MGIC Investment Corp (MTG) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGic Investment Corporation First Quarter Earnings 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 anyone requires assistance please press star and then zero on the touch tone telephone. I would now like to introduce the host Mr. Mike Zimmerman. Sir, you may begin.

Thank you, Matt. Good morning, and welcome to the call. Joining me on today's call is Curt Culver, President and CEO. Mike Lauer, Executive Vice President and CFO, John Fisk, Executive Vice President of Strategic Planning and joining by conference call is Larry Pierzchalski, Executive Vice President, Risk Management.

Just a couple of comments in addition to the press release that was issued this morning, we've also posted to our web site, additional information about the company's quarterly results that we'll refer to during this call. You can access this information by going to mgic.com. Clicking on the investor tab and then into the presentation section.

Finally, during the course of this call, we may make comments about our expectations for the future. Actual results could differ materially perfect those contained in the forward-looking statements. Additional information about the factors that could cause actual results to differ materially from those on this call are in our 2002 10-K and summarized in this quarter's press release. If the company makes forward-looking statements by making those statements we are not undertaking any obligation to update those statements in the future in light of any subsequent developments.

With that, Curt?

Thanks, Mike and welcome to your first call. And good morning.

MGIC had a net income of 141 million during first quarter and in what may turn out to be our busiest year yet, we wrote a total of $24.1 billion in new insurance which was comprised of $17.4 of flow, and $6.7 billion in bulk business. Persistency continued to trend down because of record low interest rates and ended the quarter at 53.8% down from the mid-50s the last quarter.

Despite this difficult operating environment, year-over-year insurance in force was still 3%, although it did contract from the prior quarter ending at $195.7 billion. The increase in insurance in force combined with higher premium rates on the bulk and the A-minus business resulted in strong earned premium growth of 17% to $332 million. In addition, the investment portfolio grew by 3% to just under $4.9 billion.

Regarding credit loss trends both the inventory of delinquent loans and delinquency rates continued. Their expected increase in the first quarter primarily to the natural seasoning of larger books of business combining with the weaker economy. The overall delinquency rate was 4.7% up from 4.5% a quarter earlier. The bulk rate was 10.5% versus 10.1%, and the flow rate was 3.3% versus 3.2% a quarter ago. Claims paid were in line with expectations at 89 million and we increased loss reserves by 53 million in the quarter, reflecting the larger overall delinquency inventory, higher average loan amounts, a changing mix of coverages and the natural seasoning of the larger more recent books of business.

The huge new insurance written volume in the quarter resulted in a 14% increase in underwriting expenses over last year but well below the 36% increase in contract underwriting volume we experienced. In fact our GAAP expense ratio was 14.3%, compared to 15.4% one year ago.

Finally operating cash flow in the quarter was in excess of $250 million and during the quarter we purchased over $1.8 million shares.

Now turning to the remainder of the year, at the beginning of the year, we like, many other anticipated a 20 to 25% reduction in mortgage origination volume. As we speak today, the volume forecast range from 2.4 trillion to over 3 trillion, truly amazing numbers. In fact some forecasts for the second quarter alone are as high as 1.1 trillion, which used to be a good year. As a result on the positive side we expect higher new insurance written volume for MGIC than we did three months ago and consequently higher revenues. It an the impact the higher new insurance written as the impact of refinances which is driving persistency is to a record low. And with higher refinance volume in the pipeline it could go a bit lower before beginning to recover later in the year. And because of the higher new insurance written volumes underwriting expenses should be slightly higher than we originally planned.

Regarding losses we expected the delinquency inventory to increase as the large books of business written in the past three years continue to age, and the economy continues to remain weak. Consequently we should continue to see an increase in paid claim development, as well as incurred losses.

So in summary, as we've said before we continue to see 2003 as a year in which MGIC ultimately transitions to higher persistency’s, lower underwriting expenses and as the economy gets back on track and proving loss trends, as we move into 2004. With that, let's take your 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 is answered or you wish to remove yourself from the queue please press the pound key. Again, if you have a question, please press the one key on your touch-tone telephone. Our first question comes from Richard Diamond of Inwood Capital.

Good morning, could you tell us what percentage of refis were driven by people who already had insurance with MTG and then refied with insurance with MTG which negatively impacts persistency’s.

We are unable to track that. What happens, because so many borrowers -- retention rates for mortgage lenders are so low in the neighborhood of 20% that most of the borrowers get their next loan with a different lender and as a result, we're unable to tract what borrowers are retained because they are not rolling over from the same lender so we don't have that number. Certainly it has an impact. For those that are retained the high percentage would come back to mortgage guarantee, but we don't have that number itself.

Our next question is from Paul Miller of Friedman, Billings, Ramsey. Your question, please.

Thank you very much, great quarter, guys. My question is: You know, the -- the -- all the negative that you pointed out with the higher refis going on which is going to cause higher expense ratios are you sticking to the guides from 585 to 610?

Well, this is Mike. What we said in January was that we had updated everyone on -- with respect to earnings guidance last year, and the beginning of this year, because there was so many changes, but, again, at that time, we said we weren't going to update that any longer. Okay?

And I -- I understand, you know, where we're headed with respect to SEC reporting and disclosures. We're doing more disclosure work right now and trying to get out more information. And I guess going forward, we would like not to give anymore earnings guidance because of all the volatility. So our guidance that we gave out in January is the last guidance we plan on giving.

Okay. Thanks.

Paul, this is Mike. I would just add also to keep in mind the addition information that was posted on the web site. That's something that you will be seeing on a going-forward basis.

Our next question is from David Hochstim of Bear Stearns. Your question, please.

Yeah, thanks. I wonder would you be giving any comments on loss provisions and reserve building because you have give than since you gave --

Well, I think, David, Mike again, I think relative to what we're seeing currently. I mean I can tell you indications are as Curt talked about we continue to see increase of notice development and increase in paids and severity because of the factors that Curt talked about. And if you looked at the provisions we made in this quarter, I would anticipate that we would see trends about that same level for the balance of the year.

Okay.

All that changes, again, subject to what happens quarter to quarter on delinquency development and paid development. But clearly, we continue to see an increase of notices, as well as paids and severity because of the factors that Curt mentioned.

I mean, should we assume that you will add about $200 million to the reserve this year or just you're talking about the provision?

Well, I think on a relative basis, at 50 a clip would be about $200. That seems to be reasonable at this point in time, but, then, again, that's subject to quarter to quarter changes.

And then I wonder if -- could Curt give us an update on conversations with lenders about Captive arrangements?

Sure. I guess we're through the process of the Captive update or conversions and regarding that we had a number of relationships somewhere between 10 and 15 relationships with lenders that were at levels between 35 and 40% excess of loss treaties and as you know, we sent out notice saying that we would no longer provide that on the excess of loss basis but would do, on excess of loss 25% or on quota share, we would go as high as 50% what has happened is within those, we've lost a couple of relationships; although, they were not that significant to MGIC at the time, but any time you lose a customer, it's significant to us. We also converted some customers to quota share, which we were thrilled about. And on the others, they maintained relationships; although, they reduced market share relationships in going to the 25% seed level.

So I would expect that the market share loss coming out of this would be in the neighborhood of 3 to 4 percentage points getting us into the low 20s, as far as market share ultimately, but the resulting financial success from that and getting those either to quota share or 25% seeds, I think, is much more the positive than the loss in the market share.

Okay. And then if I could ask you to expand on the average premium rate that seems to be related to the mix change. Is there anything in there that is not sustainable? Is there any reason we would expect it to decline?

I think a lot of it has to do with the bulk business.

The bulk.

We had a strong quarter so as the bulk business, I guess, moves up and down from quarter to quarter that would affect that average premium rate.

But that moves up and down as a percentage of insurance in force, not in insurance written, in particularly.

But the volume has an impact, obviously on the new business that we write.

Right. Okay. Thanks a lot.

Thank you.

Our next question is from Christopher Buonafede of Fox-Pitt, Kelton. Your question, please.

Hi. Unless I'm mistaken, it didn't appear that you reported a press release --

We can't hear you.

We can't hear you.

Oh, okay. Unless I'm mistaken it didn't appear that you reported on the press release, the contribution from CBAS.

It's -- yeah, we added that, Chris, to this additional information we put on the web site.

Oh.

The -- let me just give you the numbers. For the -- for the quarter, included in other revenues, CBAS contribution was 9.8 million, versus $15.7 a year ago. And the EPS calculation is 6 cents this year and 10 cents last year.

Anything on Sherman that you are going to disclose? I know you does in the annual report?

No, we did not.

Oh, okay. That's it. Thank you.

Our next question is from A.J. Gruel of Smith Barney. Your question, please.

I just have a follow-up on the premium rate it. Seems to me about 27, 28% of your new insurance written was bulk but your premium rate on the total insurance in force jumped 5 basis points. The change shouldn't be that high. Could you let us -- talk to us about the pricing maybe on the -- some of the other business that you're doing?

Well, on the other business nothing has changed relative to pricing. So I'm -- I'm not quite sure what -- where you're --

It's the mix of business.

I mean, what could change is we're doing more 95s and I don't have that number. I'm sure we have it here, or more arms. I think there are 8 to 9% of the volume. So a changing mix within the volume that we wrote can drive that slightly higher, along with the increase in the bulk business.

Okay. And just one other question, your operating expenses seem to be flat with the fourth quarter, despite a 30% increase in refinancing. Could you give us an idea of what to look for on that line item.

I think what Curt talked about, if we experience a continued increase in underwriting activity, if these volume forecasts hold true that we're reading and seeing right now, I would anticipate some -- some higher level of operating expenses in the outcoming quarters and, again, that will be relative to volume and, of course our contract underwriting activity. So I think that wouldn't be the way we had thought the year was going to run, three months ago, but looking at current forecasts of volume, we're -- we're looking at probably an increase in operating expenses in the second half of the year relative to those levels, if we had incurred those types of volumes that people are forecasting.

Great. Thank you.

Thank you.

Our next question is from Bob Ryan of Merrill Lynch. Your question, please.

Good morning.

Good morning.

Two unrelated questions. Number one, what market conditions can you describe about the bulk market currently? And secondly, discuss Litton a little bit in the contest of the Fairbanks FTC investigation.

On the bulk market, this is Larry Pierzchalski here. The market is still very strong. In some respects, it's strong because the overall mortgage market is strong. Rates are low. A lot of people are refinancing, and relative to our credit enhancement, spreads are still wide between the -- the lower traunchs and the double A pieces it pushes up into the upper traunchs and when spread widen, our product brings more value. So two things, one a strong market because rates are low and, two, the spread between the lower traunchs and that are wide. So we can -- at this point, we see going into the second quarter the bulk market still be pretty strong.

And relative to Litton, I mean, it's hard to comment. Other than they are an outstanding servicer, as recognized by all the rating agencies. I think they have the highest rating from all, and as a result of that, have excellent controls in place on how they do business. And other than that, I really don't know what I can comment on. I mean there's nothing I can comment on.

Very good. Thank you.

Yes.

Our next question is from Geoff Dunn of K.B.W. Your question please.

I just wanted to get a little bit more color on the bulk business written in the quarter. The sequential jump in the premium ratio suggests that the mix of the bulk business probably changed somewhat materially. Can you give any color as far as the mix of A minus versus some of the bulk you did in the fourth quarter or what might have boosted up the pricing on that business to give you such a big premium lift on the quarter.

On the bulk business, the mix in the quarter may have changed somewhat, but the premium rates on the bulk business, we were able to increase our premium rate, once again back to the spread widening. We are we were able to make the transaction work with what spreads being wide, even though we're charging more than in past quarters. So we seized the opportunity to not leave money on the table and increase the premium rates on the bulk business in the quarter and the bulk in force is representing close to 21% of the in force, so it's providing more in the overall. And as Curt mentioned earlier too, on our flow business, we're writing more high LTV business with deeper coverages and deeper premium rates associated with that coverage.

Okay. And then looking at the information on your web site, it looks like year-over-year, you are building more of the A minus book and reducing maybe the prime and subprime exposure. Is that a trend you would expect to continue?

I think there will be more A minus in the future. Freddie Mac, Fannie Mae are doing more of that. People are getting more comfortable with it, as -- as time progresses. They understand it. They see it, and they can get comfortable with it. So I would say probably more A minus in the future.

Okay. And I think in the fourth quarter call, back when we had different estimates for the year in originalations, you expected bulk to come down, I think 20% year-over-year. What are your new expectations for growth in that business this year?

Once again, I think two factors, the bulk business will follow the overall market. So when the refinance frenzy tapers off, we should see a tapering off in the bulk. And if spreads tighten we should see MGIC's level of volume taper off if that happens but right now both factors are strong.

Yeah, and as it stands now we would expect to write more than we did starting the year, Geoff.

And the last question, on delinquencies, although they were up, they were not up maybe as much as I would have expected. Are you starting to see a slowdown in the delta change quarter to quarter. Is there anything in your books that suggests that we are gradually reaching a peak over the next several quarters, or are we still on the ramp-up stage?

Let me talk and then Larry can talk a little bit about it. What you are really seeing now is the normal, I think -- the first, second quarter generally are not that significant. We see higher increases generally in the third and fourth quarter as the books season. Larry, do you want to add anything to that.

Yeah, I think on the bulk side and on the flow side, at least for a few more quarters here, certainly, both are -- we're writing more volume than we did in years past and it will take, you know, a handful of quarters yet for the books to get distributed across the delinquency curve, the lifetime delinquency curve and until that happens you will see just a progression because you have larger books replacing smaller books and the inventory going up. And then on top of that, you have this economy. When it will get back on its feet and how much is going to be impacted on the housing sect.

And actually one more if I could. Are you seeing any early on development that's surprising you in the '01 or '02 books of business or is that trending as normal?

I would say the '02 and early '03 is in line with the 2000, and 2001 books.

Okay. Thank you.

Thank you.

Our next question is from Jim Kissinger from Kissinger Laughton Capital. Your question, please.

I would like to pursue the delinquency side of this. A while ago, you were talking about a peaking at a 15% rate. Is that -- is that still relevant, you know, given the delinquencies in the subprime are only up three basis points quarter over quarter? And secondly, Mike, it sounds like you guys bought a pretty significant slug of stock back. Do you expect to finish up your allocation or authorization this year? Thanks.

Larry, let me answer the second question first as to the buy-back. We still have authorization of somewhere around $3 million shares outstanding and our activity in the market will be dependent upon dividends capabilities, cash flows and other activities. So, I mean, we don't have a set plan, so to speak. I can't tell you that we'll buy so many shares a week or anything but suffice it to say, that if we don't have use of the capital the dividend upstream, we'd be in the market, but that would be subject to other conditions, other uses of funds.

And on the bulk delinquency rate. The 15% we threw out a while back was the number in the general market. The general subprime or bulk markets fully seasoned. We hope to do better than that because we do not insure some of the higher risk product that is represented in that industry number. So we're at 10.5 now. And the industry is generally around 15. We hope to do better than that.

Okay. Thanks, Larry.

Our next question is from Kiko Kokliey, [Endeavor] Capitol. Your question, please.

The question was asked.

Our next question is from Lee Rosenbaum of Putnam Investments. Your question, please.

Hi, just a quick question, getting back to capital management what would be the other uses of capital? I know you have historically being buying back stock at prices well above where we are with the stock basically just above book value. I'm trying to get a better feel for what other uses of capital are going to, you know, add more long-term value creation than buying back the stock at close to book.

Well, certainly that's a good point but if there are new business opportunities, we would -- that we feel we can take advantage of, we'd use it there. And longer term, if the dividend policy changes it may have an impact there also.

I guess I would say any new business opportunities have to add a lot more value than buying your stock back at close to book, I'm sure you are aware of that.

Thank you.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone. Our next question is from Robert Hochinsten of Goldman Sachs. Your question, please.

Mike, maybe you can talk about the average severity and the increase and whether specifically you can make any comments on that severity by region, types of loan, by borrower or FICA type or loan type, or by year in which the loan is originated?

We need another release for that, Bob!

Larry, do you want to go through another release of that? Larry did you get a chance to see the release we had, at attachment to the web site.

No, we did not.

We released the average severity which was 20,800, versus 19,800 the first quarter. And so the average severity is up, and a lot of -- most of that, Bob, has to do with -- with higher average loan amounts but let Larry talk a little bit about general markets and where we're seeing the increasings in claims activity, et cetera.

Yeah, as Mike said, quarter to quarter, I think we're up, average claim paid, about 10, 11%, quarter to quarter, about half of that was due to average loan amounts, and -- and as -- you know, our coverage is the loan amount times the percent coverage. If the underlying, average loan amounts are increasing, as they are, the performing loan limits move up, as housing prices move up, year to year, new books of business are at a higher average loan amount. So the expectation should be, through time, our average loan amount, all other things being equal, going up in line with the overall house prices, inflation rate.

The other half quarter to quarter here was due to fewer acquisitions and presale activity and more percent option payments. We do benefit in strong housing economic environments, where if somebody does go delinquent and results in a claim, as the prices and markets are strong, we can hopefully find a ready buyer to mitigate our losses.

So in the quarter -- in the most recent quarter, some of that acquisition presales opportunity is diminished because we see a slowing in the housing market. And I would say especially in the manufacturing Midwest areas, you know, the recession probably hit manufacturing the hardest. They really haven't recovered to date, and we do a lot of business in the -- in the Midwest. So Illinois, Indiana, Ohio, Michigan, strong MGIC market share areas, and strong manufacturing. So it's more of the -- it's more of that than any particular segment, I mean, our business is pretty much fixed rate, conforming loan amounts so it really is those geographics and the higher average loan amount coming through.

Mm-hmm. You know on the first part where said 50% from, you know, the general inflation and higher loan amounts, is that in loans that are higher than your average loan size or, you know, on the flip side of it, the higher inflation that you get over time should be a limiting factor in terms of the severity over time.

Well, the newer books were large books, higher average loan amount books, and they went delinquent roughly a year ago or started producing delinquency and now they are running through that foreclosure process. So it's -- it's -- the claim paids are more to that more recent books that have had higher average loans and have had time to go through that delinquency disclosure process --

Let me follow up on that. Can you give us a rough feel as to the percentage of claims that are paid that represent the maximum coverage that you have, and whether there's any change in that general trend towards, you know, the highest severity of claims paid on a loan-by-loan basis?

Well, I would say the -- the highest contractual obligation would be the percent option payments. And do we want to disclose that, gentlemen? Curt?

Well, we don't have it disclosed already, so it's an issue. You know, we have to redo the document or something.

But I think suffice it to say, Bob, I think the point that Larry is making that has been happening really for the last three quarters is that the last three years of books, the average loan amount has increased -- just mathematically, the loan outstanding has increased and they are now going through the claims process and that's what's driving that. The only other part of that, that Larry talked about was just the geography of our book, with respect to the heavy concentration in the Midwest and the impact on the manufacturing base. So -- but, I mean, as to whether or not there's anything underlying other than just your geography, I would say, no.

Yeah, I would -- let me just add the mitigation anything underlying other than just your geography, I would say, no. Yeah, I would -- let me what wasn't mentioned along with that we're writing more -- or deeper coverages on these, because they are 95% loans that have a deeper coverage to get down. To Fanny, Freddy levels that are necessary.

The real drivers, are as I see it the higher loan amounts with higher percentage payment coverages and to a much lesser extent, the mitigation opportunities are part of that increase also. But most rely on the higher loan amount which also, as you know, drives premium growth. So it -- it happens both ways. In fact it's a very good thing, those higher loan amounts but the higher coverages that correspond with 95% loans are also playing a role.

Okay. Thanks.

Our next question comes from Bruce Harding of Lehman Brothers. Your question, please.

Yeah. I hope I didn't miss this. Did you talk about the tax deduction legislation in Washington and any progress that's making and then the -- you know, the general thesis that banks and other lenders are holding on to their mortgages or swapping for mortgage-backed securities but not -- you know, another selling them -- you know, keeping the cash flows? What are the implications for your business when they do that? Do they -- do they postpone getting mortgage insurance? Do they tend to self-insure more? And then the last question is, can you differentiate, you know, the economics of the quota share business with the excess of loss attachment points and, you know, just a couple bullet points on why you like that business up to 50%. Thanks, Curt.

Okay, let me start out with the -- the mortgage insurance tax deductibility. Since introduced by Paul -- representatives Ryan and Jefferson, in the House, it really has gained tremendous amount of momentum. Now, the -- and it has a numerous number of consumer groups backing. I think we have eleven co-sponsors within the Ways and Means Committee so both sides of the aisle find it very appealing. Some are holding back to see how it scores relative to revenue loss, but the reality is that it's something that would drive homeownership and particularly for lower income individuals. So it's a very positive proposal from both sides of the aisle.

The issue, more so than this area itself, is just the size of the President's package that will get approved. I mean there's a big difference between the House and the Senate, 750 something and 350 something. And as a result of that, what would -- what would survive within that scenario as they get down to conference will have more of an impact than anything else, I think on the mortgage insurance deductibility.

So the short story is virtually everyone is in favor of it, but what will survive relative to ultimate legislation and the administration getting as much as what they want. So we'll see how that plays out, but the momentum is very, very, positive regarding it.

On the NBF side, Bruce, the reality is people don't know what they are going to do as far as the ultimate outcome of that loan, so I would say the high, high, high, majority get mortgage insurance from the start not knowing what they might do with that loan. So I would not see that that has impacted our industry at all. Others may have another opinion, but I -- I don't see it would impact us at all, because, again, they are not quite sure what the ultimate outcome in the secondary market would be and as a result, they get mortgage insurance right from the get-go. And on the final, I forgot what the final part of the question was.

The quota share.

Well, clearly, if you had outstanding, outstanding, outstanding performance, no losses at all, quota share would actually turn out better for a lender and at certain levels it outperforms excess of loss treaties, but on the levels that -- where we think most originators will perform, the economics are far better for our company than without quantifying them. They are far better for our company than are the economics or the returns at the 40% excess of loss treaties where we virtually see no return from our assumptions.

So we -- from where the markets, we think will perform, we can get a double digit return. A high double digit return on quota share, whereas as I've said before, it's very minimal what we could get on the 40% excess of loss treaty. So a significant difference for us. If markets perform where we think they are going to perform.

And is that just the 50% -- you know, wherever you set the level, they get that percent of premium and the same --

Yes.

Level of loss?

The exceeding premium of our operating expenses. So they get the premium less our operating expenses.

And I know you're not, you -- you know, Mike I heard Rich said about SEC disclosure and don't want to give any more guidance. I'm just curious, can you help us think through as that, I think you said 3 to 4% market share loss transitions in over time, can you just help us think through how long before you can start growing the book of business again? I mean, in other words, if your share of insurance in force is, say 25, just to pick a number but your share going forward of new insurance written is going to be something less, 21, 22, you know, have you kind of modeled out where the two lines meet and how long before we start seeing some insurance in force x the bulk?

The biggest impact on the insurance in force for us now and flow insurance in force has been the cancellations, the refi activity so I think relative to premium growth, you have a couple of factors on the plus side, one is some return of persistency is and then secondly bulk activity. Okay? So on the current flow business going forward, yes, there's market share risk, you know, how we can compensate for that with respect to the bulk business and/or some return to persistency would be an offsetting factor but right now I would say that persistency still is clouded by refi activity. And you mentioned it earlier too, the lower market share is offset by improved margin on the business we do write because we won't be at -- seeded out at 40 seed but something more reasonable.

Okay. Thank you.

Our next question comes from David Hochstim of Bear Stearns. Your question, please.

Yeah, thanks. Can you talk a little bit more about CBAS and the revenue this quarter. Does that exclude any securization gains? Is that kind of a normal fund raise in the K, you talked about the -- the high percentage that's kind of recurring revenues.

I think the difference this year with respect to CBAS is they did two or three securizations in the first quarter last year and they did one last year so that's the issue.

Okay. Then is it reasonable for us to assume that the average loan size on A minus or subprime and flow business would be about the same as in bulk or are there differences in size of loans?

Larry, do you -- relative to the bulk average loan --

No.

I don't think we have that.

I do. It will just take me a second. If we can continue, I'll calculate it.

My own feeling, at least on the bulk side would move in conjunction with the general market. So I wouldn't see a significant difference, David, at least from what we've seen in the past.

Okay.

We'll try to confirm that.

All right.

You know, one of the things that you mention about CBAS there has been attention given to CBAS, this quarter in particular. It's something -- it's a wonderful company that we've owned since 1996 that turned profitable in '97 and has grown earnings since and we have an outstanding management team there. And financially, as you know we own 46% and can -- along with Raidian and the management team and our investment is $178 million, and the impact to us is not that significant; although, as I say, they are a wonderful group, but it's only about 2 to 4% of our revenues are driven by CBAS so we certainly had a lot of attention to them this quarter, they're a wonderful company but in the bigger scheme of MGIC, it's still an insignificant part of our financials.

Curt, on the average loan sizes, I'm showing bulk on the in force about 127,000 average loan, flow being 118,000 in total and subprime being about 119,000 average loan amount.

Okay. Thanks.

So in the general market for all three, I would say.

And one other question. Could Mike or somebody explain the change in the equity in Sherman, in the quarter, I guess a percentage of the business was sold but if we -- there's no way really to look even though you don't disclose earnings there, we can't get to what the kind of adjusted book value was to think about a change during the quarter which would be another way for us to kind of --

Well, we may have to add that to this fact sheet then if that's important. The issue here, David, was everything -- we tried to put everything down on this fact sheet to get it in the call. I guess what we'll need to do is expand that and get some more information -- if that's important to you. It's a relatively small number but we can get that in the fact sheet.

Okay. Thanks.

Thanks, David.

Our next question is from Paul Miller of Friedman Billings. Your question, please.

Thank you. Yeah, a lot of investors I talked to really feel that this deep seeded premium issue is going to be the downfall of the whole industry. I wonder if you could just address how big do you think that market will get, the deep seeded premiums, and can you talk about the fact that you feel the industry can still continue with the double digit returns.

Well, I -- I'm not sure what was asked there, but I'm very bullish on the industry to those of you -- and most of you have heard me speak relative to the opportunities to serve homeownership with a strong demographic and the increasing homeownership driving 15 million borrowers this decade and millions more in the decade after. Now, relative to serving that marketplace, mortgage insurance is going to be essential within it, and from our aspect, the deeper seeded -- the 40% excess of loss is such a significant give-up that you have to have outstanding loss performance from our perspective, to achieve the double digit returns and we had that in the mid '90s and we don't see that loss scenario throughout this decade, particularly as we do more in affordable housing which is what we are about, in working with Fannie Mae and Freddie Mac and our major lenders that serve that market.

How big do you think -- I heard that that market is only going to be really 10 to 15% in size. I think there's a misperception that a lot of people think that will completely dominate the market.

I'm sorry what --

The deep seeded premium as part of the overall insurance premium in force market. What type -- how big of a market share do you think that could ever get? Of deep seeded cap.

What percentage of NIW would that be for the industry?

Yes.

Yes well, I think it's in the neighborhood on the flow business of probably a third of the business. On the flow side.

Okay.

So then you have the bulk opportunity and also at some point, a lot is going on in the 80-10-10 world, as you know we've lost a quarter of the marketplace for mortgage insurers. Over $100 billion of loans that could have been insured by our industry that was not and I think things are turning in that world as -- as losses will happen and I would expect somewhere down the line capital charges to change at some point are reflecting that higher loss. And so we've got that coming back to the marketplace also. I do think, as people work through -- but, again, every individual company's own decision on how to deal with the higher seed than excess of loss but I do think in looking at how business will perform going forward, others, I would think, would make a decision similar to ours, but again I can't forecast.

So Curt, you are saying about a third of the market right now is seeding 40% of their premiums right now?

It is with lenders that are seeking those higher terms or have, yes.

Okay. And -- but I guess my major question is --

Referring to the flow business.

Especially in the flow. A lot of people feel because of the consolidation open the originator side is that the -- the power is in their hands and they will force the M.Is to take this type of concessions. And I guess my question is -- a lot of people feel this business is, you know, don't have a lot long-term profitability in it because of that scenario. That's what I was kind of looking for, kind of the answer, is can these aggregators force this stuff down your throat?

Well, I again, from my standpoint, no because it's not long-term sustainable. In my opinion, and you can only get what's being offered, and I think the market naturally will -- will get to an economic scenario where people have to adjust accordingly on what they offer. I would also say, Paul, relative to the consolidation on the lending side -- I mean, that's still -- that's still a question that needs to be resolved too. As we've gone through these periods with high prepayment speeds which I think will be more the norm than the exception going forward given the ease of refinancing and the information in the marketplace, I don't know if people will want to consolidate into the mortgage lending/servicing business because of the impairment risk involved within it. I've been in the business for 26, 27 years and I've seen a lot of consolidation and then deconsolidation and then consolidation and then deconsolidation, so I would not, as we sit here today, say that scenario is, you know, what the outcome might be either.

Okay. Thanks, Curt.

You bet.

Gentlemen, at this time, I'm showing no further questions.

Great. Thank you.

Okay with that, thank you for the wonderful questions and have a good day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.