MGIC Investment Corp (MTG) 2004 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 should require assistance during the conference please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Thanks, Michele. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me this morning to discuss the first quarter results are Curt Culver, President and CEO, Mike Lauer, Executive Vice President and CFO, Larry Pierzchalski, Executive Vice President of Risk Management and John Fisk, Executive Vice President, Strategic Planning.

Our earnings release of this morning includes additional information about the company's quarterly results; which we will refer to during the call and include certain non-GAAP financial measures. The release of additional information can be accessed on MGIC's home page located at www.mgic.com.

During the courses of this call we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that can cause actual results to differ materially from those discussed are contained in the quarterly earnings release. If the company makes forward-looking statements we are not under taking an obligation to update those statements in the future in light of subsequent developments.

At this time I would like to turn the call over to Curt Culver. Curt?

Thanks, Mike, and good morning.

Net income in the first quarter totaled 130 million compared to 141 million a year ago. New insurance written forth quarter totaled 12.9 billion, 10.8 billion came from flow and 2.1 billion from bulk. Persistency ended the quarter higher at 51% up here from 47% last year, or last quarter, rather. As a result of the low persistency and low insurance written volume, insurance in force declined to 185 billion from 190 billion last quarter and 196 billion a year ago. We now have 5 quarters are the average insurance in force has declined and it has had it's significant impact onrevenue growth, especially this quarter when coupled with the slight decline in average premium earned.

On the credit side we were delighted to see the significant improvement in the delinquency notices from just over 86,000 at year end to just under 81,000 at the end of the first quarter. Larger tax refunds and an improvement in the economy both played a role in this positive development. We are also seeing some improvement in the cure rate on new delinquencies which again should have a positive longer term impact on losses.

On the in flip side paid losses were as expected at $142 million, up $53 million from a years ago and $18 million from last quarter. Were we also strengthened loss reserves by $49 million, reflecting higher claim rates on existing delinquencies as well as higher severities.

Finally underwriting expenses were down 9% from a years ago and 7% from last quarter, reflecting lower levels of insurance volume as well as contract underwriting.

Looking at the remainder of the year we clearly are encouraged by the improvement in the level of delinquencies. The question is, did the improvement come from tax refunds, which I don't think are as sustainable, or from improvements in the economy and job growth which clearly are more sustainable. Therefore, before we get too optimistic we would like to see another quarter of minimal activity.

Regarding claims paid as Mike discussed last quarter, they are tracking as planned and should approximate $600 million for the year.

Finally revenue growth as machine in the first quarter will continue to be challenged throughout the year by last year's lack of insurance in force growth.

So with that let's take questions.

[Caller Instructions]. Our first question comes from Paul Miller with FBR.

Thank you very much. I guess you made in your opening statements that you're not sure that the seasonality issue or improving of the economy, so how should we look at reserves going forward and, because I guess you are not changing what your pay loss expectations are but we did see some improvements, so could we see lower reserves going forward?

Paul, this is Mike Lauer. I guess what we were trying to indicate was that given the trend that we saw in March we would anticipate that subject to changes in the economy we would stay at pretty much this level. However, in the event as Curt mentioned that the economy continues to improve and we see lower delinquencies at any kind of significant level I think then you'd see lower curves and lower reserves building. Relative to changing the forecast at this point in time it would be too early. We are looking for confirmation of the trend if you will in April and May and June.

Thank you.

Our next question comes from A. J. Grewal of Smith Barney.

Just a follow up on that, are you saying that your reserve levels are going to stay at the current level or is it going to increase quarter by quarter? Secondly, what's driving the growth in the investment portfolio?

Well, on the second part the growth investment portfolio is all just cash-flow. Yields for the most part have been declining. I think in the first quarter this year we were at 3.6 versus 410 a year ago but just primarily cash-flow.

With respect to the reserve question what I was indicating was that if the trends stay at this level with respect to delinquency inventory and decline, you would anticipate seeing lower incurreds and lower reserve building. So the incurreds level, if will you, is going to be a function of what happens to new notices? Do we begin to see an increase of delinquencies, a flattening, or a declining. So I would say if we see notices increasing in the remainder of the year we would look to some increases in incurreds and reserve building. On the other hand if notices stay flat to declining we would be adjusting incurreds downward as well as the reserve build up. But, again, at this point in time it would be too early to forecast that.

Okay. Your tax run rate. Could you give us an idea -- it's jumped quite a bit in the quarter to 27. What do you expect?

I think for the balance of the year we should be at about this level. We did have some reporting convention changes. We pointed out that last week. And changed how we report our investment in equity and subsidiaries just to clarify, I guess improved reporting if you will on that line. The tax rate currently is about 26.5, 27, should stay at that subject to any changes. We don't see any significant change in our investment yield. What could change that tax rate if you will be whether or not operating income declines as a percentage of duty income and at this point in time I don't see that.

Thank you.

Our next question comes from Robert Ryan from Merrill Lynch.

Good morning.

Good morning.

What should we read into the relative volatility, I would say, on the paid claim number? Very, very favorable in the 4th quarter and then a substantial rise sequentially in the first quarter. What's your current thinking given what's happened in the late first quarter to mortgage applications in terms of volumes for the second quarter as well as persistency improvement in the second quarter?

Rob, Mike Lauer. Let me just comment on the paid question and then had a Larry or Curt can comment on the volume. I guess I would say that we are not at all, there was no surprise here with respect to paids we didn't forecast an increase to 10 to $15 million for this quarter. It's slightly above that. And as Curt mentioned before we gave an outlook for paids last quarter for this year of about $600 million. We are still on that forecast.

And relative to the premium kicking up, I mean, relative to the second quarter, we should have stronger volume, both in the flow and the bulk that we experienced in the first quarter reflecting the fact that rates had dipped, I think, in March, and a lot of loans are closing and then we will get insured after the fact. So I would expect on the flow side you'll see higher volumes.

Also, the strength in the economy I think is helping us relative to spreads on the bulk side so you'll see higher volumes there, also; in the second quarter. Persistency should continue to tick upward but I mean, again, tick upward, not any dramatic movement within that. For the remainder of the year after the second quarter, now as we look to applications now you've seen a slow down, again reflecting the fact that it kicked back, the tenure has gone up pretty dramatically. So I think you will see a slowing in the second half of the year as we sit here now relative to the flow side. I think bulk will recover nicely; and continue to increase in persistency.

How would you characterize the bulk pricing market during the first quarter given what seems to be relatively low volume?

It was pretty much in line although a little less than what we had done in the last 2 quarters of '03.

Thank you.

Probably down about 10%.

In terms of the volume or the pricing that you were?

The pricing.

Gotcha. Thank you.

You bet.

Our next question comes from Brad Ball of Prudential.

Thanks. Curt, you mentioned some improving trends in the cure rates. Could you talk about what's driving that in the quarter?

Well, I think it may be, again, we are never certain what that is. It could have been the fact that people got an early, they were one month delinquent coming off the holidays and got a tax refund and cured right away. But we have seen that really I think over, Larry, if I'm correct, over the past year that flattening out and starting to increase throughout even late last year and continuing that this year. So part of it may be the tax refund but I think also it has been a case that jobs are no longer being lost and we are gaining jobs and as a result of that these new delinquencies are curing. Larry do you have something -- Larry is not with us, he's in another location, do you have something?

I can confirm all that. The home prices are still going up and rates are still low but I think it's more now that the job losses have slowed and we are starting to see some gains, significant gains, and that's a positive sign, coupled with lower new delinquencies and a firming of the cure rate kind of confirming one another. I guess the question with regard to the new notices is that a short term lived positive in terms of being driven by taxes or is it more sustainable given that it's the economy and jobs? Looking at the cure ratio firming through time it tells me it's probably economy and we are probably getting an added boost in the short term from taxes as well. But I think it looks from the cure rate not just spiking in one month or a quarter but gradual building over the last couple of 3 quarters now, that it's the fundamentals of the economy playing through.

So these are the trends that you'll be focusing on before making any update to your reserve builds?

Yes.

Okay. Separately, Curt, if I may, can you give us an update on what you're hearing on the tax deductibility of mortgage insurance?

Yeah. The Senate reached agreement on the fifth ETI bill last Friday and that will be considered when Congress returns the week of April 19 and our provision is part of the, of that Bill. So it now has passed the Senate twice. The fifth ETI will be taken up by the House, and there it's a little tougher sell and in fact our provision is not part of the House Bill. We are optimistic from the work that we've done that it will be added at conference. So again I'm optimistic relative to its passage.

What has changed is that it had been rescored from $600 million impact to $4.2 billion impact and as a result of that, if it is passed, it will be included with a number of the tax bills that are sunseted annually. So we'll have to go through this process annually. But there are enough enabling legislation to have extenders on these tax provisions that again the sunsetting shouldn't be an issue, either. So we are optimistic that as they come back the week of April 19 and it's taken up by the House that indeed we'll see positive movement.

Thank you.

Our next question comes from Kenneth Posner of Morgan Stanley.

In the past, Curt, I think you and some of your colleagues have talked about an ultimate claims rate for the business that might be around, 4% if I remember correctly. And I'm wondering how is the strengthening or the weakening of the economy could change that view? Could it push do it town 3% or would it push it down to 3.5%? Is that something realistic at the economy goes from losing jobs to creating a few?

That may be one years worth, Ken. I think overall as you look at our business and you are talking in terms of a 90% loan at the 4 percent, but what we look at is basically a 40% loss ratio; operating year in, year out. And I think that is pretty much ingrained relative to whatever happens on the economy. If the economy improves maybe it gets to 30 to 35, if it's running not quite the high levels that you it did in the mid 90s then maybe you are at 45. But overall I would look for these books to perform at around 40%.

The reason I don't think they will get to the levels that we saw in the mid 90s when the economy was strong and we had 10 to 15 percent, is that frankly, credit quality has declined and reflective of more affordable housing, trying to get more people into housing and I think as a result I think loss ratios moving forward will always be in that band of 35 to 45% nationally.

And when you look at default trends is there typically any kind of seasonal pattern? There are in other types of loans.

Larry, as far as that flowing through our book I think we've seen quarters where they certainly change.

There is a seasonality but certainly the economy will trump that and some of these tax refund things will trump that. Typically the low point is kind of like the summer and as you move into the 3rd and 4th quarter, the activity picks up again and then in the first quarter here you get help, I guess, from tax returns and seasonal employment around the holidays. So the high point would be that 3rd, 4th quarter. The low point, the summer, first, second quarter.

One last question if I might. When you think about the paid losses going out to the future, the tax refunds or the economy will certainly help or hinder, depending on what's going on, to what extent, I mean, you guys put on big books of business in 2001, 2002 and 2003. Will those seasons with the typical pattern of losses peaking in years 3 and 4 or will that kind of pattern be today dwarfed by the economy or will the refinance boom have in fact changed that pattern?

I will start the answer by saying that the, you're right, the typical pattern is that 3, 4, 5-year, but what happened with some of those books you mentioned in 2000 - '01, they have seen significant run off, they refinanced out into lower rates, and so there's fewer populations remaining in the out years now. So I think those books are going to be much more forward loaded on notices and claims and not have much of a tail. Because there's just not the populations that are typically out there. We are seeing the new node activity really dive from those books because of populations are much run down.

Thank you very much.

Our next question comes from David Hockstim from Bear Stearns.

I was wondering if you could talk a little bit about the average premium rate and whether that might stop going down over the next couple of quarters? And I had a question about the [Seabass] and Sherman earnings and if it's possible to say how much of the roughly $14 million from Seabass and $9 million a quarter from Sherman was the recurring and how much was gains, one time gains?

All right. David, let me talk first about the latter subject, Seabass generated about 14 cents in the quarter versus 6. They did 4 transactions. I don't have the numbers in front of me with respect to gains versus revenue, but both lines I know were up recurring revenue as well as gains on transactions. I think going forward it's difficult, as we said, every year to forecast it because it's transaction driven. I would think that, I would assume a flat level from here on in subject to any changes with respect to what they do in transactions.

Sherman similar, they, I would think this level for the balance of the year and maybe slightly less, I guess, in the second half of the year. So the first half of the year may be about at this level and then flattening out in the 3rd and 4th quarter for now for a forecast.

With respect to more information, we will have to provide that after the call and maybe put some additional information in our release going forward.

Relative to premium rates. They are, they are about 72.9 I guess for the quarter. That's down a tick. I would anticipate, with this mix of business and the lower mix of bulk business that we would anticipate that average premium rate to continue to tick down in a quarter to quarter, or maybe stay at a lower level in the second and 3rd quarter, depending on what happens, again, to the bulk business as Curt talked about, it continues to be changing quarter to quarter. But I think for the most part the average basis point will tick down in the second quarter, maybe stay there subject to any changes in volume.

On the premium rates on the flow side, as we move into a purchase money market what typically happens is we'll see higher LTVs. Those that have a higher premium rate, and if rates move enough we will say more ARM volume. That segment has a higher premium rate. So on the flow side I think there's potentially a firming, even upward depending on how much purchase money and drop off in refinances and whatnot.

On the bulk side, I think it's a matter of how much volume we write. We are down from 6 billion to 2 billion. I think that impacted the overall premium rate. To degree we would write more volume on the bulk side that would also firm up the premium rate. If we stay where we are then that will put somewhat flat to downward pressure on the premium rate.

Can you tell us how much was written in excess loss captive in the quarter and where we are in the overall book?

We will have that in a second, David.

Maybe now you can talk about the regional variances in credit, this quarter?

Larry, you want to take that now?

Sure. On the market, I guess, I am seeing much improvement in the Midwest, the manufacturing areas yet, Ohio, Michigan, Wisconsin, the auto manufacturers inventories remain high and that has been a good market for us, a lot of our business is tied up in those markets. I guess the positive side is maybe the reductions in the employment have slowed but certainly it hasn't seen the recovery that the other areas have seen.

Areas of primary concern, Seattle, airlines, San Jose, the high tech, although we don't do much business in that market, Denver, Kansas City, telecommunications are soft, and parts of Southeast, Atlanta, Georgia, seems to be not so much economy as a bit of fraud prevalent in that market that we are dealing with. So overall pretty good. Midwest manufacturing still soft. Hopefully that recovers here.

Do you have?

Yeah, for the quarter, this is a number on the captive and the risk area, there's always a quarter lag because of the recording, so for the 4th quarter, just under 51 %. 50.8% of the flow was in the risk sharing arrangement.

Is that what you are looking for?

What about on the insurance in force?

46.1 on the last page of the press release you get the last several quarters.

Okay. Can you just maybe, Curt, give us an update on where relationships stand with the lenders that were doing deep seed captive deals before and now aren't with MGIC?

Well, it has moved forward on a limited basis with a couple of customers. If we look year over year it's more positive than it had been. We are doing business with a couple institutions that had on the retail side discontinued business with us, although to a limited extent. So we are pleased about that. Relative to the industry itself, really only General Electric has made a movement. There's been rhetoric by others but only General Electric has made a movement as far as what we see. And taking a position somewhat similar to our own.

To summarize it I would say it's more positive than it was a year ago, David. We have improved some retail relationships. We are still doing business with those institutions on a correspondent basis which is a significant part of their business. So all in all better than it was a year ago.

Okay. Thanks a lot.

You bet.

Our next question comes from Mark Brown of Darryl Handley.

Good morning, fellows. Just two quick questions. One is this is persistency is a twelve-month rolling number, do you have a number for the quarter?

I know we do. Mike will have that, also.

63.7.

63.7.

Terrific. One other question I wanted to ask, your risk to capital ratio now continues to improve as time goes on and I'm wondering what level you feel is necessary in the environment today and what level you would think is necessary if things start to improve and how I should think about your use of that capital if it were to become free?

Well, relative to the level it certainly is adequate now and we are looking for ways to utilize that through other investments, buying back our stock or increasing our cash dividend. So all 3 are being looked at as we speak, because we are certainly at a very strong capital position as we sit here today. Clearly given what we've seen on the delinquency side, really the last 2 quarters. If you remember the 4th quarter we basically had a flattening of delinquencies. We saw a it spike up in January but then terrific improvement in February and March so we've had 2 quarters in a row that are very encouraging on the delinquency side. So I think we are sitting fine there. So, now we need to deploy the capital to get the return on capital higher. And we are looking at all 3 alternatives.

Okay. Thank you.

Our next question comes from Howard Shapiro of Saks Capital.

If you can, could you just tell us what the weighted-average coupon in your portfolio is today?

Howard, we haven't heard from you in awhile.

Good to hear your voice.

Yeah, good to hear from you, Howard. We'll have that in a second.

Thanks.

I'm fumbling through some papers, Howard. We don't have the specific weighted-average coupon of the insurance portfolio but on the flow side, what I can do for you right now is say that half --

Are we looking for investments?

No, I'm talking about the mortgage insurance portfolio.

Oh, okay. That's a different question. It's roughly half of it is below 6.5% but I don't have a weighted average coupon of the entire portfolio for you offhand.

Okay. Thanks. I will circle back.

Our next question comes from Richard Diamond of Inwood Capital Partners.

Good morning, gentlemen. First, the prior interest rate rising environments, there is a prevalence of adjustable rate mortgages that didn't exist in the past. How should we thinking about the impact of rising interest rates on delinquency going forward given the stresses of ARMs and also I have one more follow-up question?

On the flow side, into percent, 92 percent of the risk in force is fixed and the remainder is some form of ARM. On the flow side, given the number of years of low interest rates and the dominant is fixed, I don't think there's much of an issue there. It's more on the bulk side where roughly 60% of the in force is an ARM. That ARM is typically a 2 or 3-year ARM. Meaning that for the first 2 or 3 years, the payment is fixed and then it's adjustable. Typically it's a LIBOR based instrument as the index. And it's really with an eye towards the possibility of interest rates rising here that I guess I'd say we've taken here a more conservative nature in view of ARMs in the bulk market versus the general capital market. That's one of the reasons why I think our volume is down as we priced the ARMs up for the past couple of quarters whereas the market was still pretty hungry for the ARMs.

But the 2 or 3years because of the persistency of the bulk business after 3 years half of the business is gone so I guess the saving grace in all that is by the time most of these come due, a lot of them, half of them are gone. And then the payment shock on the half remaining that you have to worry about.

So some of those people after establishing credit for a couple, 3 years, will have the opportunity to move out of the bulk market at a higher interest rate into the A paper world. So even though rates move up here they are able to move into prime instead of the sub prime market. And that's helpful to us.

But it's that 3, 4-year population out of the original population that the payment shock occurs and we studied past payment shocks. By and large there hasn't been much of a history because rates over the last ten, 15 years have been generally down. We haven't seen much of a payment shock except for a few periods in the 90s. But it does pose a risk to us but we priced that up and we are mitigated by the fact that by the time it occurs, 2, 3 years out not much of that original population is remaining.

The second question, is you've been very conservative in writing or providing insurance on all day paper, especially no docs for some of your competitors have been very aggressive in taking on that business. I've heard from industry sources that there is increasing delinquency in the all day market because of substandard underwriting. I would just like to here your thoughts on what's going on in that specific marketplace and, secondly, if delinquency does rise dramatically in all day, how that may spread over to other markets? Thank you.

On the all day market, on the bulk side, 20 some-odd percent, 24% or so of the bulk business is all day. All day really is stated income or no income, meaning that instead of documenting how much a borrower makes, they simply state, I make 50,000 or 75,000. So it's very difficult to underwrite. In fact I'm not sure how you underwrite that; statement by the borrower. They do pay up for that in rate. And all of us at MGIC scratch our heads as far as why, what's the logic behind that other than self-employed, where people try to shield their income from their tax returns, it just doesn't make much sense to us other than qualifying people that normally can't qualify.

And that's why I think you are seeing the higher delinquency rate. It's not a convenience matter in this day and age. It doesn't -- you don't have to produce that much documentation on your income. The hassle factor is low. I think it speaks more to qualifying people that normally wouldn't qualify otherwise. On the bulk business, a good chunk of our business 24, 25% is the all day. But we are comfortable with it because most of that is 80 and under LTV. So we've got 20 or more percent equity. On the full business, you've got the same situation except that now somebody is putting only 5% down. So you don't have the payments to protect you. We've been very conservative with that and we are experiencing higher delinquency rates and we are kind of just managing the market in relationship while this hopefully plays out.

You really have to, and I've authored an article on Mortgage Banker Magazine, I think it last month relative to our position on it. We have discontinued business arrangements with some significant originators and aggregators on this project and it all boils down to the point Larry mentioned, why would a consumer willingly pay a higher interest rate if the only thing that they need to do get that lower interest rate was to document their income. And 80% of the business that we've seen come in over the past year has been wage earners rather than self employed so it's very easy to get a pay stub, take it in and reduce your interest rates.

So why wouldn't you do that? We think it's because you couldn't qualify for the house and that's been born out relative to our short experience in the sector as delinquencies have been 5 to 6 times higher and we think the claim rates will be probably at the same levels relative to standard [INAUDIBLE]. So unless you have great LTV protection, which we do on the bulk side, it's a product that does not make sense for people that are wage earners. I understand that on the self employed it's been a product around for many, many years in that sector. Once you get into the wage earner where you can easily document your income and they knowingly take a higher interest rate, our management team and our experience indicates there's an issue.

Do you worry about some systemic risk in markets that are, where houseing prices are rising very quickly and people are able to qualify with monthly ARMs. Not the 2 and 3-year paper that were creating a tinderbox of potential house foreclosures based on underwriting that may not be tough enough? And how do you guide against that sort of systemic risk?

Well, through our own underwriting process and as indicated by the fact that as I say we've taken strong positions with major originators and aggregators on this product that we can't just insure it unless we have LTV protection or dramatic credit score improvement. Relative to the business itself, however, and values increasing, that's always part of the risk. But long-term, I just don't see of housing bubbles in this business. I mean certainly and a regional basis and that's the nature of the business and why our company has always done so well, great dispersion of risk that we have nationally. Because regions are always going to go through bubbles. And we've had dramatic run ups in the Northeast. I don't know if that's sustainable. And then markets adjust and you move forward while the rest of the country is operating fine.

So I don't think credit standards, this is not overtaken the market relative to the all day area. It is a piece of the market and I think through industry discipline of our industry, Fannie Mae and Freddie Mack and originators, those issues will be dealt with on the credit side.

We thought the same thing in 1985 and then we had had the explosion in Texas in '89. I don't mean to go on about this but in '85, '86, there was probably no better investment than a house in Houston, Texas, and just I would love to hear about the safeguards that are in place today to prevent a recurrence of what occurred in the late '80s?

Dispersion of risk. You saw the same thing and you saw it in Houston and you saw it in Colorado and Wyoming and Alaska. Clearly the oil patch had a large impact within those states. It didn't impact the rest of the country, however. So, same with New England in the late 80s and Southern California in the early 90s. But, again, you had those markets tank, but you had the rest of the country performing nicely. Dispersion of risk is how you deal with those issues. You also look like we did on an interim basis and an LTL TD basis if you think the market is softening and do lesser risk instruments within those. You always have to support those markets or else you really could get an event.

There are and there always will be regional bubbles relative to housing and it's the nature of the beast. On a national basis real estate values are going to go up 3, 4, 5% annually for the next 2 decades. It's just within certain sectors that you are going to see problems happening. That's where you get back to, again, being a national player, doing a lot of business in all markets, those take care of those issues.

Thank you very much.

Our next question comes from Paul Miller of FBR.

Just a couple of quick housekeeping issues. You announced you were going to start reporting Seabass earnings below the line and there's a couple of headlines today when you released earnings excluding capital gains and excluding Seabass, you guys made around $1.11. As analysts, what type of guidance do you want to give us in the sense, should we start reporting your numbers excluding Seabass numbers?

No. All we did is to clarify, the equity interest we had in joint ventures was to break it out separately from other revenue. That's all we did. So we broke out income from joint ventures separately out of other revenue just to clarify the reporting.

You are not giving any indication to the analyst how to report the numbers? That's all I wanted to know. And the other issue was, in your last sheet on page, I guess it's page 19 that I have, I really do like this sheet when you break out Seabass investment and Sherman investment in the first quarter of '04, your Sherman investment went from $63 million to $45 million. Can you add some color to that?

We received a dividend from Sherman, a capital distribution from them, about $28 million.

Okay. And the other issue is, how are the AAA and AA spread in the asset back market doing? Are they still very tight and if they continue to remain tight is that going to hurt you on the bulk purchases going forward?

They fell probably sometime early November. They were quite wide pretty much throughout '03 and that allowed us to right the business we wrote at the pretty decent premium rate. They started falling in November and fell to January, and January, February, through the end of March here they, they are flat. But ARM spreads have fallen just as AAA and BBB spreads fell, 150 basis points. So we are not seeing it in the spread numbers themselves yet. It's more anecdotal talking to various investors out there that things seems to be firming up. And I think this interest rate spike, or increase here as of late, too, will increase and work in our favor.

So do you think with the rates going up some of these spreads should widen out which should open up the bulk market to you again.

Right.

Thank you very much.

Our next question comes from Ed Kosner of Moors and Cabbots.

I don't know if you mentioned the cure rate, if you did, could you repeat that? I missed it.

We don't give that out.

The other thing, with the delinquencies, I know you are looking for a trend and you want to be more cautious there, do you look at that on a monthly basis and could you tell me for January, February, March did you see a trend down in delinquencies or notices or do you just look at it on a quarterly basis?

No we look at it monthly but as Curt mentioned in January there was a spike up and then it corrected in February and some reduction in March. So the tread for the last 2 months was positive. And what we are indicated is relative to the total year it would be too early to forecast that we would continue to see that kind of improvement all year. So we want to, if you will, look at April, May and June to get more confirmation of what we think is really happening to delinquencies.

And the spike in January, is that like a normal seasonal item?

Generally that's what happens, yes.

Okay. Thank you very much.

You have a follow-up question from A.J. Grewal of Smith Barney.

Yeah, hi. With the remaining other income about 11.5 million, could you give us an idea of what's driving that and what you expect on that line item? And secondly, you made some comments about investing capital in some buybacks, dividends and some other opportunities. Could you give us an idea what have those other opportunities could be and or what you are looking at? Thanks.

No, we can't. On the other opportunities. And on the --

Other revenue is primarily contract and service fee revenue that we get and as Curt mentioned the contract revenue or contract underwriting volume was off significantly so that's really the decline quarter to quarter. I think it may come up a little bit here in the second quarter because we saw increased activity and then basically flattened out for the rest of the year.

Thank you.

Our next question comes from, we have a follow-up question from Kenneth Posner from Morgan Stanley.

I'm wondering to follow up on the question on capital levels. Is it possible to characterize where you stand vis-a-vis the rating agencies? Are there things, do they give you specific ranges where they think they would be comfortable with the capital or are there issues that they are monitoring before they would let you raise that leverage ratio a little bit?

Well, I think that for the most part the ratings have not become a number rating if will you anymore, okay. Maybe ten years ago if you said you were 20 to 1,it will be AA. But I think they look at everything, and not only the capital position we have but clearly as Curt pointed out at 7 or 8 to 1 we are considerably over capitalized. But they also look at everything else that you are doing, the business you're writing, the profitability of the business, the management depth, et cetera. So there is not a really a number anymore that I would say they tell you must be at to be at a certain rating. It's a compilation of everything they do.

But clearly I would say that as Curt mentioned we are well capitalized probably more than we need to be. We have excesses capital and we are looking at ways to deploy that or utilize it, et cetera. We had the luxury if you will of putting on less risk than we were generating surplus the last 4 years or 5 years.

So would you characterize your situation as being over capitalized not just in your own view but with respect to the rating agencies opinion so that you could deploy meaningful or at least certain amounts of capital and raised leverage rate ratio without running a foul of the rating agencies?

I believe if we went with them with a strategy to utilize capital that was business prudent that they would accept it, given no significant changes in business trends. I mean obviously last year we saw some significant changes in loss and credit loss development. But notwithstanding that, I believe that we would be able to discuss and reach some kind of consensual agreement that we could use some capital for some other reason.

The next question comes from Robert Hottenson from Goldman Sachs.

For some reason I wasn't getting through but that was good because a lot of the questions I had were answered,

Good from your standpoint, Bob, or ours?

I have some questions answered and I am going to beat the delinquency thing to death. I was interested if you striate the portfolio by either loan to value or loan size or FICO score it would give some indication of the segment of the portfolio that would be least affected by tax returns, whether you have any pattern of delinquency development that would shed some light on the question that you highlighted at the very beginning, Curt?

Bob, I think what we did is we looked at delinquencies in February and March by all different segments, geography, lender, product segment and, as Larry said earlier, it was really across the board. There wasn't any significant deviation anywhere. So we saw it across all products, both bulk and flow. As well as geography. There wasn't any significant geography that did not participate in the improvement.

That's interesting. So that suggests that out of the blend of both an economic development and the tax refund issue as well.

I would certainly think so, Bob, and as I mentioned earlier and maybe you didn't hear it but it really reflects back to the 4th quarter, also, where we had the flattening. So we really had 2 quarters that I think, again, would lend some credence to the job or at least the fact that people reason losing jobs any longer.

In the inventory, I guess people tried to ask this in different ways but the foreclosures that you're executing that in effect get cured during the process of foreclosure or people come up with the money and take you out as the thing is being foreclosed, has that changed?

You mean the mitigation opportunities? I'm not sure what you ask, Bob.

Mitigation.

We haven't seen, again, I'm not sure what the question was but has there been an increase of mitigation opportunities, I would say no.

That's the question.

Yeah, there has not been a material change at all, no. It's pretty much to flat to where it's been the prior quarter.

Sounds good. Thank you.

Our next question comes from Geoffrey Dunn of KBW.

Hi, I couldn't get through either, I will just follow up off-line.

Okay. Operator, any other questions? Hello? Anyone there?

Yes sir.

Are there any more questions?

We do have a last question from Ed Kosner.

One more question, then, thank you. Hello? Operator? Hello? Michele?

Yes, I am here. I guess he chose not to ask the question.

Thank you all for your interest in MGIC. Have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.