MGIC Investment Corp (MTG) 2002 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anybody should require assistance during the call, please press star, then zero on your touch-tone telephone.

I would now like to introduce your host for today's conference, Mr. Jim McGinnis. Sir, you may begin your call.

Thank you. Good morning, and welcome.

With me on the call this morning are Curt Culver, President and CEO; Mike Lauer, Executive Vice President and Chief Financial Officer; Larry Pierzchalski, Executive Vice President of Risk Management; and John Fisk, Executive Vice President of Strategic Planning.

Before I turn it over to Curt, let me just mention that during the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results to differ materially is in our 2001 10- K and in this quarter's earnings release. If the company makes forward- looking statements, by making those statements we are not undertaking an obligation to update those statements in the future in light of subsequent development.

And with that, I'll turn it over to Curt.

Thanks, Jim, and good morning.

We had another excellent quarter with record earnings of 169 million and earnings per share of $1.58, up from $1.46 a year ago. Our earnings growth was driven by strong revenue growth, which was up 17 percent in the quarter, which reflected an 18 percent increase in earned premiums. Earned premium growth, in turn, was driven by a 16 percent increase in insurance in force and the higher average premium rates generated from our bulk business. We had a huge quarter for new insurance written, with a record tying 23.6 billion, of which 17 billion was flow related and 6.6 billion was bulk generated from 27 separate transactions.

Insurance in force grew 6.7 billion, the third best ever for our company and now stands just under $191 billion. This growth in insurance in force occurred in spite of a drop in our persistency rate to 59 percent. And by way of reference, our persistency rate was 61 percent last quarter and 77 percent a year ago. The good news, however, is that our first quarter persistency run rate increased to 63 percent from 57 percent last quarter.

Regarding losses, claims paid in the first quarter were 50 million, compared to 41 million last quarter. Approximately half of the nine million quarterly increase in was related to our bulk business. And two million was from our now-discontinued second mortgage business.

Losses incurred also increased, reflecting the growth in claims paid, as well as a modest increase in our delinquency inventory, and as a result, we increased loss reserves by 10 million.

Finally, expenses were 65.9 million, down slightly from the fourth quarter, and up 25 percent from last year, reflecting the much higher levels of mortgage insurance and contract underwriting.

Regarding the outlook for the remainder of the year, I remain optimistic. The economy seems to have bottomed out, consumer confidence has improved, and mortgage originations continue to be strong. Given this positive environment, we expect new insurance written to continue to be strong throughout the year, reflecting the strength in purchase transactions.

we believe the persistency has bottomed out in the first quarter and should rise going forward, reaching the high 60s to low 70s by year end. As a result, insurance in should be relatively high, although we wouldn't expect it to match the 15 percent growth rate of last year.

development should continue, in line with recent trends, reflecting the growth and aging of our insurance in force, as well as the growth of our bulk business as a percentage of our new business. We expect the delinquency inventory to continue to grow, and there will be continued growth in paid claims and loss reserves, although we would expect the sequential growth rate to moderate through the remainder of the year.

Despite the increase in delinquencies, healthy real estate market, and MGIC's strong geographic dispersion should continue to mitigate the growth of paid claims. Home sales continue to be strong throughout the country, and the inventory of homes is at a 30-year low. Furthermore, real estate appreciation, while slowing in the fourth quarter, is still at healthy levels. In fact, as appreciation flows, we are getting closer to our sweet spot of real estate market growth, which helps improve our persistency rate, as well as helps mitigate future claim problems caused when people overpay for their homes in rapidly appreciating markets.

Finally, as I discussed last quarter, going forward we would expect our underwriting expenses to decline from last year's levels, reflecting the expected reduction in refinances in the origination market. So, all in all, it should be another excellent year for MGIC.

With that, we can now take questions.

, we'll take questions now.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. If you are using a speakerphone, please lift the handset before asking a question.

Our first question comes from of Bank of America.

Good morning.

Good morning.

Could you go into some more detail on the other income line? I see in the footnote disclosure in the press release decided to give us the C-BASS number right up front. At 10 cents compared to eight cents last year, that doesn't seem to be a full enough explanation for what's going on on the actual income statement line item of about 31 compared to 15 million. What else should we be thinking about on the other income line item for the quarter, and going forward in terms of better run rate?

Well, I think -- a couple of things. First of all, remember that C-BASS does securitizations. They had one in the first quarter, and they also had one last year in the second quarter, so that -- there's always lumps, if you will, relative to C-BASS numbers.

Relative to the other revenue line, Curt didn't mention, but contract underwriting revenue was almost as much in the first quarter as it was in the fourth, so we had some strong revenue, and probably it was about double relative to where it was a year ago. So contract underwriting volume was very strong, again, in the first quarter. Relative to what we think, you know, that should taper off probably in the second half of the year.

With respect to C-BASS, I think once again, we're looking at a modest increase relative to the year-to-year changes on that. I think it's subject to obviously whatever they do in addition with respect to securitizations, but on a -- on a flow basis, I would think that we would take this increment relative to a year ago, and that would be my base forecast -- that would be the guidance I'd give you on C-BASS subject to any change with respect to securitizations.

With respect to contract underwriting volume, I think we see another pretty good quarter in the second quarter, but we would think that, as business trends down in the second half of the year of flow business, that we'd see contract underwriting volume begin to decline.

OK. Great. Thank you.

Thank you. Our next question comes from of Keefe, Bruyette & Woods.

Hi. Good morning.

Good morning.

As we look out over the next couple of years, could you talk a little bit about what you see in the expense line? What kind of leverage you have there through automation and the decline of contract underwriting. What sort of trends might we see as we go forward and how pronounced might they be?

Well, I think you, without quantifying it - because I, frankly, I can't - I don't know how to quantify it. But the general trend, I would expect, would be a reduction in the expenses going forward. We continue to move more and more of the work to automated means. And so, as a result of that, we're able to take advantage of that on the expense line.

In addition, as you have consolidation on the customer side, it impacts you also in reductions in your sales and underwriting efforts. So, I think there will be modest reductions, relative to the expense line, moving forward. Again, subject to volumes, however. I mean, if we have another blowout year like last year, you know, it - obviously, it's going to have an impact on the expense side. But if you looked at holding all things equal, you would say, overall, there would be continued reductions in the expense side of the business.

OK. And then, could you comment on the details of any share repurchase in the quarter?

Yeah. We purchased - repurchased about 450,000 shares in the first quarter.

And the average price on that?

Sixty-six - about 66.7.

Great. Thank you.

You bet.

Thank you. Our next question comes from .

Now, the bulk business, at 6.6 billion, is that - have you guys put some thought into, you know, what's your ultimate run rate there and is any constraint - is there any size you want that to be of your total portfolio basis? Could - would we expect that to pick up, stay flat, trend down? And, secondly, just a little more color on the credit. I mean, it's a, you know, remarkably good. And, any more hints on why you think it's been so well?

Relative to our run rate, , on the bulk business, we'd like to maintain - it's currently at 18 percent of our insurance in force. And I think it was about 28 percent of current writings. We'd like to get it about 20 percent of the company's business going forward.

So that -- that's kind of -- as we look at writing business, we think in the neighborhood of 20 percent is a good risk management mechanism, although we love the business, it's a good risk management mechanism in managing the business.

Relative to the delinquency, I think it reflects what's going on in the economy, you know, relative to jobs, which are positively impacting the delinquency side of the business. So to that end, you know, also we're pleasantly surprised relative to the performance on the delinquencies.

Great, guys. Nice quarter. Thanks.

You bet.

Thank you. Our next question comes from of .

Yes, I just wanted to ask you about your capital, and I've noticed that your capital ratio actually picked up a bit this quarter, which frees up quite a bit for you guys to use for share repurchases. And I'm curious as to what level of capital are you comfortable with going to now that this thing has kind of passed, and will you allocate that all to share repurchase?

Well, I think as we stated in -- first of all, let me just clarify with respect to the issue. It hasn't totally passed. I mean, we're still in an -- in an area where we're expanding, I guess, if you will, into the market and thinking about what the ultimate reaction's going to be from the agencies. But with that said, the -- our current position as we mentioned before is we just got an authorization from the board for another repurchase program, and with respect to that risk to capital ratio change, that pickup of two points has to do with the fact that this is the primary writing company, and we just dividend, if you will, $150 million out of the writing company up to the parent company. So that's the overall impact, if you will, of that dividend up to the holding company.

That'll have a -- that -- those funds will be used for future repurchase levels. I think currently we're repurchasing in the market on a quarter-to-quarter basis, and we don't have any stated plans with respect to where we're headed with that. But clearly, in the past, we have had repurchase programs in the area of $250 million levels, and that's what we're comfortable with.

Thank you.

Thank you. Our next question comes from of Viking Global Investment.

Hi, guys. Just a couple of quick questions. First, if you could just tell us the average claim paid for the -- for the quarter. And second, the sub-prime or - and/or bulk loan default rate, which, I guess, we could figure out, now that you gave us the percentage. But, if you have it handy, I'd love ...

Well, the average claim was 19.9. As far as the delinquency rate on the sub-prime, that was 11.28 percent.

Is that the bulk or the sub-prime?

What was your question again?

Either/or. I noticed, over the last couple of quarters, you started differentiating them, which is fine, but ...

Oh, yeah.

OK.

... the bulk was lower than that. That was ...

Yeah, the bulk ...

... , I believe, or ...

Yeah. It was 866 on the bulk. The sub-prime was 11.28.

OK. And do you have - I think there was a change in just kind of the press releases over the last few quarters, but do you have the comparable number for sub-prime of last quarter and last year?

Yeah.

OK.

And sub-prime - 11.60, last quarter. And a year ago, 966.

OK. Great. Thank you, guys.

You bet.

Thank you. Our next question comes from of Sanford Bernstein.

Yes. Could you tell us what the claims paid were in the quarter that we - were generated by your bulk portfolio?

Say it again, . The amount of claims this fourth quarter?

Yeah. Dollar amount.

Yes.

Approximately nine million.

Thank you.

Thank you. Our next question comes from of Lehman Brothers.

Hi. The other two companies kind of doing diversification into different areas. Could you talk about your strategy in that area?

Yeah. Diversification for MGIC has been into the bulk area. And, to that end, it's added a substantial amount to our company. Obviously, we've had the opportunity - we are looking at one of the things , who was introduced on the call, is looking at - is international opportunities. But, frankly, we felt the contributions here, within the - until - and elsewhere, was much more relevant and much more profitable for the company. We know - we know this market and we have lots of data that we can analyze. And we feel there's just a better contribution to earnings.

Now, we are looking at international opportunities. And, as I say, once they make sense, MGIC will be there. I still struggle, as many of you have heard me talk about international opportunities when there is not a secondary market. Because in many instances, you have people insuring loans, purely from the sake - you don't have the secondary market standard saying all loans above 80 percent have to insured. So, you get adversely selected against in that insurance process. And so, until there is more of a normalized secondary market, internationally, I don't think it will be one that we'll pursue too avidly.

Can -- just to understand -- on the bulk business, is the character requirement similar to flow business, or you have to put more capital for bulk?

Little bit higher.

OK. Thank you.

Thank you. Our next question comes from of Robert W. Baird.

Good morning.

Good morning.

My question pertains to local real estate markets where you've had appreciation to higher degrees, and I suppose this is a question for Larry, but the question is if you -- do you have an early warning system or something that -- in the underwriting process for dealing with markets with rapid appreciation where you -- where you -- where you may sense some trouble in the future?

, this is Larry, and on the market front for flow business, we have a market score that is imbedded into our overall mortgage score, and that basically evaluates the major markets and update it pretty much on a quarterly basis. On the bulk business, we in fact see the layout of the -- of the bulk loans geographically, and apply geographic factors in pricing the bulk business.

At the moment, I guess market-wise, areas of concern -- the primary markets would be Seattle. They've had pretty good healthy appreciation, and now with layoffs at Boeing and Microsoft possibly, the tech sector being somewhat weak, Portland, Oregon, as well. So the Pacific Northwest that has done quite well an area of concern. Northern California, not that we do a lot there becauase it's generally nonconforming loan amounts, but tech sector impact there. New York City area, financial services, and a little bit of Detroit, although that hasn't seen the rapid appreciation that some of the other markets have.

Thank you.

Thank you. Our next question comes from of Maverick.

Good morning. I was wondering if you could make a couple of comments on one or two things. One is I noticed that sequentially that you had a fairly large jump in your debt outstanding on your balance sheet, and yet, on an average basis, your debt servicing costs were actually down quite a bit when you do the math. I was wondering if you can kind of talk about the increase in debt and what you may have done to lower your debt servicing costs. Because short rates are up over the period, from one end to the other. So, if you could kind of help us.

Well, we ...

That's my first question.

... we've restructured some of that and it was done very late in the quarter - late in March, as a matter of fact. And we issued 200 million five-year senior subordinated debt at what - about six percent. And so, I think, that's the increase. We've also restructured a CP program. All of that had to do with the forthcoming stock repurchase program that we announced earlier in the quarter. So, for the most part, we've repositioned our balance sheet, tried to reduce the interest rate cost and still have a positive spread, if you will, with respect to our portfolio and the after-tax effect of the interest rate.

Going forward, we'll probably see an increase, if you will, quarter to quarter, with respect to interest rate costs, because of the additional level of the debt.

OK. And the other is do you think that, over the last four quarters in 2001, could you, if you have the numbers available, can you give the per cents contribution of C-BASS per quarter?

I don't have the per cent ...

Well, the cents per share is ...

I've got - I've got - yeah. Cents per share - I've got that. Eight - last year, first quarter, eight cents. Second quarter - eight cents. Third quarter - three. Fourth quarter - five.

OK. And did you disclose the revenue contribution this quarter, of C-BASS, in your revenue line?

No.

Will you?

Not necessarily. I mean, you can calculate it, but ...

We've got the earnings per share contributions, so ...

It's a net equity investment for us, in that line.

OK.

Do you follow? I mean, it's ...

I'm assuming you're giving - it's 100 percent. It's 100 percent - it's 100 percent gross margin then. Go right to the pre-tax, since it's an equity event?

Yes.

Yeah.

OK.

So, we don't record it as revenue per se. It's our net equity position, if you will, recorded through the other revenue line.

OK. So, just inverse - the inverse - one - should one use the federal tax rate or should one your implied tax rate?

The federal rate.

OK. That was it. Thank you.

You bet.

Thank you. We have a follow up from at Sanford Bernstein.

Yes. Can you give us some indication of what percentage of the total book was bulk, say a year ago and, perhaps, at year-end? And then, if I could ask a short follow on question to that.

I know we can, . Just give us a second.

Year-end bulk was about six - just shy of 16 percent of the insurance in force. A year ago, I don't know ...

About eight percent.

Eight percent.

Are the -- are the loans in the bulk portfolio, do they -- are they smaller -- they're -- how much smaller are they than the ...

The -- on new writings, both the bulk and flow are 135, 36, 137,000, so they're within a thousand or so of each other on new business. But on the in force, because the bulk is relatively -- the last year or so, that's sitting in there at about 135, 136, but the flow business, because that goes back into the early '90s, on average, I think the in force is about 115. So 115 on an in force basis to 135 flow to bulk. But on a recent writings, they're comparable.

And my follow-on question, if I may, is how does the persistency of the bulk portfolio compare to the traditional book? Do you expect the bulk portfolio to be shorter-lived?

We would expect it to be shorter, but what happened, , over this past two years because of the quick runoff relative to the flow business and the prepayment penalties on the bulk business, the persistency actually was better on the bulk. But again, back to the all-things- equal, you would expect it to be probably a prepayment speed, you know, 25 to 30 percent quicker than our flow business.

Thank you.

Thank you. Our next question comes from of Legg Mason.

Good morning. As the boom slows down, I understand your underwriting expenses will fall, which is positive, but it also looked like maybe some of your other revenue would also decline. On a -- on a net/net basis, is the decline in the boom a positive or neutral for your income statement?

I would say positive, particularly, , because of the size of our in force book at $191 billion. So you're right on relative to the impact on contract underwriting. That's almost netted out on the other revenue side versus the expense side. But clearly on the persistency side, as diminish, we're retaining those policies much longer, and that's very beneficial to us in the long-term revenue growth.

OK. So your other revenue and the underwriting expenses are relatively offsetting it ...

Right.

... going . OK.

That's correct.

And your tax rate was below last year -- last couple years' trends by 40 basis -- 50 basis points. Are you expecting 30 ...

That's primarily the shift to , but not much change for the rest of the year.

OK. And Curt, what are you waiting for, in terms of information? What piece of information are you waiting for before you are more comfortable in being more aggressive in buying back stock?

Well, I think we're, you know, starting that process they're going to do. I'm fairly comfortable that on the flow business that there wouldn't be a differentiation. However, on the bulk, there still may be. Although, I don't think the AAA companies are participating as much in that side of the business. So, where we have opportunities, we're looking at continuing. As Mike said, we bought just under 500,000 shares. And we're going to continue take those opportunities as they present themselves throughout the year.

Two hundred and fifty million divided by a $70 stock price is 3.5 million shares. So, obviously, you're going to be stepping up the pace. Have you already gotten more comfort on the information levels? Would it enable you to complete this plan by the end of the year or is this more comfort you need to get before you can start averaging a rate of 250 million a year?

Well, I'd say there's a high probability, relative to our comfort.

OK. Thank you.

You bet.

Thank you. We have a follow up from of Keefe, Bruyette & Woods.

Thanks. Just a quick follow up. It looks like, maybe, the paid loss trends on bulk are starting to pick up a little bit. Can you refresh us on where the trends are for both paid trends and delinquencies on your and A minus businesses versing - versus your pricing expectations?

Well, we're at roughly 8.6 delinquency rate now in the bulk business. And as that seasons - we think that's going to increase to the low mid-teens. I think we stated that all along here. So, we think that's headed higher. And, as the bulk business - those delinquencies that are at 8.6 percent delinquency rate - go through the foreclosure process, you'll start seeing them hit the paid lines, which started really occurring here in the last couple of quarters and should continue to grow.

Yeah. Let me just give you a rundown on bulk. Just the general facts, so that maybe that'll help answer more of your questions, too, . As I mentioned, in total, we've got 33.8 billion or 18 percent of the in force in our bulk business. Out of that, 55 percent has A quality credit scores. Or credit scores above 620. And, if you break that down - of that 55 percent, 15 percent are loans that could be delivered to Fannie and Freddie relative to credit score and documentation and loan purpose. Another 15 percent are , 17 percent are , and eight percent are reduced stocks. So that's the makeup of that 55 percent prime credit quality.

Forty-five percent of the bulk is below 620, or, if you will, the or sub-prime, however you want to define that. And out of that, more than half -- actually 55 percent -- have below 80 percent. And looking at it even in a bigger picture, 76 percent have below 85. So the average on our bulk business is 82, versus 93 percent for our traditional business, and yet it's priced 63 percent higher, and we have one-fourth the expense level that we have on our normal flow business. So as a result -- and we don't share any of that business relative to captives or GSE programs, and so the margins there are slightly higher than our flow business.

Great. Thank you. That's very helpful.

You bet.

Thank question comes from of .

Thanks. Good morning, guys. Just a couple quick questions. I apologize. They were a little slow to get me on the call if you covered this. What your perspective would be, whether it's , or year-over-year, just to get some price the underlying appreciation of the assets .

I think year to year, the National Association of Realtors came out with a press release in the last few days, and in there, I thought they indicated about five-and-a-half percent year-to-year price increase nationwide.

Yeah, it was 6.9 percent fourth-quarter-over-fourth-quarter, which was down from 8.4 in the third quarters. And looking at this year, they're in the neighborhood of four to five, as Larry mentioned. And that's where I say it gets back to where we really are in the sweet spot of our business, where we have nice appreciation in the market throughout, but yet it's not excessive, so that we retain our policies longer, our persistency improves, and yet we don't get caught in these real estate markets where values have gone up dramatically, like Southern California in the early '90s and New England in the late '80s.

Terrific. Thank you very much. second question if I may is would you please give some perspective on what the average claim paid trend has been? How that's been trending over the last few quarters?

It's gone up slightly, reflecting the higher level of insurance that's on the bulk business where the cover is deeper than those. And I think it's gone up in reflecting that.

Yeah. The first quarter we 19.9 and annualized last year, we were 18.6. But a lot of that, in the first quarter, as Curt just mentioned, was weighted towards the bulk claims, which, again, had deeper coverage.

Any way to break that out separate instead of excluding that?

I don't have it in front of me. No. We could do that. We - if you'd follow up with him again at the - later day, we can get you that number. I don't have it right ...

Sure. It's not going to be a big change anyhow. But, OK.

No.

Thank you. And just, finally, I noticed, if I'm not mistaken, you're total defaults were down, sequentially. I'm just curious, as you look forward, given the housing market and what you're seeing in terms of the , in your perspective, do you actually expect defaults and delinquencies to be flat to down from here going forward in the next couple quarters?

I don't. I really don't. I think this is too early to call, given what's going on in the economy. I - frankly, I don't know the strength of the economy, relative to job ins and job losses. And so, as a result, I think we're still in for some increases over the next - as I mentioned, over the remainder of the year.

OK. So, from your perspective, this was you're not carrying on it going forward.

Well, we can't, to run the business. I mean, that - we run it expecting to not know what will happen and hook the best quality of business we can. Within that, I think this has been a wonderful quarter and - but I'm not sure how long or what the strength of the economy is.

Sure. No. It's definitely better to be conservative.

Thank you.

Thank you.

Thank you. Our next question is a follow up from of Sanford Bernstein.

I think I can - I think I'll ask my question offline. It's a picayune mechanical numbers question. Thank you, very much.

OK. Thanks, .

Thank you. Our next question comes from of Investments.

Hi. I just have a question with respect to the ratio - the - of the risk written versus new insurance written. That ratio is - has increased. First quarter last year was 23.8 and I think last quarter was 24.8. Now, it's 25.2. And just wondering if you could give us some characteristics behind that?

It would reflect the growth in our bulk business. As I mentioned, I think, a question ago that the bulk business has a little deeper coverage. It's down to 50 or 60 in many cases. And, as a result, that was ...

Yeah. The flow business, the average coverage is about 24 percent. And the bulk business is about 27 percent. So, as Curt indicated, as the bulk weight increase from year to year, that's putting a little pressure or increasing the average coverage of what you're seeing.

I understand that. I would just wonder if there were any other issues involved there, because I see the bulk business written this year was -- this quarter was 6.6 billion, and it was 6.7 billion in the same period last year, whereas new insurance written has increased from 16.7 billion to 23.6.

Yeah, one of the other things within the bulk arena is they're always looking for best execution and the securitization, and in the past, a lot of the transactions was insurance down to 60 percent exposure. But over the last year, people have recognized the better execution is insurance down to 50. So the bulk business average coverage year to year has increased.

Is even deeper.

Yeah.

OK.

Yeah.

OK. Great. Thank you.

Yeah.

Thank you. Our next question is a follow-up from of .

My question's been answered. Thank you.

OK. Thanks, .

Thank you. Our next question comes from of .

Hi. Thanks. I wanted to follow up on this issue of deep coverage. Do you expect to continue to write coverage on bulk business down into the 50 to 60 percent range?

Yes.

OK. All right. And ...

I mean, that's beneficial for us from the aspect -- one, that's how they get to borrow beyond their securitizations, and two, we get a lot more universe to insure.

OK. All right. Very good. Thank you.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

There appear to be no more questions at this time.

Well, if not, again, as always, thanks for your interest in the company ...

... gentlemen, thank you for participating in today's program. This does conclude the call, and you may now disconnect.