MGIC Investment Corp (MTG) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MGIC Investment Corporation third quarter earnings conference call. At this time, all participants 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, press star, then 0 on your touch tone telephone. I would now like to turn the conference over to your host, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Thanks, Hector. Good morning and thanks for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call to discuss the third quarter earning results are, Curt Culver, President and CEO, Mike Lauer, Executive Vice President and CFO, and 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 it includes certain non-GAAP financial measures. The release, and this additional information, may be accessed on MGIC's web site, 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'd like to introduce Curt Culver. Curt? Thanks, Mike, and good morning.

Thanks, Mike, and good morning. Net income in the third quarter totaled 134.1 million compared with 105.1 million a year ago. Diluted earnings per share was $1.36 versus $1.06 a year ago. New insurance written was 18 billion, comprised of 12 billion of flow and six billion of bulk, and persistency ended the quarter higher at 59.4%, up from 54% last quarter and 45% a year ago. Insurance and force fell slightly to 179.8 billion, from 180.4 billion last quarter, reflecting the impact of a smaller origination market, our slowly growing persistency rate, and the continued maturation of the large books of business that we wrote the last three years.

Regarding credit losses, paid claims increased to 144 million, up 20 million from a year ago and 2 million from a quarter ago. In addition, we added 25.8 million to reserves reflecting the increase in the delinquency account. Underwriting expenses totaled 69.7 million in the quarter, down 10% from a year ago and 5% from last quarter, reflecting the lower volume of newer insurance written. Finally, our joint venture results continued to be strong, with a particularly strong quarter from Sherman Financial.

Regarding next quarter, we would expect to see seasonally lower volumes of flow business and to take advantage of opportunities in the bulk channel that meet our return hurdles. Persistencies should continue to move upward while expenses remain relatively flat. Reflecting seasonal patterns, our delinquency inventory should increase modestly, with paid losses running at third quarter levels.

As we look to next year, mortgage originations are expected to be significantly less, particularly in the refinance sector. As a result, we would expect our flow volume to be down somewhat from this year's level. I do expect, however, our mortgage insurance penetration to increase slightly as we chip away at business loss to structured transactions. And even though persistency should continue to increase, the combination of lower and new insurance written, in conjunction with a maturation of the three huge books of business we wrote in '01, '02 and '03, should lead to flat to relatively -- or to slightly positive insurance inforce growth. Regarding credit losses, the growth and paid claims should moderate and be up modestly from this year's levels, with the data in our loss numbers dependent on delinquency performance.

Finally, underwriting expenses should be in line with this year's results, reflecting the lower volume of business.

With that, let's take questions. Operator?

Thank you very much, Mr. Zimmerman. Ladies and gentlemen, if you would like to ask a question, please press the 1 key now. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Bradley Ball of Prudential Equity.

Thanks, Curt. One question--

Yeah.

on the quarter and then one on your outlook. You know, in terms of the bulk business --

Yeah.

have you seen an increasingly attractive opportunity to invest there as the quarter progressed? You seem to be indicating that in the 4th quarter that should continue?

Well, these opportunities are pretty lumpy in character, so, as I expressed, to the extent we see opportunities that meet our return hurdles, we will take advantage of those, I mean, we have some transactions in the pipeline that we're bidding at -- are bidding on, and again, the results of that, we don't know what will happen yet. But I would expect us to have a modestly -- I mean a moderately good quarter, relative to bulk volume in the fourth quarter. I think we have more opportunities -- one of the things that happened last year relative to the bulk business is, frankly, we didn't take advantage of enough of that business. We moderated our volume relative to our overall book, trying to keep in line with the 25% volume, and, frankly, we missed opportunities. And this year, as opportunities present themselves, we've taken a different stance that if they are indeed there they're going bid on them and hopefully win them. So, we had a quarter like that.

Yeah, does that mean you'll actually let bulk rise to above 25% of total insurance in force?

Yes, to the extent they meet our return hurdles, we definitely will.

Okay, and then you mentioned as you look out to next year, that you'll chip away at the structure deals --

Yeah.

How do you plan to go about that? Is there --

I think it's two-fold, I think we will see an increase in interest rates, which helps us a great deal with the HLAC business in particular that we've lost, but I think you'll see -- and maybe I'm optimistic here, but our single file product is already starting to have modest results; although very early, and I think that that will certainly help us as we deal with those transactions on the second mortgage side, and that interest rates will play a role on the HLAC side. So, I think all in all, the combinations of those two factors -- our product, along with interest rate increases -- will play a role in that persist-- or in that improvement of, you know, maybe 1% or so.

But it doesn't reflect an expectation that the banks are going to back off from the 80-10-10s or anything along those lines? It's just really an interest rate call?

It's an interest rate call plus our products. I mean we're already having results with that with interest rates where they are, so, the combination thereof. But no it does not forecast banks backing off that product.

Great, thanks very much.

You bet.

Our next question comes from David Hochstim from Bear Stearns.

Hi, wondering, could you tell us a little bit about the earnings from Sherman and how much of what you got there this quarter could be recurring, and how much might be one-time? And then, also, on the bulk business, could you give us any sense of what -- what kinds of loans you were insuring in the third quarter and the bulk channel?

This is Mike, let me first answer this -- the JV question and Larry can talk more about bulk. For the quarter, C-BASS contributed about 12 cents and on the total line, from JV is about 30 cents and Sherman contributed approximately 17 cents. Relative to outlook for the next quarter, I'd say we don't expect that level from either one, C-BASS or Sherman, I would anticipate probably something less by about a third. Once again, and as I look out relative to next year for your modeling, I would anticipate relatively no growth from either one of these companies because they had superb years, and from a planning standpoint, I would say flat in '05 to '04.

Okay. Thanks.

As far as the quarter on bulk goes, first off, that market is still very strong. It hasn't seen the declines that the prime market has seen. As far as the FICO mix goes, what we wrote in the quarter was in line with the in force, and maybe slightly better, more business above 660. All day, in line with the -- what we've done in the past -- arms, a tad more. A lot of the bulk channel is -- is arms. As far as the in force goes, it's probably about a -- a 60 -- 65% is arms and 35 or so percent is fixed. And that market in the quarter continued to be heavily -- heavily armed, so, we're probably 70 -- 75% arm in a quarter.

And that would be hybrid arms?

Yeah, two-year, three-year arms.

And how -- can you give us an idea --

The prepaid, so, prepaid tendency is typical for the first two or three years. It's LIBOR-based. Then after two or three years, the prepays come off and then it's a pure adjustable tied to LIBOR with margins probably of about 500 basis points.

And how much, if any, are you doing in the interest only?

Well, interest only, both on the flow side and the bulk side, is a recent phenomenon. Really little or no volume prior to '04, maybe just a tad in the first quarter. In the third quarter, on the bulk side, I'd say that we would estimate maybe about 10 to 15% of the bulk business to be interest only, and then once again on the third quarter bulk NIW, as far as the in force goes, since it's a recent phenomenon it would be materially less than that -- I don't have that number here. And on the flow side, same kind of story. It's a second --third quarter phenonemon, and our estimate -- estimate on the flow side is five to 10% of the flow third quarter NIW would be interest only, and in both cases interest only would be with periods of under five-year interest only periods. We're really not concerned and really worried about the fixed rate with IO period of seven years or ten years. By that time, most of our in force is gone. After seven years, we think appreciation has taken care of things, but when you get inside of five years, a lot of our in force is still there. Appreciation you can't count on, and you're putting people in a situation where you're forcing them to think about moving or refinancing, probably before they're ready.

Yeah, we've done a lot, David. As I've talked about publicly for quite some time, when these IO programs start hitting, really led by Freddie Mac, I think, relative to the three-year period in particular, we've done everything to try and discourage that, including early conversations with them and Fannie Mae and putting articles-- working with Ken Hardy and others to get articles in the paper, relative to what we think the abuses are when you get less than the five-year period. So, we're trying to discourage it as much as possible relative to the writings of the company, and the market in general.

Okay, and then, Larry or somebody, can you give us a sense of sort of regional credit issues in the latest quarter? Was the increase in delinquencies concentrated again in the same -- in the midwest states? Or --

Well, you know, I think it's more seasonal. Third quarter is generally up from mid-summer and whatnot, and it's just, you know, just natural maturation of the books. As far as the hurricane goes, we think we had a couple of hundred added to inventory because of the hurricanes in Florida, with more to come given the time lags to reporting to -- you know -- us, 45-plus days delinquent and whatnot. So, you know, broad geographics would be my answer.

I wouldn't read anything into the delinquincies other than a natural maturation for this time of year, the season involved within it. I don't think it reflects worsening credit or things of that sort.

Okay, I'm sorry, one last thing, just Sherry Burgess might give us an update in terms of what's available still in reauthorization?

Oh, Sherry Burgess?

Yes.

I think 6.2 million shares still outstanding, in the auth-- under the authorization.

Okay, and do you have -- you have the cash to buy that much?

Yes.

Okay. Thank you.

Thanks, David.

Our next question comes from David Chamberlain.

Hi, guys.

Hi.

A couple of questions. Just going back to the bulk you wrote this quarter, can you give me an idea of what the implied pricing and loss rates were on the new underwritings versus prior quarters?

Well, the loss ratio relative to how we're trying to participate in this business is 65% with a 5% expense ratio, and we've been significantly outperforming that with the books rewritten the last two to three years. And as a result of that, we did moderate pricing on some of the loans that we're insuring, some of the types in the past two quarters are reflecting the fact that we felt we had margin to deal with and that's reflected, I think, in our volume, too. So, in some areas, actually, we raised pricing, relative to geographics, in this quarter; and in others, we lowered it relative to our expectations on real estate appreciation. So, all in all, we expect to have a margin of at least 30% on the bulk business, that's what we've always run. We've been running significantly under that,. We've got an average to date loss ratio of 30%, paid loss ratio on the bulk. And again, our return hurdle is minimum of 30% in the bulk business and our pricing reflects that.

Okay. Can you talk a little bit more about the competitive environment, you know, you -- you mentioned a little bit of the new single premium product versus the HLAC and what kind of contraction. Can you kind of quantify of the new issuance written on the full side and what came from that?

Well, we just -- we just introduced it, so, it really, it hasn't put a dent in any volume at all. Brokers are now introducing it to consumers and realtors, and we expect it to be an important part of our business next year.

Um. Okay, and then finally, given your loss assumptions on your paid losses, what should, what should, what should we expect for, you know, paid to incur ratios going forward, do you expect them to be in the kind of 85 to 95% ratio?

I think a lot of that will depend on what happens to delinquincies, on a short-term basis. Obviously in the fourth quarter, as Curt mentioned, we looked for a slight uptick in paids, maybe around $10 million. On the incurred side, as he stated, the issue there is what happens to delinquencies. Normally we would anticipate a slight increase in delinquencies. The issue going forward then relative to '05 will be, as we stated, we anticipate a moderate increase year-to-year in paids, relative to incurreds. whether or not we need to build any reserves will be a function of what happens to delinquencies on a couple of fronts. I think number one is, the absolute number of delinquincies. Do they continue to rise or moderate? And then secondly, does the economy continue to improve going into next year? And can we get some break, if you will, on claim rates, that is cure rates improving ,and claims, notices going to claim decreasing. That would be a benefit. Severity, I don't think you will see much change because the average loan size continues to increase. So, the improvement I would anticipate, if we saw it, would be the pure level of delinquencies and then secondly some kind of moderation in the rates at which those notices go to claim, but probably too early right now to forecast that economy.

Okay, thank you.

Our next question comes from Paul Miller of Friedman Billing.

Yes, thank you. I have two quick questions. The first one is on the hurricanes. I thought most of the -- for any type of property losses -- is covered by homeowners insurance. Can you just discuss why -- why that's having an impact on your upticks and default rates?

It isn't having an uptick. Larry just mentioned we've got about 200. That's not an uptick. Um and you're right, it will not reflect -- it won't reflect the claim to us. That is covered by homeowners, unless their employer somehow participated in the loss and they lose their job. But you're right, those -- those would be covered under homeowners policies, but in the meantime, a number of them may go delinquent while they're dealing with the issues.

So, we -- we may see an increase in the fourth quarter in specifically Florida, certain counties of Florida, delinquencies, they -- they will not, depending on what happens to the case, probably will not be claims to us.

Do you follow?

Yeah okay that's what I was--

Unless their employer was wiped out.

Yeah, I didn't think about the employer. The other question I have is your risk-- your-- your risk of capital ratio is at 7.1 now to 1, which, you know, I've been covering for you for like four years now, that's the lowest you guys have ever been. Can you talk about your capital management? You did buy back shares this time, two million shares, but, in the way you're going to go with this stuff, you haven't got a lot of insurance and force growth. What is your capital management plans going forward?

Well, what we've said continually is that we continue to look at various opportunities to invest the capital and we've continued to balance dividends and stock repurchase. Over the past five years, we've repurchased, I believe, somewhere over 20 million shares.

25 million.

25 million. So, I mean we have been balancing that, if you will. We've got a unique situation here right now, obviously with the refinance that volume we went through, the book went off significantly faster and the risk in force dropped significantly. I think going forward, beyond next year, you will see an increase in risk in force again and that we will continue to monitor and prudently look at dividends and stock repurchase programs.

Okay, thanks a lot, guys.

Thank you.

Our next question comes-- comes from Kenneth Posner of Morgan Stanley.

Thank you. I wanted to ask about the bulk business. You've talked about moderating prices given the outperformance of those loans over the last few years and that's a very consistent observation with what people in the ABS market are seeing and saying, which is in very strong performance of those kinds of loans relative to expectations, I guess my question is: What factors do you think drove that outperformance? And, going forward, are those factors like -- likely to continue operating driving outperformance or are we at risk of a reversion to the mean in some of the credit trends in that -- in that kind of collateral?

Well, let me start off by saying in prior years, you know, we wanted to manage the business, as Curt said, to about 25% of the mix. Now, back then in '02, '03, spreads were wider than they are now. And so we were able to not only price -- to achieve our returns, but we added more to the premium to control the volumes, okay? So, that led to loss ratios, we believe, on those books that will be less than the 65% target. And we kind of maintained that posture early into this year when spreads narrowed, and it was at the end of the second quarter, thereabouts that we, you know, had enough data now to confidently go back and adjust some pricing assumptions to reflect the better-than-anticipated forecast -- performance. But we also have an eye to the future and we expect the appreciation to be less than what it was. So, we recognize the good performance in the past, but we think the market will appreciate but at a slower rate. So, we kind of made changes to the pricing model, and we're able now to bid more competitively for the narrower spreads that are currently out there. Now, we're still losing a lot of deals to the market because the market is pretty aggressive in terms of narrow spreads and this and that, but we were able to write, you know, six billion instead of two to three billion in the first couple of quarters of the year.

We have looked very strong at geography, Ken, relative to our pricing model. And, in fact, without giving out too much of that, if you look at California, we've adjusted and we're pricing there at two times what it's running rate now in losses. so, we are looking at the future within our pricing model and geography is playing a big role in it, because we, like you, buy into the fact that real estate prices are going to slow. It just has to, and certainly some markets will slow more than others, and that's reflected in our bulk pricing.

And, Curt, you mentioned, you know, the possibility that you might get a break on the cure rate next year, and I guess the question would be: Would you -- looking across your business, would you view the cure rates right now as better than, you know, normalized expectations? Or worse than normalized expectations?

Well, I -- I think the cure ratios have been flat for the last couple quarters. So, the positive aspect of that, I would say, is there haven't been any deterioration in cure rates in the last three quarters, really. So, that's -- that's been positive. So, we've seen two things with respect to credit. One is, delinquency levels slowed, and then most importantly, cure rates balanced out, so, maybe some markets -- some of the-- the midwestern markets may be still ticked up a slight amount, but not significantly. So, we have not had a significant change, if you will, in -- in cure rates and to the negative side-- and that's positive-- so, I mean that's kind of where I would leave it. And as I commented earlier, if next year the economy continues to improve, that could be an upside for us.

Okay. And if I could just ask one other quick questions? You guys provide very helpful disclosures in terms of the credit scores and documentation types for the different businesses and I think a number of folks have noticed that those numbers have been fairly stable. There aren't huge swings in the aggregate subprime exposure of the company's bulk or flow business. And I guess just taking a step back, I think you guys have been very open about the risks to the business from the GSE systems letting in, you know, more low-quality loans, and also the adverse selection threat posed by the 80-10-10s and, you know, we are certainly seeng higher delinquencies across-the-board, but that doesn't --

No, we're not. The delinquencies really are pretty round year-to-year, Ken.

I was thinking of the delinquency -- the delinquency rates.

Well, that's a function of the book running off. Yeah, that's -- that's --we haven't been able to grow the book, Ken, that's the denominator, not the numerator that's an issue there.

So, even on a lag basis, if you look at one year lag delinquency rates, that's not enough adjustment for the shrinkage in the portfolio? On the one year --

We're down what seven our eight, 7%, I think, year-over-year on our in force book. So -- That's a big factor, Ken, you know, we're down ten billion year-to-year.

Okay, so let me put that off to the side. I guess the question is: The disclosures suggest that really your quality of business hasn't changed much, even given what the GSEs are doing and even given the threat of the 80-10-10s. Are there other ways that -- that risk is -- is falling through your business in a way that isn't necessarily captured in the numbers? Or have you adopted strategies that have to date limited the effect of those -- of those threats?

Well, again, as you said, we've always been up front relative to dealing with these issues. On the -- if you will, the adverse selection on the 80-10-10s, our single file, is a reaction to that. And we are improving our pricing there to consumers that are going to run a very low loss rates. We want that business. On the others, the bulk side of the business, I mean I know that there's been a lot of shots taken at that business for a long time and true to our form, we said trust us, we know what we're doing in the business and it's worked out that way. We had just set pricing on every deal, and also get a great deal of colaterall protection on that business, so, I'm very comfortable on that business. And on the flow side, I mean ultimately, the GSEs, obviously, we have an interest in people paying their mortgages. And just like the IO of three years or less, where we're working to try to get that out of the system, eventually I think that all will buy into that and get away from it. In the meantime, we try to minimize our writings where we see things that don't make sense to us. And again, you've seen that relative to captives and you've seen that relative to all day business, where it didn't make sense to our underwriting. We're not going to write business that doesn't meet our return hurdles.

And then-- my last question, if I may, then I will hop back in line. In terms of the seasoning of the business, as you guys pointed out, we have big books of business from the last three years that are now seasoning. The typical loss curve would peak three to four years out. Do-- Do we appear to be following that typical seasoning curve? And therefore should we expect the peak losses from the recent books of business, you know, in the next few years? Or are the seasoning curves different than the traditional?

I would say the newer books, last year's-- this year's books of business, would probably, you know, get back to the normal, as you described, the normal claim curve and delinquency patterns. The '00, '01 and probably '02 books of business will be distorted, they will be more front-end loaded because there's been so much runoff, you know, so, they had the front part of the delinquency claim curve but then so much ran off quicker than normal, the survivors aren't there to fill out the latent life delinquency and claim curves. I would say even throw the '03 book into -- I think each one of those books is accelerated by at least a year because of the runoff of those books and the '04 book is going to return to a more normal pattern, but the last three years, I think are pretty much have accelerated and are reflected in our numbers now.

That's very helpful. Thank you.

Our next question comes from Geoffrey Dunn of KBW.

I think all my questions have been addressed throughout all the other questions. Thanks.

Okay, thanks, Geoff.

Our next question comes from Mike Grasher of Piper Jaffray.

Likewise, all the questions have been addressed, but congratulations on a nice quarter.

Okay, thank you.

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

Yes, could you give us an idea of what is happening with your tax rate and what we can expect there? Also, with the rise in default rate, I know there's been a lot of questions about the denominator, fixed seasonality, and whatnot. Can you give us an idea -- what's the magnitude of the denominator effect, the seasonality, and the seasoning of the flow in bulk business on that ratio?

This is Mike Lauer, let me first answer the question on tax rate, then Larry can talk a little bit about the denominator.

Thanks, Mike! [ Laughter ]

Larry's studied a lot of physics. The tax rate is about 26.5 for the quarter, pretty close to last quarter, 26.4. Possibly about the same level in the fourth quarter and I don't see much change relative the next year -- I guess except for what happens to the mix between investment income and operating income. That really is -- is the genesis as -- as our operating income increases, the tax rate will go up. So, I think we have to look at new income versus operating income, and for now I would say use the current rate, and we'll give you another forecast in January, if you will, for -- for '05, we know a little bit more about where we think rates are, and the mix between investment income and operating income.

And then I -- I guess, just uh -- I'm not exactly sure of all parts of the question there, but, you know, as we've indicated here, the insurance in force on the-- on the float businesses year-to-year down, you know, roughly you know 5% or so and prior to the last couple of years, we were growing the portfolio by, you know, five or so percent per year. So, if you think about really it's -- it's more of a 10% growth swing than 5% from where we typically were, growing the portfolio to now shrinking it. You know, just roughly speaking here, too, the flow delinquency rate is about 50 -- or 5%. So, 500 basis points. So not having the portfolio grow 5%, but shrink 5% is probably worth roughly 50 basis points in the delinquency rate. So, instead of five, you would expect it something like 450, just because of the shrinkage instead of the growing book.

And not to be casual about it, but I will be, the delinquency rate really is not the impact. It's the delinquencies. That the count that matters, because that's what we reserve against, the rate really doesn't impact financials. So, what you need to concentrate on is just the inventory of delinquencies with it increasing, decreasing, et cetera.

Yeah, and also, through the years, too, you know, we're doing -- on the flow side -- more A-minus than we used to and we have higher premium rates there. So, A-minus loans will probably throw off more delinquencies, but we get paid more. Um, there's probably more all day than in prior years; Once again, we think they throw out delinquencies, but we've got a higher premium rate for it and there's more loans above 95% LTV. Once again, those loans will throw out more delinquencies, but once again, there's more premiums. So, there's a lot of things going on here. The product mix is expanding to some of these other let's call it higher risk segments, but we get paid more.

And then on top of that, you've got this declining in force rather than the typical growing 5% per year, growing in force. Thank you. And just -- just getting back to your guidance that you gave, could you -- was it cash claims paid that you expect to be about ten million in the next quarter?

Yes.

And what do you expect in losses incurred for, I guess over the next couple of quarters?

I guess -- for the quarter, you're talking about the fourth quarter, I said we thought paids would be up about ten, maybe 10 to 15. The -- the incurreds would be up over paids, relative to what happens to the notice inventory. If notice inventory is flat, that may be -- there may be some moderation relative to this -- this quarter, if, in fact, notices are up a couple thousand, like this quarter, it could be 20, 25 million over the paids. And relative to next year, I think it's relatively early. I think we will give you another shot at that in January, but we anticipate from today's forecast that we would see an increase in paids, maybe somewhere in the area of 50 million year-to-year. Relative to what happens to incurreds will really be a function of what we see at year end with delinquencies. It's probably a little too early to make the call yet. But the question is are delinquencies rising next year or remaining flat? And it's too early to make that call.

And your insurance in force guidance for next year is flat to slightly up? Is that right?

That's correct.

Okay. Thanks, those are all my questions.

Our next question comes from Rob Ryan of Merrill Lynch.

Good morning.

Good morning.

Let's switch over to flow. What do you think is the general trend in the discipline of the market as a whole for various MIs dealing with the lenders on deep sea captives these days? Any changes that you've noticed?

No changes.

Okay.

No changes.

Then, looking at your JV income, could you go into a little bit of why 2004 was so strong? What were the market conditions that led to that circumstance? And on the C-BASS side, whether the recently-announced transaction with Providence maybe is going to change the complexion of the earnings, make it more reliable as opposed to potentially volatile? I mean I don't know, it's just a thought.

No, I don't think -- the C-BASS question I think -- it should fit right into the current business. I think the outlook that we gave you was one of moderation. They had a very good year this year, both businesses with respect to the Sherman business there's been a significant amount of new competition into the business with pressure on -- on pricing and margins and so I think to-- to forecast that -- the growth this year could continue, next year would be inprudent. I think we will have to look at it quarter-to-quarter, but the guidance we're giving at this time would be to say flat year-to-year, it's too early to make a call. Both of those businesses are transaction-driven as we talk about every quarter and so the guidance we're giving with respect to your model building is to assume no significant increase year-to-year. Both those companies have wonderful managements, creative but disciplined, and opportunities presented themselves this year and they took advantage of them. So, I would expect that to happen next year, even though Mike has said the flat earnings to count on, but those management teams are very good in dealing with the change in market conditions.

Okay, and last thing, what's the latest and greatest on the potential for tax deductability?

Not going to happen this year. Relative to next year, I think as an industry we're -- we're trying to figure out -- we had, unfortunately, the Chairman of the Ways and Means committee, didn't agree that mortgage insurance should be tax deductible, even though we had 220 co-sponsors in the House and probably more -- well it was in part of the Senate bill, so, that shows you how the Senate felt. But he was the one that led the conference this year. Now, next year, Senator Grassley would lead the conference on any tax bill. So, I would say the -- I don't want to forecast chances and it depends on what happens in the presidential election, I think we'd get a tax bill out of the Bush group and I don't know if we would on the Kerry side. So, that's the first caveat. And then after that it's more positive that it could happen next year with Senator Grassley leading the conference.

Okay, great. Thank you.

Our next question comes from Kenneth Pos-- Kenneth Posner of Morgan Stanley.

Yeah, I just wanted to ask one follow-up question on C-BASS and Sherman: In this quarter, what percentage of the earnings could be characterized as -- as gain on sale? Um and to the extent you know it, I'd also be interested if we could look at the equity invested in those companies and understand how much of that is represented by holdings of key pieces and residuals in other kinds of assets with -- with significant --

Yeah, I think, Ken, we've got to get back to -- with respect to Sherman, zero was gained on sale and I don't have the C-BASS data in front of me. Relative to the other questions, I think we'd to get back to you.

On our official information page, Ken, we give you the equity investment for both C-BASS and Sherman. On the last page, you know, we added some additional information and the investment on C-BASS and Sherman are listed there.

That's very helpful. Can you just explain given the strong performance that Sherman, you know, just conceptually, what drove that, what they did? You know, what kind of --

They had growing portfolio and improving margins and -- and, you know, whether or not that will continue in the fourth quarter, I said earlier, you know, I wouldn't forecast it at this time. I think if they can continue to purchase assets at good margins it may continue, but once again, you know, guidance that we're giving relative to these businesses is-- is more on the conservative side, and not --

Right. So, what you're saying is that Sherman's -- the increase in Sherman's earnings was driven by the expansion of their portfolio and favorable margin trends.

That's correct.

Okay.

Yeah, clearly they're collecting better than what they're paying for the assets.

Okay, um thank you very much.

Okay.

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

Okay. Thanks, Hector. Thank you all for your interest in our company. Have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may now disconnect.