Donna Halverstadt - Goldman Sachs
Good morning. Most of my questions were asked.
I want to ask one of them in a slightly different way. Given that it can be difficult for us to forecast terminations and contingency reserve releases, would you care to share some color with us on where you expect the risk to cap metric to trend over the course of 2011?
Bob Quint
You know, obviously we have maintained a strong risk to capital ratio and we would expect that it would remain in this range, give or take, but there are a lot of things that impact that. So, we’re going to manage that closely and it’s not something we project and/or, you know, would because I think it comes hand-in-hand with projecting operating earnings, which we’ve not done.
So it’s a difficult one but it’s something we’ll manage closely. We have liquidity available at the holding company.
To support it, if need be. And you know we’ll have to see where it goes.
Donna Halverstadt - Goldman Sachs
Okay. And then the other question I wanted to ask, when you look at slide 17, which is your default rollforward, if you compare that to the same slide last quarter, the beginning and ending, default inventory numbers are the same but if you look at the new defaults, the cures, the rescissions and denials, those numbers are actually different, kind of for second quarter of 2010.
They’re different on this slide 17 relative to last quarter when it was slide 16. Now, is that just further finalizing numbers subsequent to the end of the quarter or is there something operationally going on which causes some of the composition of the default inventory to switch from one of those buckets to another?
Bob Quint
Yes, I think what we try to do all the time is to try to make sure our results are comparable to others in the industry and some of the line items, it’s not extremely clear exactly what goes on what line so we’re always attempting to make our numbers more comparable. And that’s what we’ve done.
Operator
Thank you. Next we’ll go to the line of Douglas Harter at Credit Suisse.
Please go ahead.
Douglas Harter - Credit Suisse
Thanks. I was hoping you could talk a little bit about the pool insurance.
We saw another increase in the reserves there, just sort of where we are and sort of winding that business down and any outlook you can share with us on that?
Bob Quint
Sure. The remaining risk on pool insurance is $2.5 billion.
About two-thirds of that is what we call GSE pool so it’s more of the older pool that was secondary insurance behind MI and/or first loss insurance but it’s on lower LTVs. That has historically performed very well.
The other third is the written during a lot during the ‘06 and ‘07 vintages and contained more Alt-A and subprime. That would be the more problematic.
Clearly we are seeing severity increases fairly significant this year and the losses on pool this year reflect that, you can see that in average claim and the reserve for default. However, if you look at the 2.5 billion of risk, break it down, two-thirds, one-third GSE, non-GSE and you look at the current reserves which are 524 million, we do think we have limited further exposure on the pool insurance.
Obviously that could change if severities go up dramatically from here but they’re already close to 50% on the pool insurance. So again, I think, we have taken a lot of it this year.
We think it’s somewhat limited in the future but it is certainly something that we’ll keep watching.
Douglas Harter - Credit Suisse
Thank you.
Bob Quint
Sure.
Operator
Thank you. And our next question will come from the line of Conor Ryan at Deutsche Bank.
Please go ahead.
Conor Ryan - Deutsche Bank
Hey, guys, thanks a lot for putting out all the additional info over the last couple of quarters. My first question was, you know, I know this might not be the way that you look at it, but if I look at your business historically, it looks like losses incurred ran somewhere between 0.3 and 0.55% of your insurance in the quarter during the majority of the last decade before we kind of headed into the heavy loss period.
Do you think that that’s a pretty consistent run rate in a normal market? Or do you think that that will be lower than that because of the high quality of business you’re writing now?
Bob Quint
And without doing that math and, you know, assuming that those numbers are right, I think we think the business we’re writing today at a very high credit profile will have results that are in line with historic norms. You know, we look at loss ratios, you know, between 30 and 40%, typically, the very high credit quality business could be lower, you know, but I think we certainly believe the business will be profitable and will generate acceptable returns.
Conor Ryan - Deutsche Bank
Okay. And maybe just as a follow-up to that I mean, obviously the roll, probable rollforward that you have been putting out has been really helpful for us at least.
Any chance that you would be willing to put that out on a historical basis? So kind of, for example, in 2005, what were the number of new defaults over the number of shares or the number of claims paid?
Bob Quint
We’ll take that under advisement and we’ll see if it’s possible.
Conor Ryan - Deutsche Bank
Okay. And then the other question I had was just related to the total primary insurance portfolio.
How many loans of your total programs have gone through mod programs?
S.A. Ibrahim
Teresa, please.
Teresa Bryce
I think, we know that a certain number have been through and we’ve got, I think about 51,000 or so that have been completed. The difficulty is that as S.A.
said in his remarks, we have limited visibility on the number of proprietary mods that are out there. We have a lot better information about what is coming through the HAMP and HARP programs, and so as a result, sometimes we don’t know about those until after they are completed and reported to us as a cure.
Conor Ryan - Deutsche Bank
Okay. And then that is very helpful.
And then of the 51,000 roughly, given the limitations you just mentioned, how many of those loans have cured so far? I mean, they have been completed.
Have 75, 90% of them remain cured?
Teresa Bryce
You mean in terms of what’s the re-default rate on those?
Conor Ryan - Deutsche Bank
Yes, put another way.
Teresa Bryce
Yes, I don’t know the answer to that.
Conor Ryan - Deutsche Bank
Okay. And then the slide you put out on inventory and the 12 missed payments or more bucket, I believe it’s slide 16.
How many of those kind of mod loans would fall in that bucket? Maybe that’s too much granularity.
I think the more relevant question might be, what is your cure ratio assumption currently for the 12 missed payments or more bucket in your loss reserve?
Bob Quint
Yes, we don’t give the overall frequency in our disclosures, but we don’t break it out by aging of defaults.
Conor Ryan - Deutsche Bank
What about just kind of, like, color that you can give to people, I mean, can you give us a general sense for how many of those you assume are still going to cure?
Bob Quint
I think all we’ve said is that we have a substantial amount of the older loans that we expect to go to claim and pay claims. However, we do also expect a good number of those to cure as well.
And we’ve done the work that S.A. mentioned with regard to exploring those defaults in detail by literally going to the doors of these homes and even though it’s early on in that process, we’ve seen nothing that leads us to believe that the reserves and the cure expectations are not consistent with our loss reserve expectation.
Conor Ryan - Deutsche Bank
That’s helpful. And then if, I mean, it looks like your run rate on cures is roughly 20,000 a quarter.
Can you give us any additional detail on what bucket those cures are coming from?
Bob Quint
Earlier in the year they were coming mostly from the earlier buckets, and that’s why the aging was getting older and older but more recently, they’re coming more evenly distributed.
Conor Ryan - Deutsche Bank
Okay. That’s really helpful.
And then just the last question I had was, have you run any numbers or have any internal assessments for what the cumulative loss requirement is would be to breakeven on the new business you’re writing?
Bob Quint
We certainly know yes, we certainly know that. If you think in terms of the normalized loss ratio to be in the 40% range, it would be 2.5 times those assumptions that would, so certainly we know those numbers.
It’s different for different LTVs and different kind of loans, so it’s a tough one to just put one number out there.
Conor Ryan - Deutsche Bank
That’s fair. Thank you very much for answering all my questions.
Bob Quint
Sure.
Operator
Thank you. And next we’ll go to the line of Matthew Howlett at Macquarie.
Please go ahead.
Matthew Howlett - Macquarie
Hey, guys. Thanks for taking my questions.
Hey, Bob, what was the loss adjustment expense for new notices, ex the adjustment for the delinquencies for the 28 NODs? What did you add for those loans?
Bob Quint
Matt, I am sorry, we don’t understand the question.
Matthew Howlett - Macquarie
I’m sorry. What was the provisioning for the 28th, I guess I’m just looking for the provision per new delinquency this quarter, so ex of the 348 million of loan adjustment expense.
What was it just for the new delinquencies that you added, was it 6,000 per new delinquencies, 7,000?
Bob Quint
Yes, Matt, we really don’t disclose that. However, what I can tell you is that this quarter, a bigger portion of the provision was related to the reserve on new delinquencies than it has been over the past couple of years.
Matthew Howlett - Macquarie
Okay. Got you.
So the adjustment for the existing delinquency pipeline was less?
Bob Quint
Relatively less.
Matthew Howlett - Macquarie
Got you. And then when you look at notices, it’s good to hear that your cures are more coming from the later stage buckets and are more spread out.
Your new notices are down 34% year-over-year. They’re tracking to be down 30% year-over-year.
What can we expect that run rate to continue in 2011?
Scott Theobald
This is Scott Theobald again. I guess, what I can tell you is, what we’ve been seeing is, we’ve seen kind of a bottoming or a stabilizing here, and we’re starting to see seasonal patterns kind of reassert themselves albeit at much better levels.
Given that, I wouldn’t expect too much different from the trend we’re seeing now. Obviously what the big unknown is kind of when the cyclical upturn will occur at which point then you would see an acceleration in cures.
Matthew Howlett - Macquarie
But just from the book shrinking going down in terms of force and the curves, continue to go down, wouldn’t we just naturally see new notices continue to sort of decline?
Scott Theobald
Of course.
Matthew Howlett - Macquarie
Okay. Got you.
And then Bob and S.A., I mean there has been the financial guaranty book does that look stable this quarter? There’s been a lot of peers still left going after put-backs on claims they’ve already paid.
And I look at your, that one ABS CDO that you are going to pay claims on and I look at some of the claims you’ve paid on your second liens, I know that’s not technically in financial guaranty. But is there anything that can be done?
I mean, are you starting to kind of get on the bandwagon and possibly go after some of these lenders or asking to look at loan files and recoup some of the money you’ve already paid out or will pay out?
Dave Beidler
This is Dave Beidler. We’ve looked at that issue pretty closely and we don’t have a lot of the exposures that are right for that kind of put-back, which is a positive for us actually.
S.A. Ibrahim
And we’re happy we don’t have a lot of that.
Dave Beidler
Right.
Matthew Howlett - Macquarie
Yes. Got you.
Great. Thanks, guys.
Operator
Thank you. Next we’ll go to the line of Nat Otis at KBW.
Please go ahead.
Nat Otis - KBW
Good morning. First, you talked about operating expense reductions in 2011.
Can I assume that nothing has taken place thus far? That will all come sometime in 2011; would you think you would be in the earlier part or just stretched out through the year?
Bob Quint
I think you’ll see most of it beginning in 2011 and throughout the year. So it’s in the process of being done and it will affect 2011.
Nat Otis - KBW
Okay. And then just looking back on the DTA, you noted that there could be an increase in valuation required sometime in the future.
I know it’s a tough equation, but what could we look for that would make you guys at greater risk for some type of increase in valuation allowance?
Bob Quint
Yes. That is a tough one, Nat.
I think what we’re doing every quarter is we’re producing a positive evidence that is allowing us to keep the asset and not take a significant valuation allowance against it. I think prolonged operating losses could be something that puts that more at risk, because you’re able to look forward 20 years.
However, the further out you have to look to project that income, the less reliability it has and the less credibility it has, and the more likely you are to make a judgment that a valuation allowance is required against it. So I think that’s what we’re going to do every quarter.
And the further out you’re relying on profit to generate that tax expense to take down the asset, the more likely it is that you would determine a valuation allowance where an additional one would be required.
Nat Otis - KBW
All right. That’s very helpful.
The only follow-up to that I’d have is, is it something that when you look at it and you say, profitability, and you’re looking at it on a quarterly basis, is it quarterly profitability going forward or is it from an annual basis?
Bob Quint
It’s neither. I would say it’s just profitability in the future.
But the sooner it would occur, the more reliable it is. We had net GAAP income this quarter and that took our deferred tax asset down some.
So I think we’re really just looking to the future and what kind of profits can be generated in the future.
Operator
Thank you. Next we’ll go to the line of Chris Owens, EpicQuest.
Please go ahead.
Chris Owens - EpicQuest
Hey. So I’m just looking at slide 14 here and it seems pretty clear that `07 is kind of the big issue in terms of incurred losses.
It looks, I guess, close to 50% of the generated incurred losses. So just wondering if you could give some more nuance around what you’re seeing in that book of business?
Whether you’re still seeing high levels of new defaults or if it’s largely repeat defaults at this point, average claims, persistency? Just give some more color on that and sort of what you think that trend could develop and look like in 2011?
Thanks.
Scott Theobald
Sure. This is Scott Theobald again.
The good news around 2007 is that it is experiencing credit burnout. So what we’re seeing is we’re seeing more repeat defaults as opposed to brand new defaults.
The bad news around 2007, it’s a very large book, it tends to be concentrated in all-day collateral but have larger balances, which is resulting in these higher losses. So the good news is we’re seeing some signs of credit burnout and stabilization.
The bad news, it’s a large exposure.
Chris Owens - EpicQuest
Okay. And I guess my next question is, Bob, you mentioned that or not the majority, I don’t want to put words in your mouth, that a substantially higher portion of the reserves this quarter was dedicated to new defaults as opposed to the legacy book of NODs.
And so, I guess what I’m just trying to figure out in my mind, does that mean if we have quarters where there is negative net new defaults that there is a possibility of sort of operating profits? If we’re sort of done reserving for the legacy book or not done, but it requires less TruPs?
Bob Quint
I mean, Chris, certainly that’s a possibility, although just because it was this quarter a relatively bigger proportion being incurred, that doesn’t mean it’s going to be next quarter. So I wouldn’t call it a trend.
I would just say that’s what happened this quarter. As you know, there’s a lot that goes into that incurred loss number.
But it’s, I would say, for one quarter, it’s a more encouraging sign.
Chris Owens - EpicQuest
Sure. Okay.
And then final question on the net present value slide that you guys included, I noticed that your loss estimate went from 4.5 billion to 4.3 billion. Was that a result of the termination or what happened in the quarter, or is that actually you expect lower losses going forward?
Bob Quint
I mean, that’s always going to be updated for both new business and also what incurred in the last quarter. So certainly, the claims we paid in the termination could impact those numbers.
Chris Owens - EpicQuest
Okay. So I guess if you paid out 500 million in claims this quarter, does that mean it actually went up?
All right. So without the impact of new claims, it would be 4.8 billion?
Bob Quint
Yes. I mean, that’s one piece of it.
But in a vacuum, yes is the answer.
Operator
Thank you. And next we have a follow-up from the line of Conor Ryan at Deutsche Bank.
Conor Ryan - Deutsche Bank
Thanks. I was just wondering if you could give me an update on what the 9/30 number is for the non-performance risk associated with your fair value liability?
Bob Quint
It will be in our 10-Q. I don’t know that we’re saying it’s approximately 1.6 billion.
But you’ll see the exact number in our 10-Q.
Conor Ryan - Deutsche Bank
Great. Thank you.
Bob Quint
Sure.
Operator
Thank you. Next we’ll go to the line of Steve Stelmach at FBR Capital Markets for a follow-up.
Steve Stelmach - FBR Capital Markets
All right. Just real quickly on the operating expense statement you made, Bob.
I believe you said it was due to expectations for lower MI business volumes next year. What is it did I get that correctly?
And two, if so, is that a function of lower private MI penetration or just overall volume expectation for lower overall mortgage origination volumes?
S.A. Ibrahim
Steve, it’s a combination of the two that’s been driving it though our expectation is that in terms of the private MI industry, we will continue gaining share from the FHA. However, there’s a wide variance in terms of the projections of mortgage origination volumes.
The MVA is coming out with a projection that’s about the lowest that I’ve seen in a long time, whereas some of the other players are expecting slightly better volumes. Again, like everything else, we’re dealing with now, it’s an environment of great uncertainty and we believe we needed to trim our capacity to get it more in line with where we think the opportunities are and leaving ourselves some cushion for expansion if the opportunity is greater.
That said, we also want to continue to manage our business efficiently. And our goal is to increasingly, year-by-year, do the same thing with fewer people and get more efficient.
So those were the drivers.
Steve Stelmach - FBR Capital Markets
Perfect. Thank you very much.
Operator
Thank you. Now we have no further questions in queue.
I’ll turn it back over to S.A. Ibrahim for closing remarks.
S.A. Ibrahim
Thank you, operator, and thank you all for joining our third quarter call and look forward to seeing you in the next call for the end of the year.
Operator
Thank you. And ladies and gentlemen, that does conclude your conference for today.
Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.