MGIC Investment Corp (MTG) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MGIC Investment Corp. second 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 0 on your touchtone telephone. As a reminder today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me today to discuss the second quarter results are Curt Culver, President and CEO. Mike Lauer, Executive Vice President and CFO. Larry Pierzchalski, Executive Vice President of Risk Management.

Our earnings release of this morning includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. The release and this additional information may be accessed on MGIC's home page located at www.mgic.com. During the course 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 could 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 undertaking 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. Good morning. Net income in the second quarter totaled 154.5 million compared to 144 million a year ago. While diluted earnings per share totaled $1.56 versus $1.46 a year ago. New insurance written was 16.1 billion comprised of 13.2 billion of flow and 2.9 billion of bulk business. This is up 25% from last quarter but down 37% from a year ago. Persistency rose to 53.8% up from 51% last quarter.

Insurance in force continued to decline and finished the quarter at 180 billion down from 185 billion last quarter and 194 billion a year ago. The loss in insurance in force as a result of a number of factors. The first is just that we are in a significantly lower origination market which is down approximately 35% from a year ago. The second is a significant strength of structured transactions that avoid mortgage insurance such as 80/10/10s, 80/15s, 80/20s.

Especially at the 700 plus credit score. In fact, I would estimate that on-- in the 700 credit score range 80% of that business right now is being done through structured transactions of some sort and it has dropped our percentage of business done in that sector dramatically.

Third, while persistency is moving in the right direction at 54% it is still at very low levels historically. Compounding this issue is the huge size of the books written in the past 3 years where we averaged $92 billion of insurance versus the much smaller book that we are insuring this year.

And finally, the fourth is fewer opportunities in the bulk sector as spreads remain relatively narrow, limiting our opportunities. Further more, we are seeing our competitors become much more aggressive in pursuing this business. So the impact of these four factors played the major role in the decline to net premiums earned. On the positive side our credit loss development continues to improve.

Delinquency notices were basically flat from our first quarter results and down approximately 5,000 notices from year end. Paid Claims were in line with expectations at 140 million, down 2 million from the first quarter. Reflecting the improved delinquency development, as well as increased loss mitigation opportunities, we added 14 million to loss reserves bringing losses incurred to 154 million, down 11% from a year ago and 19% from last quarter.

Also on the positive side were our joint venture results as both C-BASS and Sherman had excellent quarters. C-BASS, in particular, benefited from ideal business conditions in the quarter and have played out in their financial contribution. As we've discussed in the past, however, the results can vary widely based on opportunity and we wouldn't expect such strong opportunities in the second half of the year. Finally in looking at the remainder of the year I believe our results will be mixed as we continue to be challenged on the revenue side but encouraged on the loss side. And with that, let's take questions.

Thank you, ladies and gentlemen if you have a question at this time please press the 1 key on your touchtone telephone. If you question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again if you have a question please press the 1 key.

Our first question comes from Paul Miller of FBR.

Okay. Thank you very much. Curt, correct me if I'm wrong, if my memory serves me correctly, you were talking about adding about $50 million to your reserve per quarter for the rest of the year. If credit trends, you know, were as you were expecting at the beginning of the year and you know in this quarter you only added 14 million.

Are you -- are you assuming that $14 million in the credit reserves will be adding to reserves will be the rest of the year? Or at some point is there going to be an inflection point where the credit outlook looks is going to look so good where that you could be releasing some reserves?

Let me answer this for Curt. It's Mike Lauer. In the quarter we had paid claims of about 140 million down just a couple from the first quarter which was about 142. And earlier in the year we had thought maybe that claims would increase modestly throughout the year. Right now they look to be trending relatively flat upwards. So I think the beginning of the year we talked about claims being in about the 600 million level for the year.

Now, I would estimate maybe 575, 580. So we have taken the reserve or the paid for cash lower. Similarly as we look at notice development we had a modest decrease beginning of the year in delinquencies. And in the first quarter we increased the reserve about 49 million, and only 14 million in the second quarter. Earlier in the year we had thought that perhaps as you mentioned the increase of incurreds and over paids could be as much as 200 million. We have now reduced that forecast somewhere in the area of anywhere from 100 to 120 million for the year.

So, basically what we're looking for in the second half of the year is a modest increase in delinquencies. Seasonally we do get some increase in the second half of the year with respect to delinquencies. We believe now that may be moderated. Relative to the increase in the reserve some of that will be determined whether or not we get an increase in delinquencies. Secondly, whether or not we see mitigation, Larry will talk a little bit later about loss mitigation efforts have improved so some of that may be mitigated.

So for the balance of the year we're looking at an increase at about 14 million to 25 million a quarter for the rest of the year each quarter. That will all be dependent again upon what happens in the economy, what levels of delinquencies we see, if it continues to be at this lower level. And what if any improvement we continue to see with respect to loss mitigation.

Would there be at some point within the next 6 quarters where your outlook if your outlook stays consistent where we're talking about now, where your paid losses will be higher than your incurred losses?

Yeah.

You --

Yeah mathematically that can happen. Obviously if we do not see increases in delinquencies and in fact also get improvement in the claims rate factors I think that actually could happen.

Okay. Thank you very much.

Thank you, Paul.

Our next question comes from James Shanahan of Wachovia.

I'm sorry. My question has been answered. Thanks.

Our next question comes from AJ Grewal of Smith Barney.

Yeah hi. Can you talk about the severity? It looks like it flattened out and you were alluding to the loss mitigation efforts and how they are improving. Can you give us an idea of where you expect severity to go? And secondly, it looks like the average investment growth has come down and, you know, what do you expect from the investment portfolio? Thank you.

Let me just touch on one aspect of the average severity. It is flat, roughly about 23.9 for the quarter versus 24. And Larry will talk a little bit about mitigation. Relative to the investment portfolio we anticipate yields to go modestly. I meant they are up modestly this quarter, not significantly. Cash flow is still positive. So the yield on the investment portfolio has been declining over the last 5-6 quarters relative to what has happened to rates. But rates just turned slightly and we anticipate yields to improve modestly this year.

Do you expect that -- that the full year to grow? I mean it looks like it was done on a sequential quarter basis and what do you expect from that?

Well, I think the portfolio decline, I think some of it is obviously is the mark to market decline if you will. In the unrealized gains FAS115. But cash flows were positive. And they continue to be positive. And we forecast them to continue to be positive throughout the year. Let me just clarify that. Last year we had an unrealized gain in portfolio of over 300 million and right now it is about 65. That impacts that balance sheet cash position.

And can you give some color on severity and what you expect there and what is happening there?

On the severity side it is really a function of the coverage, the average loan balance and the loss mitigation opportunities. I think coverage is pretty consistent. Freddy and Fannie's requirements are out there and on the bulk side it is pretty consistent as well. So, that is pretty consistent quarter to quarter to quarter.

On the average loan size each year because of appreciation and whatnot, the average loan on the newer books is higher than the prior books. So, all other things being equal, over time that should suggest a slightly increasing average paid. Now, the offset or more of the wildcard is the loss severity opportunities or mitigation opportunities. What I'm talking about there is opportunities to acquire a property and in effect have a lower loss than paying the percent option.

For instance, in California, you know, the average balances out there are, you know, above average. And but the economy is so well that if, you know, a loan does encounter problems we don't typically pay the option out there. We would, you know, be able to sell the property and in effect a loss that is lower than the straight percentage option applied to them. So really that last part it is really by a market by market. California has been doing well. That has kept claims from California relatively modest average paid.

And the rest of the country right now we are seeing a bit of improvement and, you know, for instance, in the last quarter or so our acquisition activity has crept up by a percent or so and this a seems small but the average paid between a percent option payment and an acquisition payment is substantial. So a small improvement on acquisition opportunities does a fair amount of loss mitigation to the bottom line there. So, coverage, loan amount, loss mitigation opportunities which really is a function of the various markets.

You know, we're seeing both opportunities as Larry mentioned on the acquisitions and while they set us up a percent relatively speaking that is large because it goes from 4-5% of the properties that we're playing claims on we're buying and reselling. And also on presales where we work with a lender or investor to sell a property prior to a claim being submitted to us which also mitigates our loss versus the payment, the 25% option. Those are up also. So we're seeing excellent loss mitigation opportunities right now which speaks to the strength of the real estate markets.

Thank you.

Our next question comes from Mark [Ambrone] from [Darrel Hanley].

I good morning, fellows.

Good morning, Mark.

One first thing is what was the persistency rate just for the quarter?

For the quarter it was at 54%. 54.6.

But that that is a 12 month rolling number isn't it? Can you calculate it for me just for the quarter?

For the quarter, the annual persistency at the end of the quarter was 53.8. The quarterly run rate was 54.6.

Okay. The other thing I wanted to ask is now that credit appears to be improving and additions to reserves also appear to be lessening from your perspective, and yet you still have a lot of excess capital what are your thoughts and what should we expect in terms of this use of excess capital for return to shareholders? Whether it be dividend, share purchase or something?

As it looked right now, both share repurchase and cash dividend would be the mechanism that we are looking at as a company.

And what about timing from that perspective, Curt?

Well, that will be something that will be discussed in detail next week at our board meeting. So without giving an indication -- in 2 weeks, I'm sorry. So we'll know more in the next couple of weeks.

Okay. That sounds great, thank you.

You bet.

Our next question comes from David Hochstim of Bear Stearns.

Hi. Wondered, could you talk about C-Bass and Sherman in the quarter and how much of what you reported was another sort of unusual item or how much is recurring? And then could you just talk a little bit more about the prospects for some recovery in bulk business over the next few quarters?

Larry, will take the bulk side first.

On the bulk side, just to back up. Over the past couple of quarters compared to last year spreads have narrowed and thus the MI execution brings less value. In April or so, we saw a slight improvement or widening of the spreads. So that has helped but there is still dramatically down narrower from a year ago. Volumes continue to remain high. It is a lot of cash out activities still going on.

So I would say that the bulk markets haven't quite seen yet the contraction that we have seen on the prime flow side. But going forward here as Curt mentioned, we have noticed some of our competitors become more aggressive in this market compared to prior years so there is increased competition there. We still have substantial competition from the nonMI execution and from the volume side, you know, I think for the next 6 months the volumes ought to be continued strong there.

Next year, you know, big question mark. I'm not sure whether or not these cashout opportunities stay as large as they are now. At some point I would guess maybe it tapers off or maybe these type of borrowers continue to use that cashout vehicle. But that would only be available to the degree we continue to see house price appreciation where they can kind of continually every couple of years, you know, go back and pull more cash equity out of their home.

We'll have to wait and see. We continue to try to improve our execution. Work on what we insure versus the rating agencies models to bring most value at the least cost. And we hope to write more I guess in the second half than we did in the first half.

Is there anything that in the market that would lead to an increase in a widening of spreads if rates move up? And I guess if rates move up to volume of business would decline in the market whether you get more or not. Could spreads widen as rates move up? Or not necessarily?

That is a market reaction to various things. You know, the economy and I -- I would say, you know, at the moment, too, the investors seem to want ARMs rather than fixed. Whereas if you are the credit enhancement provider like we are you worry about ARMs and payment shock. So you get a bit of a miss match between investor appetite for ARMs and from the risk side the payment shock concern.

Okay. Thanks.

David, on C-Bass their increase year to year on income was about 13 million and most of that was T&S securitization and increase in servicing and subservicing fees. The generally in the second and -- or the third and fourth quarter they flatten out and do about half of what they did in the second quarter. So and I would anticipate that that trend would probably continue. That has been the trend for the last 2 years.

And Sherman then keeps going up and any reason that should drop off?

I I wouldn't think so. It may be that they had 1 unique transaction relative to increases quarter to quarter but I think at this level I would expect them to be modestly down in the third and fourth quarter.

Okay. All right, thanks.

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

Good morning. Can you guys give us your latest strategy on, your know, captives and deep seeds and any updates on the tax legislation? Thanks.

Okay. On captives and deep seeds, we reviewed the 11 or 12 or 13 lenders that we had relationships with at deep seed levels. And, you know, all which were impacted 2 years ago relative to market share. And looked at each one of those customers relative to were there other attributes within what they do on either the loss or the expense side that would justify a higher seed. So that the margin would be at a minimum at the same level or higher than the 55/25s to us. And some of those accounts that we reviewed and went back because of their excellent loss performance, their high level of retail business where they outperform the market or where we have such good working relationships relative to expenses we were able to on a couple of accounts say we can give you some what more on seeding commissions because you out performed the market on the loss and the expense side of the business. So that our margin is actually higher than what it would be on the 55/25s where we had put a floor relative to margins.

So we have gone back to some of them in a couple cases we've increased our business relationship to, you know, where it was basically a couple of years ago. And other cases with other lenders that were just at the flat 40 with nothing different about it, we just can't come to that same conclusion relative to the return and, you know, we're there competing for their correspondent business but really not their retail business.

So we have seen an increase in business because of that strategy and actually our margins improved because of that. Relative to the industry, however, we -- you know, there's has been a lot of lip service but really no one taking the position that we have taken that we can determine anyway.

Relative to the tax legislation, relative to the tax legislation, that right now is part of the FISC/ETI bill that has been approved by the Senate twice. And that bill before they go out and recess next week they are just in the midst of choosing the conferees from the House and Senate side that's going to hopefully hammer out that bill in September. And again we have been approved as part of the Senate bill. We are not part of the House bill. We don't have the support of the Chairman of the Ways and Means, Chairman Thomas on that. And he didn't include our provision like he didn't many provisions as part of the House bill. And we got strong support in the House and from the leadership of the House.

In fact, we have 208 cosponsors in more than half of the Ways and Means Committee supports it and again the help from the leadership of the House that supports it. So that is a good sign and on the Senate side we have great strength given that they've passed this twice. In coming out of the FISC/ETI really most tax payers have no idea what that bill is. And it is always cumbersome for politicians to pass bill that have no benefit to the consumer. And this is one aspect of it that really is a consumer benefit. And so that's something both sides of the aisle like. So, where does that make it stand? We've got great strength in the Senate.

We've got great strength in numbers from the House. We don't have the Ways and Means Chairman on our side on this issue however. But we're hopeful coming out of the conference on the FISC/ETI in September that the provision will be added. And I'm still encouraged relative to that happening. But it wouldn't happen until September when they are back from recess.

Just out of curiosity was the 1 month persistency much better than the 54 number? Do you have the 1 month number?

I don't have the 1 month number with me.

I'm sure it is.

Yeah, I would presume so but I don't have that data with us.

Did you see a pretty significant ramp up in or ramp down in payoffs toward the end of the quarter?

Yes. We saw a ramp up.

So the -- is the delay effect of all the prepayments from the real low rates in February-March.

I'm sorry cancellations were down.

Cancellations were down, okay.

In June.

Yeah. That is a good sign.

For the quarter approximately a 45% cancellation rate but probably weighted more toward the front end of that quarter.

The trend is positive, Bruce.

Okay. Thanks.

Thank you, our next question comes from Adam [Eggleberg] of SilverCrest Asset Management.

Hey. Good morning.

Good morning.

I was wondering if you could sort of give us some insight into the capital issues? I know it was asked earlier. But you guys have so much capital tied up in this business relative to the risk ratios you used to write at 4 or 5 years ago. And I know you're generating a 15% ROE even despite that. But there is a ton of capital there. And if you could talk about the conversations with the rating agencies and maybe what the pressure points are in terms of you being able to release that. And what you think may be realistic, the realistic upside for shareholders is in terms of you giving us that back via share repurchases or dividends? Thanks.

There is not an issue with the rating agencies with respect to -- I mean the heretofore the issue has been increasing the dividend from the writing company to the holding company. And we've modestly increased that dividend over the last year and a half and right now we're dividending up about $44 million a quarter this year. In the -- in the future, we can increase that dividend about 15% a quarter. Or in effect if we need a special dividend we can go to our Insurance Commission in Wisconsin and ask for a special dividend. We have done that.

So I think the issue with respect to the use of the capital is relatively a business decision, not a regulatory issue. And that is, you know, what are we going to do with the capital vis-a-vis the question that Curt had before. Either increase the dividends or increase the stock repurchase program or in fact deploy it in some other business investment. So that is the balance. But it is not a regulatory issue at this time. Did I answer that for you? Hello?

Yeah. I'm sorry. Yeah, that answers that. It is just $44 million a quarter relative to where you used to run this business a few years ago just seems like not a lot of money. In other words, if you just did a simple ratio and you look at your risk to capital ratio of 7 times, you know, it was 12 times a few years ago it was 20 times maybe 6 or 7 years ago. You're talking about billions of dollars of capital in theory anyway.

I think we have the winds at our back relative to as we deal with the State of Wisconsin, you know, one thing that Mike has dealt with in that area has been the fact that we are looking at increased claims and increased reserving. You know, the last 2 years there have been a lot of dollars put away and it was difficult to make a sale of doing something different other than our normal dividend. And I think as we see the economy improving. Certainly our numbers improving in the loss side of the business that makes that sale to do something outside of the normal scope easier to happen.

Can I just clarify. Did you guys say that it is 44 million a quarter now and you can increase that 15% per quarter or is that 15%-?

Annually.

Annually. I'm sorry.

Annually.

Okay. Well, thanks, I think you guys have just done a tremendous job. But, you know, you always want more.

Thank you.

Our next question comes from Jim Kissinger of [Kissinger Lautman.]

Good morning.

Good morning, Jim.

2 quick questions. The underwriting expenses look fairly high given the volume. Is there a lagging issue there? And as you guys looked out a couple of quarters if this is kind of the mix of volume that you end up writing, what would that number look like? And then the second questions have to do with the bulk loan delinquencies and, you know, you got the bulk was at 1289 and the A- at a little over 15. Are those now kind of peaking areas relative? And if that is the case are the ROEs as good as you had expected when you wrote that business?

Regarding the bulk delinquencies, that delinquency rate, is you know the numerator is the number delinquent items and the denominator is the number of items in force. And so that number can go up if the numerator stays constant or even down but the denominator contracts.

And that's what's kind of happening. Driving the number higher is the in force is contracting. The absolute number of delinquencies, you know, flat to down from what we have seen. So, you know, it's a hard to evaluate unless you have both components, I guess. But in this case the delinquency rates are up because the in force is down not because the delinquencies are up. And that, you know, you know, we wrote the last couple of years 25 billion, 25 billion and now, you know, we have written, what 5 or so in the first half.

So, you know, I would think that the in force would be flat to down until we can get our writing levels back up given the large amounts that we wrote the past couple of years. And then with regard to the performance, you know, right now I would say year -- or inception to date the business has operated better than what we planned or targeted.

Larry, is that -- does that include, you know, the first small year of writing where it -- the pricing wasn't as good?

Well, we're -- we're still profitable across all the policy years. The earlier ones let's say not as.

Okay.

But still profitable and then as we refined the relationship segments and pricing models we have done much better.

Jim, the early years will exceed, if you will, our loss ratio target of 65%. The 2001, 2, 3, and to date the 4 will better and those were the big books. Whereas the early books were, you know, we did like 4 for 500 million in '98 and 2.1 billion in '99. So it's exceeded our expectations relative to returns.

Great. Terrific.

Relative to expenses, they were up from the first quarter. But relative to the rest of the year I think they probably stayed about this level. They were up reflecting I think contract underwriting which was again for us is pretty much an offset relative and to the revenue side. So the volume was up 25%, I think, quarter over quarter. And that reflected in the heavy contract underwriting. Which again if we stayed at this levels they should be comparable expense levels.

I guess my sense that that contract underwriting business should be rolling down as the re-fi wave has kind of gone away and the pipeline has thinned out. And what I'm trying to do is figure out going forward does that number fall in the environment we find ourself in today? You know, 3 months ago was a lot different.

Well, yeah. If contract underwriting goes down then expenses would go down. But right now I'm saying they probably stay flat at this level unless we see some reduction possible in the fourth quarter. Seasonally we might see some reduction in the fourth quarter. Then there might be some mitigation of expenses too. But there is not significant changes I guess would be my point quarter to quarter here with respect to volumes and expenses.

Okay. Thanks, guys.

Thanks, Jim.

Our next question comes from Jonathan Gray of Sanford Bernstein.

Yes, can you comment on the loss rate on the bulk, the portion of the bulk book that is say, 2 years old? In other words, are you having an opportunity now to view what fully seasoned loss experience might be on the bulk portfolio?

We don't disclose it year by year, though.

I just did in a way,Jonathan. I said the 2001, 2, 3, and this book will be better than our 65% loss ratio target. So without giving you the details I mean it's going to do quite better than that.

Better meaning below.

I understand.

Okay.

I wonder, could you clarify, I was confused when you discussed the magnitude of the dividend from the operating sub to the parent. Could you just repeat what you had said? I was --

Jonathan when we were dividending up a modest amount a year and a half ago, about $15-$16 million. And then we had special dividends. And then last year we began increasing the quarterly dividend and we now have to up to about 44 million a quarter this year, on a quarterly run rate of about 44 million a year that we can a quarter rather that we can dividend from the writing company to the parent company.

Not to --

And next year's dividend is based on a calculation that in one particular -- takes into account what the previous year's dividend was. Okay so we've increased the base if you will. Do you follow?

Yes, of course. Not to be redundant or respective but I think I asked this question before and another gentleman just asked it earlier. I'm trying to understand, several years ago 7-8 years ago the company's total capital to insurance in force was about 80 basis points. And as he correctly pointed out the risk to capital ratio is 2.5, 3 times where it is today. The regulators never thought you were under capitalized historically. If that is the case why wouldn't you appear to them to be in a tremendous surplus capital position currently?

Well, I think Curt pointed out, you know, an interesting item and that was at the same time that we were asking for special dividends to, if you will, repurchase stock and increase the cash dividend and increase the dividend, we were also if you will, reporting exceedingly high losses quarter to quarter and negative forecasts with respect to paid losses and incurred losses if you follow that time period. Okay?

So notwithstanding the fact what our capital position is I think they were looking at the business trends. And allowing us to increase the dividend quarterly in lieu of those changing conditions. Okay? And as we get farther down the line I think with respect to that issue as Curt pointed out as business conditions improved it maybe allows us to more I guess if you will, meet with them more often and suggest larger dividends.

Thanks very much.

Thanks.

Thank you. Our next question comes from Geoff Dunn from KBW.

Hi good morning. I wanted to dig a little bit on some of the other questions that have been asked. On the 80/10/10 market how much more of a concern is that as far as taking away MI market share than maybe it was back in the big refi wave of '98? I think historically we've kind of thought of it as quarter of the market. How dramatically do you think that shifted?

I think think it is about 40% of the market. As they say on the FICO scores above 700 is probably 80% of the market. So it is our number 1 issue as a company.

And on that 80% number that you threw out, that was probably materially lower historically. How does that alter your long-term expectations for loss ratios? I think on the prime we've kind of cited as 35-40. If you are being adversely selected against on the 80/10/10s does that shift materially?

If would if we let it keep happening as it is. I know our company is in the midst of looking at some new ideas relative to attracting that business as are our competitors. So I -- you know, I look at it and I'm energized by the opportunity that we have to recapture all of that business.

And I think there are ways with our product we can do that. And even if we don't get tax deductibility but as you heard me say I think we will. That will be a small part of it. The rise in interest rates: clearly we have been hurt by people doing 80/20s with [Helox ]based on prime. And as rates pick up those products go away. So we don't compete up against that so much. But all in all we need to regear our product to compete for that sector. And that's what we're about as company. And as I say it's energized our management team trying to bet back all that business we've lost. Think of the terrific opportunity to get back 40% of what we had and is available to us. So we're about doing that.

If you look at the numbers Jeff 2000 to 2003 the penetration rate on the purchase transactions for our industry was 15%-16%. This year it's 12%. And on refis it was 7.5%, today it is 6%. So we've got a terrific opportunity to recapture and we just need to retool our product. And I know that is what we are looking at as well as our I know competitors are also.

I think a lot of people on this legislation are kind of thinking that it could be a big opportunity as an inflection point to shift market share back to MI. Is that realistic or does that just open the door to a much longer term process? And do you need other things to happen to really cause the banks to not want to offer that product is much? Whether they have alternative products that are more attractive or the consumers not demanding it as much because rates going up? What is the reality of the potential impact of FISC/ETI passing.

The reality to me is on the margin it helps us a lot. But that is not a lot of that 40%. What it does do is it gives us a vehicle for the Ken [Harnys] the Lou [Sicklemans] and others to talk about our product to the consumer and present that case again whereby we are a great alternative to 80/10s, 80/15s and 80/10 20s. And in many cases and lenders today if you have a high credit score you aren't offered mortgage insurance.

So it creates a vehicle to get the consumer thinking again about the value of mortgage insurance. And as interest rates rise, particularly again in competing against the [Helox] it makes our product much more feasible to the consumer. Particularly when you add in the 2 closing costs the fact that there are losses that happen, it is much easier to work on forbearance in our industry than having 2 notes, paying 2 notes. And on a cost basis.

But it also allows us to rethink what we are doing in that sector and how we are doing it as a company. And get a product that's competitive regardless of what happens. And again that is what we are about as a company right now. So I'm looking forward to this opportunity. The tax legislation is a stepping stone. It is not a milestone. It is a stepping stone. But it will allow us to get to the endpoint.

Great, I appreciate your comment.

You bet.

Thank you. Our next question comes from Paul Miller of FBR.

My questions have been answered. Thank you very much.

Thank you. Our next question comes from Brad Ball of Prudential.

Thanks. A couple of additional follow-ups. On the tax the FISC/ETI where does the Senate currently score the cost of the tax deductibility of MI? And then separately you talked about the opportunities in bulk being somewhat less. Does the same go for the nonprime business or are you actually seeing more opportunities in nonprime? And could you just refresh us on what your strategy is in the nonprime area where the delinquency rate also rose fairly sharply this quarter?

The last scoring that the Senate looked at although it just has been re-scored at the suggestion of Paul Ryan in the House, but the scoring that they approved the bill under was 4.2 billion over 10 years. That they were looking at. Now, that was -- that was retrospective if you will. That included all borrowers that currently had mortgage insurance as well as these would get mortgage insurance going forward. So in order to reduce the scoring while we are not taking a stance on this you could look at just doing it prospectively and that number comes down dramatically. And I think both those sides are being looked at right now.

You mean by adding in the prospectives penetrations?

Just looking at borrowers going forward. Rather than those that already had mortgage insurance.

Right. And so assuming deeper penetration of MI and a bigger growth rate going forward?

No, no. I mean there are assumptions. I don't know how Treasury determined the number that they determined that is their own process. I mean but what they came back with was I think 4.2 billion over 10 years. And that was including all borrowers that currently had mortgage insurance and those that will get mortgage insurance over the next 10 years. I don't know what assumption they used as far as the penetration rate on borrowers that would get mortgage insurance moving forward or how long existing borrowers would be there. But one of the things they are also looking at as they score this is: Well what if we only did it for new borrowers not existing ones? And that drops the number dramatically. Although I don't know what that number is.

Okay.

Regarding the bulk in the sub prime, once again, the sub prime delinquency rate increased not because of the notice or delinquency count increasing. But rather the in force decreasing because we have written less over the last couple of quarters. So I just want to clarify that point.

And then too, with regard to the bulk market, you know, it is still quite sizeable, maybe as sizeable as it was last year. It hasn't seen the decline that the prime markets have. Our writings are down because spreads have narrowed and our competition has gotten more aggressive. But the market itself is quite large. And how long that continues, you know, we will have to wait and see.

But, you know, our attitude towards sub prime, I mean we have been at it a number of years. We think we are knowledgeable and confident in our loss assumptions. And, you know, we would still aggressively pursue it. So I'm not quite sure exactly what your question was there.

No. That is helpful. But I think you've said in the past that you would target bulk at about a quarter of your book.

Yeah.

And I think this quarter bulk was 18% of NIW. So you know, would you update that target or, you know, that 25% of your book, would you think that that it would come down?

No, that just happened to be this is a lumpier business than the flow business and there wasn't as much opportunities at the return on our rate that we had as a company. Now other companies took advantage to that to the extent and may have lower return hurdles than we do and to we lost a couple transactions that were of good size. So I mean we still think the opportunity is there from between 20%-25% of our business in this sector.

Okay. And just finally, you suggested and actually you just started to touch on that point, you suggested in your comments that you are seeing competition both from other MIs as well as from nonMIs. And one of your competitors who spoke yesterday indicated that they are seeing competition from the nonMI space. Could you sort of describe to me how those 2 competitors are, you know, which is more influential in your view in the spread compression that you are talking about?

Most of the business and certainly in the past and even over the last couple of years is still to no MI execution. And that -- last year we did well as an industry because spreads were wide. When spreads are wide MI brings more benefit to the transaction. About late in the year spreads narrowed significantly, have come back little bit but are still down. So many more transactions are going no MI than MI. So of the 2, I would say, you know, the spreads are a bigger factor than what our competition is doing.

And just competitively again given our history we have been doing this a long time. So I -- I think we have an edge in competing and getting these transactions done because of our due diligence expertise and turnover capabilities in working with an issuer. So I think I'm with Larry and the size in our capital position we can do some larger transactions than others can comfortably. So I think the non-MI is still it has always been the primary competitor.

Great, thanks very much.

You bet.

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

Could you guys tell us what your liquidation rate was in June or do you not have that number?

You mean the monthly cancellation rate?

The cancellation rate, right thank you.

Yeah I don't have the monthly data. The quarterly was at 45 and I don't have the monthly statistics with me.

Thank you.

Thank you. Our next question comes from Ken Posner of Morgan Stanley.

Good morning. Wanted to ask a little about the credit trends. One of the questions is how the refinance boom of the last couple of years has affected development. And your disclosures point out that it is not known whether mortgage books put on during the refinance boom years will develop with the normal timing where losses peak in years 3-4. So I thought at this point it might be interesting to ask how the 2001 book of business is developing because that would now be moving into the peak loss periods. My question would be is the 2001 book business developing in line with the normal curve or is it different from that normal curve?

I would say the 2001 book as well as maybe some of the books as well as maybe some of the books on either side of that are going to have the -- be a little bit, have abnormal shape with regard to the delinquency and claim curve. The reason being is those books had -- they started out obviously with, you know, 100% in force. But they encountered, you know, rapid prepayments because of the interest rates. And so the -- the delinquency and claim curves on those books because of the prepayment will be, you know, peaking forward of the typical pattern. And what we are seeing is a lot of those books the delinquency rates are just drying up because the in force as dried up.

So they peak earlier and decline faster.

So are you finding in the so for example in the 2001 book is the cumulative loss development do you think going to be lower than in a normal year because some of the bad credits were cleaned up by the refinancing waves? Or would the cumulative losses ultimately be sort of you know the same as other years with the idea being that only the good credits are refinanced?

It started out. Those books started out with higher delinquencies. Because of the all day minus higher LTVs the collection of things. But now because of the rapid runoff they are probably diving under the older books. And cumulatively I would have to add it all up but if it comes up on a par we still lost significant amounts of revenue on those books compared to the older books.

Sure. And then with respect to the question that a fellow asked earlier about the adverse selection implications for these 80/10/10s, what is the difference in ultimate loss or cumulative loss rates for the 700+ book of business versus 700-, 700 and less in the prime category?

We don't give that information out, Ken.

And could I ask one last question on the credit trends. The GSEs have loosened the underwriting standards over the last few years which has to some extent resulted in higher cumulative default rates and I think you guys have talked about that. Has that process stabilized or are the GSEs still further loosening the underwriting trends? Is that something you need to be on guard for?

We are comfortable with what Fannie Mae and Freddy Mac are doing relative to credit quality. Clearly, versus 1998 which you've heard me talk about, before DU and LP, I would say there was certainly a lot less business done with higher debt to income ratios, you know. At that point in time, we talked about 5% to 6% of our book being in those categories of, you know, under 45 -- between 40% and 45% total debt to income ratio. Whereas today's books and has been since 2001 have been about a third of the books. So I think it has pretty much stabilized, Ken.

Okay.

And, you know, we have also introduced higher premium rates for some of the higher risk segments. The A- premium rates and we have a bunch of different categories depending upon the credit score. And MGIC and the rest of the industry is introducing altA rates, higher premium rates. So as the market expands the risk envelope whether it be Freddie Fannie or the bulk market in general we can price the risk, we're fine. And what it has done is probably solidified our partnership with both the GSEs relative to being in this together to serve that sector. And as Congress keeps dealing with trying to get Fannie and Freddy to do more in the portable housing sector it just solidifies further the role that our industry plays as a partner.

Okay. And one last question if I might. You talked about the spreads in the bulk business. And you also made a comment that for C-Bass the environment in the second quarter was ideal. And I'm guessing that is a function of spreads, too. I'm just wondering if you could help me in terms of which -- which spreads do you think would be useful to track to measure these environments, spreads between what and what?

Well, on the bulk side, we have -- you know, it is -- I -- you got to, you know, this is ideal measures and then you got to say well, what is available on a timely basis, too. So on a bulk side we have been typically tracking on the ABS aspect security side the spreads between the AAA and the BBB as a measure of the value that the MI product brings. And we have been able to get that pretty much weekly or so.

Okay.

From various market sources.

Okay. And what about for C-Bass, what makes the environment ideal? What made it ideal in the second quarter?

The spreads.

I think the spreads.

Did you hear that? The tightening of the spreads?

The same thing.

I'm sorry I didn't hear.

The tightening of the spreads.

Okay. So that is good for them in terms of their margins?

Yeah, right. That brings less value to the credit enhancement but increases the value of whatever holdings they have.

Okay. Thank you very much.

Thank you.

Thank you ur next question comes from Rob Ryan of Merrill Lynch.

Good morning.

Morning.

Can we take a look at revenue trends maybe going forward on the issue of not just the size of the in force but average earned premium rates given the likely future complexion of new writings, fixed versus ARMs, bulk versus flow, prime versus sub prime, et cetera?

I'm not sure.

Help us out a little bit. I mean I guess what you're asking us is what is going to happen to average basis points so with respect to each of those flows sources of business?

More in total based on what the overall complexion of what the book of business is probably going to do. Will earned premium be more of a hurt or as it has been in the past at least some in the recent past been some level of help but it the type of business that you're writing today seems to be, you know, changing considerably. And therefore the average earned premium rate implication might be fairly large which in turn, you know, you add that to the insurance in force implication you come up with an idea for earned premium itself.

Yeah, on the flow side, you know, you can pick up our rate card and, you know we have a higher premium rate for ARMs. We have a higher premium rate for A- business. We have a higher premium rate for alt A. Higher LTVs, 100s and whatnot have a higher premium rate. So You can -- you know, make your own assumptions with regard to, you know, the trends with -- in those segments.

I think, you know, it is probably no state secret that ARMs are probably likely to go up from where they have so that would bring put some lets say upward bias to the average flow premium rate possibly offset by LTV mix or A- writings or altA But you know can easily see the different segments there and make your own assumptions. On the bulk side that is a little tougher.

Obviously if spreads are wide we can charge more because the product is bringing more value. If spreads are down, that would, you know, just go the other way. But it also depends on the type of transactions that we're presented. If somebody just wants coverage down to 80% exposure or 70% exposure or 60% exposure that can have dramatic effect on that premium rate. So that is harder to predict the trends on the bulk side.

Okay.

I would say one other thing to add. If you look at the next 2-3 years I think we are in purchase money market years. And again as Larry said within those years we do more higher LTVs, we do more ARMs. And so on the flow side clearly I would think the average premium would be higher within that sector. And as we just talked about given the goals that are being put forth for Fannie and Freddy that is going to give drive higher premium rates for us also.

Okay. Great, thank you.

Operator. We have time for about 1 more question please.

Actually, we have one more question in queue. It's a follow up.

Well that's great timing, then.

Perfect.

Go ahead, Jonathan Gray.

The split from C-Bass in the quarter in terms of the contribution to net income of 34 million for C-Bass and I thought it was 12 -- I thought it was. I'm sorry? Anyway, it looks like it was about 25 or 35 million pretax from C-Bass and about 20 million pretax from Sherman, something on that order of magnitude?

Close. It is about 34 C-Bass and the rest Sherman and a little bit of some tax credits. So it doesn't quite work out the same way. Okay?

But close.

But close. And I would anticipate C-Bass as in other years that would probably decline by 50% or so in the third quarter. Sherman, on the other hand, may be flat.

Okay. Can you give us some idea of what the split is at each between securitization gains on the one hand and servicing fee revenue on the other?

I don't have it in front of me, Jonathan. We would have to -- I think maybe what we will have to do is look at our website and the Sherman and we can put something in there to break that out for you, okay.

Okay. Thank you.

You bet. I guess with that thank you for the interest in our company and the long list of questions regarding it. Have a great day.