MGIC Investment Corp (MTG) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the MGIC Investment Corporation third quarter earnings conference call. At this time all participants are in a listen-only mode. Later there will be a Q&A session. And instructions will follow at that time. If you should require assistance during the conference, 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. Mr. McGinnis, you may begin your conference.

Thank you very much. Welcome to the call. With me on the call this morning are Curt Culver, President and CEO; Mike Lauer, Executive Vice President and CFO; Larry Pierzchaiski, Executive Vice President, Risk Management; and John Fisk, Executive Vice President of Strategic Planning. 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 second quarter 10Q 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 the statements in the future in light of subsequent developments.

With that I'll turn it over to Curt.

Thanks, Jim, and good morning.

This has been an unbelievable quarter for our stock, particularly given the financial and operating strength of our Company, all which seems to be lost in the market over-reaction today regarding losses, (inaudible)(inaudible) business and the housing bubble. I'll get to a discussion of each of these topics. First let's review what really happened in the quarter. First of all we earned $151.6 million or $1.41 per share excluding gains. We wrote nearly $22 billion of new insurance and despite a record low persistency of 58.9 percent, still grew the insurance in force by $2.1 billion to $197 billion, up 9 percent from a year ago. This book growth, coupled with an increase in our average premium rate resulted in strong earned premium growth of 13 percent in the quarter. While expenses were up 12 percent from a year ago, they were well below the 31 percent increase we experienced in contract underwriting volume from a year ago. Our investment portfolio increased to $4.6 billion reflecting our profitability and positive cash flow. And, finally, we repurchased 3.1 million shares in the quarter. And year-to-date 5.8 million shares reflecting our belief in the strong future of our Company.

Now, let's discuss the market over-reaction issues. First, losses. Paid claims continue to trend up in the quarter to $60 million compared with $57 million in the second quarter. The increase was driven by higher paids in our bulk brings as we expected. We increased reserves by $41 million in the quarter to $667 million reflecting the increase in the size and composition of the delinquency inventory.

Now, on to the market over-reaction over our bulk business that is driven, I guess because of its higher rate of delinquency. Let me remind you that the bulk business is priced for a significantly higher level of delinquencies. In fact, we expect bulk delinquencies to reach the mid-teens. However the ultimate score card in our business is premiums and paid losses. And to date the bulk business has developed as expected with an ever to date paid loss ratio of 14.5 percent. What that means is for every dollar we have received in premiums we paid 14.5 cents in claims.

Finally, the threat of a housing bubble. Again, as I have discussed so much in the past, we see no signs of a bubble in the segment of the market we serve with an average home price of $150,000. With few exceptions residential real estate markets across the country remain healthy. Benefitting from good affordability, strong demand and short supply. And we see this continuing in the foreseeable future.

So, let's put aside those issues and what does 2003 look like? As I have discussed with our co-workers, I see 2003 as a transition year for our Company. Mortgage originations should fall to roughly $1.6 trillion, down from this year's $2.3 trillion. And the decrease will be totally in refinances. In fact, purchase transactions should grow by 4 percent, and exceed $1 trillion for the first time ever. Obviously, this is a very good environment for us as it will drive improvement in our persistency and underwriting expenses throughout the year. Regarding the loss side of the business, our delinquency inventory and paid claims should continue to increase next year due again to the aging and composition of the end force and also because I believe the economy will stay weak in the first half of the year.

As a result, I see 2003 as a year in which MGIC transitions to higher persistency, lower underwriting expenses, and, as the economy gets back on track, improving loss trends which will position the Company for stronger earnings growth beyond 2003. With that, let's take questions.

Thank you, sir. 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, or you wish to remove yourself from the queue, please press the pound key. If you have a question, press the one key. One moment for our first question.

Our first question comes from Jeffrey Dunn of Keith Boyette. You may proceed, sir.

Good morning.

Good morning.

Could you, two things. First it looks like you maybe have about a half million shares left in your repurchase authorization. What are your plans there? And with the stock down at this level with the new authorization, would you expect to remain as aggressive as this quarter?

And second, was there anything behind the scenes on the tax rate? It looked a lot lower than we have seen in the first half of the year, especially with the gains put up.

The tax rate has to do with the investment portfolio. Right now we are probably up about 84 percent munies , about 81 percent munies, versus 69 percent a year ago. And that's what's driving the tax rate calculation. With respect to the repurchase from the original authorization, I think we have left about 500,000. We will probably utilize that in the fourth quarter.

And are you going to the board to get a new authorization?

That will be a topic of discussion at the board meeting, Jeff.

When is the next meeting?

October 24.

Great. Last question. You expect the bulk delinquencies to go to the mid-teens. What is the delinquency rate to which you price that business? Is it the same?

Yes.

Okay. Great. Thank you.

You bet.

Thank you. Our next question comes from David Hodgestein of Bear Stearns. Please go ahead, sir.

Hi.

Hi, Dave.

Could you tell us what the contribution was from Sherman and Seabass (ph) and maybe also help us think about how much we could expect in provisions over the next year, or five quarters, I guess, as delinquencies and claims continue to drift up? At what point do you have enough in reserves?

Seabass (ph) was 6 cents in the quarter versus 13 last quarter and 3 a year ago. We don't break out Sherman because it's too immaterial. Relative to reserve provisions, you know, I'm comfortable at this level, and I would anticipate them going up in the fourth quarter modestly, I guess, depending on what happens to notices. I would anticipate that that trend would continue into the first quarter. I'm not sure about the second quarter yet. But for sure I would say we would be looking to build reserves at about this level in the fourth and the first quarter.

So $40 million a quarter, roughly?

Right.

Okay. And beyond that, you wouldn't say?

It depends what happens to notices. Historically they trended down in the second quarter. I don't necessarily know it's going to happen again, but that does happen seasonally. What happens to the economy, and what happens to paid development.

But if delinquencies continue to drift up, we should assume continued reserve building?

Yes. Absolutely.

Okay. Thank you.

You bet.

Thank you. Our next question comes from Kenneth Posna of Morgan Stanley. Please go ahead, sir. Sir, your line is now open.

Hi. Thanks. I wanted to ask some general questions about credit quality. Some folks have raised concerns about credit quality in the housing sector at large pointing to the growing prevalence of second liens or junior liens on top of first mortgages. It may have pushed LTDs higher than the FHSB survey would suggest. People also think that the refinancing booms have temporarily helped credit quality and we might expect to see credit quality deteriorate thereafter.

And finally, in the sub prime area, my understanding is that many companies have re-aging practices that aren't necessarily as conservative as what banks are forced to do. So I'm curious if you guys have used, or tracked any of these issues, or have opinions on junior liens, re-aging and the impact of refinancing on credit quality, particularly in your sub prime exposure?

Well, in the sub prime or bulk exposure with regard to the refinancing question, when we insure new bulk business, the loan has to be current and cannot have had a serious delinquency over the past 12 months. And that's a (inaudible)(inaudible) made to us. To the degree that's there, it wouldn't be insured by us. It also would be reflected in the credit score, and we do due diligence on top of that to try to confirm all the above. So with regard to the bulk business in the underwriting guidelines, if there was a serious delinquency, it would probably be reflected in the credit level lower than what we typically insure.

On the flow side, you know, refinances or the presence of seconds, I guess, yeah there's a portion, probably of our business that has a second. Most of our business is 9095s to begin with, pretty good FICOs. Some of them, I guess would have seconds. It's difficult, if not impossible for us to really get a handle on that. But I think it's something that's been always present, still present, but probably at a lower level given the beginning high LTV that we have at a 95 level. There's not much room for an additional second.

That's not an impact -- an issue that impacts us.

Right.

We have been talking a great deal about it given the growth of 8010s in the market place. This is a hidden time bomb growing.

It won't be a hidden time bomb for you, but for others.

For those that own those second mortgages. And those that have the first it's a 90 exposure with a 80 LTV they are dealing with.

Yep.

From the aspect of purchase. As you can see from our own voyage into second mortgages, that's a tough business.

Yep.

And so, it's one of the reasons we are not in it.

What about the re-aging? In your sub prime area, are you able to get information on re-aging from the sellers?

What do you mean by re-aging?

The practice of making -- if somebody misses a payment, rather than marking them as delinquent, just putting the missed payment back onto the loan balance and giving them a chance to go on from there?

Well, our delinquencies reported to us are driven on servicing systems so I think that calculation, at least, reported to us is pretty straight forward. We also monitor the balances. To the degree they do any kind of loan modification, we have to approve that as well.

Yeah, and I just, in fact did a discussion on loss mitigation, Ken, and really on the sub prime sector we really don't have the opportunity. re-aging hasn't happened to the aspect that it has in our traditional business, mainly because in the sub prime area there's a lot of debt outstanding on a multiple number of accounts, so it just doesn't work. So, as Larry mentioned, we have to approve, if there would ever been a modification or a new repayment plan or forbearance plan on any of our delinquencies and that is not happening in the sub prime sector for us, anyway.

Okay. Thank you.

You bet.

Thank you. Our next question comes from Robert Ryan of Bank of America. Please go ahead, sir.

Good morning.

Good morning.

Could you give us the information on the quarter's average severity for flow, bulk and then total?

Um -- do you have that there Jim?

Yep. Yes. Rob, average severity overall about 19.7 and on flow there's about 20,300. About 19.1 on bulk.

So more or less those numbers indicate no significant shift; is that correct?

Correct.

Okay. Looking at the bulk business in terms of your expectation for writings going forward, as well as the percentage of insurance in force, can you give us an update on that?

I think you saw a downturn? What's happening. It isn't by choice, although maybe some of you wish we would, but the realities are, as I mention it has been very profitable for us. But, market alternatives are in place right now, at this point in time, anyway, that are competing against mortgage insurance as a choice on the securitizations, and so there's just not quite as big a market at this point in time. Expectations for next year would indicate that also as I look at it today. So I think we'll be down next year versus this year relative to the volumes size in the neighborhood of maybe 20 percent.

Okay. And where does the insurance in force bulk as to percentage of total insurance in force stand at the end of the quarter?

I think it's at 18.8 percent.

A little bit higher than about 18 percent?

18.2.

Oh, okay. So about the same as where you were at mid-year?

Yes.

Yeah.

All right. And then we can use your guidance for new writings to sort of figure out the future. Great. Thank you.

You bet.

Thank you, sir. Our next question comes from Christopher Burnefed of Fox, Bit and Kelton. Please go ahead, sir.

Can you provide us with some loss and delinquency trends for the bulk book by the lost triangle or the delinquency triangle by bulk year for the bulk side?

Are you saying do we have that information?

Yes.

Yeah, we have it, sure.

Would you be able to disclose that?

It hasn't been disclosed to date, no.

Right, I'm asking if you could?

Probably not. It's pretty good information relative to how the books are performing on a pricing basis relative to us and strategic advantage, I would think.

Have you seen the delinquency trends on the newer written bulk business improve or not versus the earlier years of written business?

The book by book, I would say the paths have been similar. Now the mix from book-to-book changes a little bit whether or not a deal consists more or less of, you know, higher LTVs, lower LTVs, higher FICAs, and so on and so forth. But, I wouldn't say there'e been up to this point much in the way of deterioration from book to book. I think the delinquency rates are being driven by the seasoning of the bulk business. I mean, a couple of years back, you know, when we entered the business you basically just had the newest books at low delinquency levels. And now the books have grown. We went from $2 billion to $8 billion to $20-some-odd billion written in a year and now those 20-some-odd billion dollar books that we wrote a year ago are starting to march up that normal delinquency curve and we are writing less new business being added to the denominator. So, it's more of a mechanical seasoning process driving the delinquencies.

One other thing you mentioned your expectation for mortgage volume next year --

Mmmm-hmmm.

Of (inaudible)(inaudible) .6 trillion

Right.

Freddie Mack (ph) came out the other day and pushed up theirs to 2 trillion. And I -- Fannie Mae is at 1.7 and my feeling is they'll probably do the same. Can you comment about that and what that environment, where you would see -- what would you see in terms of your outlook, if Fannie Mae or Freddie Mack were to take place?

Well, Fannie Mae is where we are as you just stated. I haven't seen the Freddie Mack going to 2 trillion. The realities are if that's what happens, we get another $400 billion in refinances. So it will be down slightly from what we experienced this year. The good news for us is the strong purchase money market which I really think will hold. I just can't see rates not picking up slightly next year. And, as a result, while I see the first quarter containing a lot of the refinance volume that's going to close here at the end -- because we've lagged the market.

Right.

So, you'll have refinances dominating in the first quarter, but after that trailing off pretty significantly and purchase transactions dominating. So I have a hard time envisioning $2 trillion myself, given where interest rates are, given where everyone in America, I think has refinanced this year.

Okay. Fair enough. Thank you.

Thank you. Our next question comes from Gary Gordon of UBS Warburg. Please go ahead, sir.

Okay. Thanks. Two things on credit risk. You're suggesting a case that performance of your bulk business or sub prime business performing in line with expectations. Maybe you can remind us again of the circumstances that caused you to lower expectations for the second half of the year?

And then, two, have you made any particular underwriting or pricing changes, you know, in the recent past, presumably tightening, or price increases?

Let me talk about the expectations that we changed. Relative to the fourth quarter we are looking at, again, lower bulk volume, probably lower persistency, higher loss trends we have experienced and probably slightly higher operating costs relative to the front end of the business with respect to contract underwriting. Those are kind of the trends we saw in this third and fourth quarter. And driven by a number of things. But obviously notice development. I'll let Larry talk about the other issue.

The other part of your question, Gary, was what?

Was, did you -- I'd like to elaborate on this a little. Specifically on the credit side. You are arguing bulk is fine. Something went wrong on credit. Just remind us what went wrong. Two, have you made any either changes in underwriting standards tightening, or price increases?

Let me go through that. Something went wrong on credit comment that you just made. I don't see that to be the case. What we are seeing -- what we said in September was that the estimates were higher than our internal estimates.

Mmmm-hmmm.

Relative to what we saw as loss development trends.

Okay.

It seemed to me when we looked at analysts' forecasts, they had maybe possibly higher book growth relative to persistency changes and most importantly lower losses driven, I guess, by their assumptions with respect to notices. So we thought it was important to get out some early information. We tracked July and August information, confirmed what we believed to to be the facts with respect to our trends on notices and delinquencies and went out with that revised estimate. So they had to do with the increase in notice activity, in addition to all the other things that we pointed out. I want to point out it's not a credit issue, it's an increase in delinquencies.

Pretty much in line, Gary, with what we expected all along. It's just that the street had not ramped up the expectations for the rise in delinquency inventory the way we hoped.

Mmmm-hmmm.

No surprise to us.

Okay. I'll try to do better next time, anyway. [ Laughter].

We expect more, Gary.

Okay.

On the credit quality, and again, or underwriting and pricing, we are holding in line with where we are.

Mmmm-hmmm.

Again, this is -- developments are not unexpected. And, as you see from the to date paid loss ratio, it's performing well within what we expected to ultimately perform to. That's the 65 percent paid loss ratio. So we are pleased with the development of the bulk business. It is, as you -- it's much more difficult, I understand, from your aspect to figure out the development. Relative to the ultimate bottom line to MGIC it's a very positive line for us.

Just to follow-up on the share repurchase. Somebody mentioned limitation on your current repurchase authorization. Would there be any issues with available cash at the holding company, or ability to shift funds from the insurance subs to the holding company that could be another limitation on share repurchase if you chose to be more aggressive?

I don't think we have a limitation. Clearly that is the issue we have to take up with the insurance commissioner. The dividends upstream. I mean, that's the issue.

Mmmm-hmmm. Okay. Thank you.

Thank you, sir. Our next question comes from Richard Diamond of Inwood Capital. Please go ahead, sir.

Can you talk to us on how you have changed your underwriting as a sub prime and based on the delinquency notices, how that is impacting either the FICA scores that you are underwriting, your pricing, et cetera, et cetera et cetera, et cetera?

Um -- take you back to 1998-99 when we started getting into the bulk business. Those books now are three, four years old and have performed as expected. Through that time, we have expanded the universe of the bulk that we are willing to insure. We have tweaked pricing assumptions along the way, and tried to maximize the premiums we could charge with regard to what the market was willing to pay for the coverage. But, other than tweaking some pricing assumptions along the way, we really haven't changed, materially, the way we view the business, or the performance of the segments.

Again, it's performing within our expectations. As Larry mentioned, in the year 2000, we made some pricing adjustments on different areas within the bulk area which we insured, or had different levels of exposure that we had learned from on the '98-99 book. Since that date, both on the underwriting and pricing, we've moved forward at the same level.

So, would it be fair to describe you as saying that you're open for sub prime business, and that versus the product that you underwrote in 2000 and 2001, that your standards are in place?

The standards are in place, basically, with where we were in the second half of 2000. We will insure loans where we feel we can make money. And that sub prime is traditional business, wherever the case may be.

On the bulk business, too, we get to evaluate each transaction and set a unique price for the transaction. On the flow side, we do see some, let's call it sub prime vis-a-vis the expanded approvals through the agency systems, and we don't have the opportunity to price those loan by loan. We put pricing out there. Now, we did strengthen that pricing in August just looking on the opposition of what we were seeing on the flow business in that A-minus segment. We did strengthen it because the mix was a little worse, I guess, than what our existing premium rates contemplated.

And do you have any thoughts on cash-out refies and where they are headed in the market place? Whether you see a tightening of the standards -- . (inaudible)(inaudible) Or do you see that as unchanged as well?

I think both Fannie and Freddie also is contemplating increasing pricing on their product which I think is warranted. And I think that will serve as the downturn in the volume of that sector.

We have always viewed cash out as being higher risk and have been pricing accordingly for years.

We had a surcharge if it was a cash-out refinance.

Cool. Thank you very much.

Thank you. Our next question comes from Ken Zuckerford of Lasser Asset Management.

Actually questions have been answered. Thanks very much.

Next question comes from Ted Gartman of Gartman Partners.

Can you tell me what age of the loans are 95-5, meaning 5 percent equity?

Um -- we sure can, but we are looking for it right now.

First of all, it was a percentage of new insurance written in the quarter. 35 percent of the writings in the quarter were 95 percent loan-to-value ratio loans. Year-to-date, it's the same number.

What about on the existing book-to-business?

What's the portfolio, do you know, Jim?

I'm sorry?

Do you have the portfolio, Larry?

Percent?

Percent of in force, that's 95.

I have the percent of in force that's 95 --

On the flow business.

On the flow business, as far as the risk in force goes, it's 45 percent of the risk in force on the flow business is 95 LTV.

Okay.

The bulk business has much, much less than that.

The average LTV in the bulk is 82 or 83 percent. So we don't get much in that unless it's one of the prime jumbo deals we might do.

Okay. Thank you.

You bet.

Thank you. Our next question comes from Mark (inaudible) of Borrow Henley . Please go ahead, sir.

Hi, fellas.

Hi.

Correct me if I'm wrong about this, but I'm assuming the majority of funds for your share repurchase are going to come through a reduction in the risk to capital ratio. It's down to 8.8 now. I'm curious as to what level you would be comfortable with running at on a risk capital basis?

Well, on a regulatory basis we are 25 to one. From a rating agency about 20 to one. And, you know, it's -- we are in the unique position, and that is that notwithstanding the fact that we are growing the book, putting on risk, we are generating profits and surplus faster. So we are at a position now that we have excess capital. But that's a position we have been in for quite a while. And so the opportunity here for is for us to look at uses of that capital from year-to-year. This last year, we came out with a repurchase plan. And from year-to-year, we will manage that and take a look at what other opportunities we have. So we clearly have excess capital. How we use that will depend on market opportunities, business conditions, rating agency concerns, et cetera. But suffice it to say that risk to capital is in a very strong position.

Would you want to put a number on what excess capital you have?

No. I would say for a number of reasons. It's a mathematical calculation, but it doesn't serve the purpose. We need to go to the insurance commissioner and talk about excess dividends over and beyond a certain amount, and the rating agencies get involved, and just immediately think all of that capital is available just to upstream, I think is a misnomer.

Besides what you mentioned -- thank you. Besides what you mentioned about changes in your book in terms of investing more in muni bonds? Are you making any other changes in an attempt to increase interest you may be earning on your investment account?

Well, we have traded securities up and down the interest rate curve. We now are in a unique position, I guess, because we have had to generate some excess gains. We've harvested some of those and probably will harvest some more in the fourth quarter. The question is whether or not we move out with respect to other investment alternatives will depend on market conditions, I guess and our appetite for risk with respect to the investment portfolio. That, again, is something that we would review with the rating agencies.

I guess my concern is, do you see that anything unique or new may happen on your investment goals in terms of maybe more equity exposure or some type of crazy joint venture?

No. [ Laughter].

I guess it won't be that crazy joint venture. [ Laughter ].

If it is, we hope it will be a good one.

Well, I mean, obviously we look at alternatives from time to time. We even did have about 100 million equities a few years ago, fortunately we got on those. I guess it's just a matter of we understand, as good as everyone, that we are using -- losing a little bit of yield. It did come up a little bit this last quarter. But notwithstanding that, we have the opportunity to look at other sources of investments, even equities. Whether or not we move into that would be a decision we would make and we would report out on. There was a limit as to how much a company like ours could put into equities with respect to the rating agencies, all right? I'll give you some comfort on that. If we were to move two, three percent of the portfolio into equities it wouldn't be an issue. If you started to move up the ladder to four, five, six, that would -- they would maybe have an issue. Remember this is a long tail business and they look at claims paying ability of the Company to undergo a depression scenario. They look at the strength of the balance sheet as one of the key components of that rating. They kind of limit to how much we can do with respect to your wild investments.

Okay.

Still 100 percent fixed income. Mostly munies and 99 to 98 percent (inaudible)(inaudible) better rated on the third quarter.

Thank you.

Thank you.

Thank you. Our next question comes from Kevin St. Pierre of Sanford Burnstein. You may go ahead, sir.

Yes. Good morning. I was wondering if you could give us the credit scores and the LTVs on the bulk new insurance written?

Um -- is this the profile right here, Jim?

That's the in force.

That's in force?

We have in force readily available here, Kevin.

That would be good, too.

Do you want to go ahead, Jim?

Sure. Well, about 53 percent of the bulk business in force has credit scores of 620 or above. The other 47 percent have credit scores below 620. And just as a reminder on that 47 percent that have the sub prime credit scores, about 54 percent of that group has LTVs below 80. And to take another cut at it, about 75 percent of that group has LTVs below 85 percent. Which compares to an average of 93 percent LTV on our traditional business. So you have significant amount of additional collateral protection on that sub prime portion of the bulk business.

Do you have, or could you give any stats on percentages below 580?

Um -- less than half. Less than half of the sub 620 business is between 525 and 575.

Okay. Do you have the NIW stats?

I don't have that handy, do you have that, Larry?

Quarterly? Um -- on the new insurance written in the quarter, 57.2 percent had FICOs above 620. And 40, almost 43, 44 percent had LTVs below 80. What other questions on the new insurance written did you have?

And that was for the bulk?

That's for the bulk in the quarter.

Okay. That's my questions on the bulk. If I could just clarify. The percentage of insurance in force which is now bulk that was 18.8 or 18.2?

18.2.

Thank you.

Thank you, sir. Our next question comes from Dennis Clayser of Robert W. Baird. Please go ahead.

A quick follow-up on the share repurchase. Could you tell us what the average repurchase price was for the quarter and secondly a bigger picture question. Could you comment on the geographic distribution of your insurance in force and are you seeing any particular weaknesses in certain geographies versus others?

The average price on the third quarter repurchase was 51.2.

51.2 Okay.

On geographic distribution, Larry, you know it's pretty much in line with where we were, I think 12 percent in our top state, 35 percent in our top five and 53, 54 in our top ten. As far as weakness, again in our sector, we really haven't seen weaknesses. Now the northeast has run up, New England and New York, New Jersey have run up quite high in values over the past two years. So that would be a segment that you would look at for potential future problems. But to date that's not an issue.

Yeah. And some of the markets, I guess, we consider weak as in prior quarters, Seattle, Denver, Boston, Dallas, maybe Atlanta, some of the same names you have probably seen in the papers. Within those markets, if you were to look a little further and deeper, the segment in the market that we insure, which is, you know, let's say around 200,000, 150,000 on average, is still quite strong. The weakness tends to be in the higher dollar amounts where we generally don't play much.

Right. And then how about for the bulk and sub prime components? Is there any geographic concentrations there, or uniqueness about the distribution versus the rest of the insurance in force?

There you do see more California participation. Larry'll give you the specific number. Frankly that's been very good because California in the sub prime is outperforming the market place.

On the bulk business in force, California is about 27 percent of the business as a per cent of new writings, it's 17, 18 percent and then we drop down to 5, 6 percent for the next couple or three states.

Okay. And how about the delinquency trends for that, is there any uniqueness by geography there?

Actually the delinquency rate for California bulk business is pretty good -- pretty low relative to the average. We don't see any stand-outs if that's the question.

Right. Okay. Thanks.

You bet.

Thank you, sir. Our next question is a follow-up from Kenneth Posna of Morgan Stanley. Please go ahead, sir.

Ken, are you there?

Hi, I'm sorry I keep forgetting to take off the mute button. My apologies to you. I wanted to ask again about the capital question. I know that was brought up once already and there's limits to what you can say. I think outsiders have to be able to calculate or estimate the return on equity, we need to know roughly how much capital the business requires. And it used to be that the state regulators said 20 or even 25 to one was the limit, but in reality, the capital levels have grown dramatically for all the companies over the past few years. And I'm wondering if you can give us some rough guidance as to how much capital, to the insurance in force portfolio, maybe a range, is the right amount of capital needed to operate today? And talk about, in particular, whether the bulk business requires more capital at the margin from rating agencies or other folks to operate?

Well, the -- as I mentioned with respect to the rating agencies, and I would say 20 to one, but I would qualify that and remember that that's just a number calculation, and they take into effect a lot of other things.

Right, so the 20 to one isn't really relevant any more? We should not be writing our models at that level?

That's my point. It always is -- I can't tell you what Moodies is versus S&P. The calculation is one of looking at the financials of the company.

Right.

Looking at everything else we're doing. Are we diversifying, et cetera? How much room do you have? They never tell you where you are any more, Ken, that's the issue. The point is, you can have a calculation of risk -- I would probably tell you that today what our risk to capital if you had gone back a few years we are probably triple A rated on a mathematical basis. But that's not the case.

Right.

The issue is how much excess capital would we have? That's a question of,okay, what are you going to do with that capital. That's my point.

I'm not asking you what you would do with excess capital or how much excess capital you think you have. I'm just asking, going forward, what level of capital should an outsider expect is a reasonable amount to run your business, given what you know are the constraints today?

Well, I don't know any constraints we have today. But, as I mentioned to you 20 to one is a good benchmark for us to think about. Now, whether or not if, in fact, the rating agencies want to move that up or change calculations with respect to their depression scenarios, that would be something new.

Where are you today? You are below 20 to one?

We're eight to one.

I don't understand the relevance of even discussing 20 to one if you are at eight to one. Something is a disconnect.

There is a disconnect here, Ken, I agree with that.

So I'm in a position of not really knowing how much capital this business needs which makes it hard to estimate return on equity and stock's value and everything else.

Return on equity is pretty straight forward. With respect to how much capital we could put to use writing more business, okay? All I can tell you is that from a rating agency standpoint, the benchmark has been about 20 to one. Now, all that being said, if conditions were to change significantly, and we were to start running at operating losses, they might feather that back.

I think that's probably true. So are you saying that it is your decision to run it eight to one, and that as far as your outside constituencies, rating agencies and so forth, regulators, you could push it up to 20 to one if you wanted but it's your decision that eight to one is a prudent level right now?

I don't know, Ken if we would push it to 20 to one. You have to keep in mind the main reason we are down at eight to one from say 15 to one three or four years ago is the failed risk base capital rates. We imported capital, if you will, against the potential requirement to have to be Triple A. So once that concern, at least looked like it left the market place here with the final risk base capital rates, we instituted the share repurchase program. So we could run certainly well above eight to one, but you can't -- we can't tell you whether that's 11, or 12, or 13 or 14 to one because it's a moving target and it's based, as Mike said, on the rating agency's calculations of how our book performs in a depression scenario.

Ken, any strategic move we would have to make and even stock repurchase programs, we always review with the rating agencies beforehand. So it's that type of situation where you review the financials, the forecast, what strategic actions you are going to take, and does this meet their tests?

And one last question, if I might. Are the rating agencies right now asking you, or sort of winking or suggesting that you need even more capital than eight to one, or are they sending that message? Or should we be thinking about a range of eight to 15 as the range that will most likely be bracket you would end up?

I think that would be reasonable.

I do, too, Ken.

Thank you.

On the sub prime there's not a need for excess capital because it's offset by the LTVs we secure within that sector.

Great. Thank you very much.

Thank you, sir. Once again, ladies and gentlemen if you have a question press the one key on your touch tone telephone. Our next question is a follow-up from Jeffrey Dunn of Keith Boyette.

Could you remind us, what is the cash at the holding company level at this point? And what remains on the dividend from the subs this year and a rough estimate of what that could be next year?

There probably is minimum cash at the holding company. The dividend capacity that we have, we instituted in the beginning of the year, and sent up $150 million out of the writing company to the holding company. We have about $100 million facility capacity on the CP line.

Okay, great. Thanks.

Thank you. Our next question is from Bruce Hartley of Lehman Brothers. You may proceed, sir.

Hi.

Hi.

The bulk business is for the 9 months, $43 million of net paid claims, flow is 79 so that's -- when you modeled that out, did you tell us that was going to run about twice the loss rate of the flow business? You know, that looks like it's more than twice the rate. And then, again, I mean relative to other sub prime numbers, you know and HUD, I remember 10 years ago FHA program used to always have, you know, what, 14, 15 percent of the market now it's down to 10. I assume some of the -- you know sub prime and bulk business you are getting is market share gains from FHA, you know, whether that's correct or not, I would love to hear. But their delinquency numbers are, you no, I guess all-time highs right now either approaching double digit or slightly less into double digit. Just curious.

You know, why, you know, what kind of models are you using to assume that you get to 15 percent on the bulk? How do you get to -- what's the magic behind that specific number? Why does it get there and stop? Or why does it go that high? And, then also, you know, comment on sort of the relative losses between the bulk and flow. Thanks.

Well, on some of the bulk delinquency rates, the 15 percent, I assume you are talking about the mid-teen delinquency projection.

Yes.

If you -- we have mentioned in the past quarters, if you pick up the MIC, or I think now they go by the name loan performance statistics, their sub prime is of similar composition, let's say to our bulk business. And if you look at their historics through time by origination year, you can see that the history is that those books have been and are in that mid-teen area. So, I point you to the outside source, our older books are in that area now. Now, we are not there in total now because of, once again, the seasoning and sizes of the books along the spectrum there. So we are pretty confident, given the MIC and loan performance statistics and the performance of our books that that's a reasonable range. You mention the paids on bulk being roughly 20 million or whatever, you don't know the other side of the coin and that is the earned premium. So back to the 14, 15 percent paid loss ratio to date, the 65 target, we just disclosed delinquency rates on the page, but we haven't broken out the premiums.

Right, I know. But I thought when you guys started getting into the bulk, the -- you know, the idea was you were going to get significantly higher premium income, and you never really disclosed what that number was, but we estimated. And then you said, you know, that would offset about -- maybe I misunderstood, but I thought about two times the loss levels of prime or the flow business?

You are looking at our paid loss ratio of 65 percent versus 35 percent for the flow business.

Yes. It just seems like the actual claims numbers are coming in a little higher.

There's a ramp-up, though. You have to look at the percentage of business put on in a hurry and the claims hit faster in this business.

Okay.

And the FHA question, that business is generally over 95 percent LTV, not the 82 percent LTV average we have in our bulk, and the premium rate on the FHA business is roughly 150 basis points up front and 50 annually. And our bulk pricing is significantly higher than that. And the coverage, FHA is 100 percent coverage. Our average coverage on bulk is mid-20s.

I have asked this before, but either I don't remember or you didn't give the answer. You report after 45 days, banking industries typically 90. Any sense of the cure rate between the 45th and 90th day for comparability purposes for some of the other companies we look at? Having covered other low dock lenders, or all-day lenders, there seem to be a pretty large chunk of people who, you know, will sort of drag out their payments 60 days, but then, you know within three, four months, come current again. So how deceptive is this double digit delinquency rate relative to the cure rate?

The cure rate improves. The 30-day delinquency has a higher cure rate than a 60-day delinquency than a 90-day delinquency. As you mention we get notices reported to us just after the 45th. So a chunk of our inventory is sitting there, let's say, right around 60, and some of the other bank numbers, as you said, might be a 90-plus day.

But you can't identify what percent?

We can identify what percent, Bruce, but we choose not to disclose it. Again, you are getting into our pricing, and why we do what we do.

I mean, ultimately you look at paid losses. That's the paid losses versus the premiums we took in and that's what's relevant.

Right. Okay. Thanks.

You bet.

Thank you. Our next question comes from Emmanuel Weintraub of Newberger Burman. Please go ahead, sir.

Hi, there. You mentioned before that everything is going fine and the just analysts were a little off on their estimates.

I don't know if we characterized it quite that way.

Okay. Good because neither would I, really. It's been a very difficult time. I'm just sort of wondering given at this point, looks like earnings are up three percent this year and the consensus is earnings up four percent next year. What's the case you can make to potential investors, you know, once you get beyond the incredibly depressed share price? Once it recovers a bit. What's sort of the earnings, you know, growth rate case you can make to people?

Well, I think you are getting back to lower double digit, longer term and it relates back to persistency improving. Again we are running at 58 percent, 59 percent and ultimately you would hope it gets close to 80 percent. We have tremendous demand coming in the housing sector. I cannot think of a better sector to be in for any business that's going to grow eight to 10 percent annually, particularly in the sector that we serve, first-time home buyers. You have tremendous demand coming within our sector. And our product is one that's necessary relative to the market place. So looking long-term, there's a very bright future for the mortgage insurance industry and MGIC is a leader in it. We have, I think relative to other businesses in this country, a very bright future.

Okay. Thanks a lot.

Thank you, sir. Our next question comes from Jim Bizoni of Delphi Management.

Good morning, folks. A couple questions. What percentage of the bulk loans is sub prime? And what percentage of the loans in force are sub prime?

11.2 percent of the total in force is sub prime. And of the bulk business in the quarter, 41 percent of the bulk business was sub prime.

47 percent of the portfolio is -- of the bulk portfolio.

Of the bulk? Right.

All right. And earlier in the call, did you say that you are expecting the delinquencies to reach mid-teens in the bulk Asia?

Mmmm-hmmm.

Okay.

As books play out over their life, that's right.

Okay.

That's right.

What if the economy does a double dip which, you know it's unbeknown whether it's going to happen at this point in time, where will we see delinquencies? Are we going to see a significant increase in delinquencies then?

I don't know. That's what -- we have to play out. Again, we have a lot of strength relative to loss mitigation capabilities in the sub prime given the LTV protection, the collateral protection. But if we have a double dip, you know, I really don't know what the outcome of that might be.

Okay. Historically, do you have any previous trend that had what the impact was at that point in time?

Well, we have gone through regional recessions where Southern California and in the early '90s and New England in the late '80s. We have done quite nicely through those environments, although not in those markets, per se. And again the sector we are in at the $150,000 home price is one where even if the economy dips, I think there's potential employment opportunities that keep people solvent at that level. In general they are double wage earners. There's a lot of protection within our product itself just by the nature of the product itself.

In the geographic dispersion, in the past there's been a pocket as Curt mentioned, California, New England, Texas, you never know what area might be next and that's why the geographic dispersion becomes important.

Thank you.

You bet.

Gentlemen, I show no further questions.

Great. With that, thanks, again, for your interest. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.