MGIC Investment Corp (MTG) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the MGIC Investment's fourth 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. I would now like to turn the conference over to your host, Mr. Mike Zimmerman, Vice President of Investor Relations. Mr. Zimmerman, you may begin.

Thanks, Hector. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation.

Joining me on the call today to discuss fourth 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 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 would like to turn the call over to Curt. Curt?

Thanks, Mike. Good morning.

Net income in the fourth quarter totaled 134.5 million compared with 104 million a year ago. Diluted earnings per share was $1.39 versus $1.05 a year ago.

New insurance written was 15.8 billion, comprised of 11 billion of flow business and 4.8 billion of bulk. The persistency ended the quarter at 60%, up from 59% in the third quarter, and 47% a year ago.

Insurance in force fell to 177 billion from 180 billion last quarter and 190 billion a year ago.

Our average premium earned was 74.5 basis points up from 72 basis points last quarter, which reflects the higher premiums in our bulk channel and our A minus business as well as a continued increase of writings of higher LTV loans and ARMs in our flow production. However, our premiums earned were down 2.7% year-over-year reflecting the impact of our lower average insurance in force outstanding.

Paid claims in the quarter increased to 151 million, up from 124 million a year ago, and 144 million last quarter. We added 35 million to reserves bringing total losses incurred to 188 million for the quarter, 19% lower than the 230 million reported last year. For the year incurred losses totaled 701 million, down 8.5% from 766 million last year.

Underwriting expenses in the quarter totaled 71 million, up slightly from last quarter, but down from 73 million a year ago. And our joint venture results continued to be excellent with another particularly strong quarter from Sherman Financial.

Operating cash flow remained strong throughout the year, and during the fourth quarter we repurchased approximately 1.7 million shares of stock with 3.1 million shares purchased for the year.

Looking at 2005 mortgage originations are expected to approximate 2.3 trillion, down from 2.8 trillion in 2004. However all this reduction is expected to be in the refinance sector.

In addition, while our market share was up slightly this year I also expect it to be up somewhat this year reflecting the impact of our single file product. And as a result I expect our flow new insurance written to approximate this year's levels even with a smaller market.

However, reflecting tighter spreads I think our bulk business will be down slightly from this year and that the net result of the flow and the bulk should be total writings comparable to the 2004 level. And while the persistency should continue to increase, the impact of the large level of cancellations from our '01, '02 and '03 books, coupled with the lower level of new writings last year and this year, will result in flat insurance in force growth and a continued challenge to revenue growth.

Regarding credit losses, the growth in paid claims should moderate somewhat and I think be up approximately 50 million from 2004. However as we discussed last quarter, incurred losses will be dependent upon the level of delinquencies and expected claim rates on those.

Finally, underwriting expenses should be comparable to this year's numbers reflecting similar new insurance written expectations.

So with that, Hector, we're ready to take questions.

Thank you very much, Mr. Zimmerman. Ladies and gentlemen, if you have a question at this time, please push the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself for the queue, please press the pound key. Our first question comes from A. J. Grohl from Smith Barney.

Thanks. Could you briefly go over your expectations for claims paid and losses incurred again? I missed that. Also, reflecting the change in mix in your insurance in force portfolio, could you talk to how the bulk, the flow, and the non-primetime books are aging and how that is expected to impact credit quality in the coming year? Thank you.

This is Mike Lauer. Let me just cover the first question relative to loss reserves. As Curt said, we finished the year about 576 million in paid claims. We think now in '05 that paids will be up approximately $50 million. The incurreds for the year in '04 were 701 million. They were down from a year ago, 766.

Recall that in '04 we had a significant increase of delinquencies as well as we were experiencing, if you recall on a quarter-to-quarter basis significant increases in what we anticipated in factoring '03 rather, in claims rates as well as severity.

During '04 we saw a couple of things happen. We saw some mitigation if you will, or a slowing on the delinquency side as well as no significant deterioration in claim rates. So for the most part, year-to-year we had a slight decrease in delinquencies and strength in factors with respect to severity and some claim rates with respect to some markets. As a result the incurreds for '04 were down.

Going into '05 we would anticipate that if the economy continues to run as it has been and we can continue to see flat to downward trends in delinquencies, that would be a positive and the incurreds possibly could be flat to down. So we would have incurreds less than paids if you will if you follow that.

Regarding the flow and bulk delinquency performance and what not, what you're seeing in the aggregate on the bulk side is really a function of, we had some two large books of business, the '02 and '03 books of business were 20 some odd billion, they now are at their peak delinquency age so they're flowing off a lot of delinquencies and now the newer writings are lower. So it's a mix of large books at peak and not writing as much business driving [off] that delinquency rate. The newer books, the newer bulk books are on a delinquency [inaudible] that are lower, better than the books prior.

And I would say all in all the same is true on the flow side. We have some large books out there, the '02, '03 books of business once again approaching their peak claim periods and now we're writing smaller books.

So you get the high delinquencies from those large books at their peak and now you're writing less business and in fact the portfolios both in the bulk and the flow have been shrinking causing that delinquency rate to escalate. So it's more of those mechanics rather than any deterioration on the book to book performance.

Thank you.

Thank you.

Our next question comes from David Chamberlain of Trafelet.

First question. On persistency, what are your views now, I mean given that we've seen a lot of re-fi pair-off in terms of where you think in persistency could improve to going forward, I guess is my first question.

Well, I think we'll see that continue throughout the year as we've talked prior, and I think our expectations would be the low 70s by year- end. Mike?

I think, yeah, a lot will depend on what Larry talked about. The bulk book certainly have lower persistency. We wrote less last year. That book runs off the previous years were 26 billion. The full book will continue to, so I think when you think about persistency you've got to differentiate between bulk and flow. But the flow book should continue to uptick each quarter this year.

Okay. And then secondly, on capital in regards to share repurchases, what's your strategy going forward given your risk to capital basis ratios?

We haven't really changed it. We're still, we still have about 4 million, 4.6 million shares I think outstanding on our current authorization buy back program and we're continuing to purchase, repurchase shares. As I mentioned on the previous calls, our dividend capacity from the writing company going up to the holding company is about 45 to 50 million a quarter. That kind of is a benchmark we're using in addition to any other borrowings that we may do. So for the most part it will be quarter- to-quarter based on cash flows, other investments, and the existing opportunities for anything else.

Thanks.

Our next question comes from Adam Egelberg of Silvercrest Asset Management.

Yeah, good morning. Nice job. I had two questions. The first is, I guess how far are you going to push to try to get that quarterly dividend rate up?

And then the second question is, in the report, the quarterly report you give us a GAAP expense ratio and if I apply the GAAP expense ratio to your earned premiums, and then assume that your other revenues are at basically zero profits because that's contract underwriting, I'm left with quite a bit of excess corporate expenses. And I think in the quarter it was about 8 million negative and for the year it's about 44 million of, I don't know what you'd call it if it's just corporate overhead or investment spending. But I was hoping maybe you could give us some color into sort of what that delta is between the 14, 15% GAAP expense ratio and the actual expenses produced by the corporation. Thank you.

I think you're going to have to help us and go back through that. The GAAP ratio is about 15%. So I missed your analogy with respect to the differentiation between contract underwriting.

Well, basically your reported expense ratio is 21%. That's just your underwriting expenses less seating commission divided by earned premium. And so the difference between the 21% and the 15% GAAP is $21 million. Your contract underwriting revenues are $13 million. And I was just kind of going under the assumption that that's breakeven business but I guess it could be, maybe the answer is that's not breakeven business, it's business that you take a loss on. I'm basically trying to figure out what are the $21 million of expenses going for? That's the differences between the reported and the GAAP expense ratio.

It is a breakeven business. So that was, that was a correct statement but I'm not sure.

In other words there's, well, there's $21 million of expenses that's different between the GAAP expense ratio and the reported expense ratio. So what was that money invested in?

Are you talking about the stats?

[inaudible] ratio that we ran for the insurance company only?

The statutory company, the writing company.

The writing company versus on a consolidated basis so that's the reconciliation there.

The difference would be in the non-insurance companies if you will. The interest costs, I guess. I'd have to, we've never looked at it that way but fundamentally what you're dealing with is a statutory ratio for the mortgage guarantee writing company and about 1500 subs that we have including some mortgage service company, et cetera. We'd have to do that reconciliation. We could do that for you off-line and go through that. But I don't have anything in front of me to help you out.

Okay. I'll follow with Mike. So if you could then just address where you're going to try to take the dividend capacity to that would be very helpful.

Dividend capacity really as I said, it's a formula and it's, right now it's about 44 to 50 million a quarter this year. Anything beyond that we would have to ask for an extraordinary dividend.

Do you plan to ask for one?

We have no plans at this time.

Okay. Thanks very much.

You bet.

Our next question comes from Paul Miller of Friedman, Billings, Ramsey.

Thank you very much. Real quick on the Sherman, you said the subsidiaries, a lot of it came from the Sherman. I know last quarter Sherman sold a lot of assets. I think you told me that. Can you make any comments, did they sell a lot of assets this time around or were these some one time gains or was this core numbers out of Sherman?

No, I think most of it is just continuing to grow their portfolio and recurring revenue. And the margins that are increasing on their existing portfolio.

And the Sherman earnings, they are not as lumpy as the Sea Bass, am I correct?

That's correct.

Okay. And then, did you see any improvement in the penetration rates at all this quarter? I know that insurance in force did decline, but one of the things I'm really worried about is the penetration rates. Where do they come in at or can you make any comments?

I don't think we know them, do we, Mike?

Not for the fourth quarter yet, Paul, we haven't seen all the final numbers yet since all the numbers aren't reported out through [MICA].

I would think they would have been what they were for the third quarter.

That's just what I was going to suggest and they most likely---

Okay. And then real quick can you make any comments about possible consolidation in the MI space?

No, we don't comment on that.

Thank you very much, gentlemen.

Our next question comes from Adam Weinrich of Sanford C. Bernstein.

Good morning. If I look at the cancellation rate on the traditional, or the non-bulk business, which I just calculate as an annualized rate in the quarter of 42%, and then look at the last three quarters and compare these numbers to other big pools of mortgages, say Fannies numbers or Freddie or even Countrywide servicing portfolio, the fourth quarter seemed to be running off more quickly than recently compared to these other institutions. Can you comment on what's happening there?

Adam, this is Mike Zimmerman. The cancellation rate that you see there in the flow is that we tend to lag the mortgage market a little bit in the reporting just from the cancellations reported to us from the MBS market. But the other dynamic you have working for cancellation rates to try to reconcile those to prepayment rates is price appreciation and all price appreciation will affect our cancellation rates where it would not affect necessarily MBS prepayment rates.

Thank you. That's helpful.

Our next question comes from Ed Groshans of Fox-Pitt Kelton.

Good morning. Last quarter you talked about repricing certain products in some regions, some were up some were down. I was wondering if you could just give us an update on that if you're continuing to do that?

Are you referring to the bulk business?

I think that's what it was in reference to, was the bulk side.

It would have to be.

Because otherwise, the other ones are all filed, right?

Right. Right. Yeah. On the bulk business we can pretty much adjust pricing deal-to-deal quite easily. And I think guess we look at our historic performance by the different product segments within the different parts of the country and then we kind of look forward with some of the housing statistics and employment numbers and whatnot and try to anticipate whether or not we're going to get better, or worse, same performance, and I guess in general, and maybe specifically for California, which is a good chunk of the bulk business, we think appreciation will slow and as a result of that we anticipate more in the way of losses and we build that into current pricing. And we continue to feel that way and continue to monitor it quarter-to-quarter and make adjustments as appropriate.

We had put that into last quarter and I think I talked about it with the change in the pricing model for bulk I think on California.

We upped up it to three times our current claims rate there, so a little more aggressive there. I don't think we made any changes this quarter relative to the bulk business per se.

Okay. I guess just along those lines, the mortgage insurance industry as a whole has been saying with better unemployment, more job creation you should see some credit improvements coming through. The guidance here is looking for some pace to increase next year and maybe flat to down delinquencies. Is there somewhat of a more of disconnect between the improving jobs picture and MI credit, or is there something else going on?

It's just the run off of large books of business from the '01, '02 and '03 that are going to throw off the claims that Mike talked about. So that's just reflecting on those delinquencies that existed back when those jobs were lost.

I mean if you look at it on a current basis of delinquencies, you've seen a stabilization over the past year and actually I think we're down about a thousand units year-over-year on delinquencies. That is an indicator that jobs have stabilized for sure, but you still have to pay the claims on those delinquencies that existed prior and that's what what's running through the books now.

Thank you very much.

You bet.

Once again, ladies and gentlemen, if you have a question, please press the one key now. Our next question comes from A. J. Grohl of Smith Barney.

Hi. You guys said that your guidance for NIW for '05 should be maybe flat to '04, and one of the reasons was that you expect some increased penetration, increased market share [inaudible] maybe one of the pieces is going to be single file. Could you talk to the penetration of this new product and how that is getting back some of the market share that's lost, that's giving you this increased confidence, I guess, in that view? And also, over the last year or so could you tell us how much, if any, extraordinary dividends you have taken out of the insurance subsidiary? Thank you.

This is Mike Lauer. Let me do the last question. We didn't take any extraordinary dividends out this last year in '04. We just had the standard dividend that we increased during the year to 44 a quarter. So we bought the shares back on normal dividends and cash flow at the holding company.

And on the share question, I do think we'll be up slightly as I mentioned year-over-year, and the single file product, while we haven't released any public information, we really were in a pilot with one large aggregator and now are expanding that pilot and the benefits of that product are such that I think it really will penetrate more of the 80, 10, 10, the 8015, 8020 business.

So as a result of that I think we will have a slightly higher share and that will reflect even though we got a smaller market a comparable flow number to what we had this year. So we're pleased with how single file has been received in the marketplace to date and we're looking forward to expanding its use to other lenders this year.

Thank you.

Our next question comes from Ken Posner of Morgan Stanley.

Good morning. I wanted to just make sure I understood the discussion about delinquencies. Can you talk about the composition of the portfolio in terms of the relative size of the big books of business which I presume would be '02, '03, '04.

No, not '04.

And in '04, right?

'01, '02, '03. '04 we didn't do that much business.

Okay. So that's, and at what point would you think each of these years would throw off its peak delinquency?

Well, let's talk maybe bulk first. The relative sizes going back to '00, we did 11 billion in '00, 25 roughly in '01, 23 in '02, and 23 or so in '03. And now for this year we are at 15, 16.

16.

So you can see that there's a lump in '01, '02, '03, all being about 22, 23, 24 billion, and now on either side of that we're down in the low mid-teens.

So that's the size and as far as the delinquency peaks go, it's about six, seven, eight quarters from the end of the origination period. So let's call it seven to ten quarters on the bulk side is when the delinquencies would peak. So you've got large books, '01, '02, '03 out there, roughly two years now, at the peak and you've got smaller books on either side.

And what kind of timing would you look for on the flow side?

On the flow side the peak is probably out a couple more quarters than the bulk. So ten to 13 quarters rather than the seven, eight to ten quarters on the bulk side.

And is the ten to 13 quarters, is that the---

And that's from the end of the origination year.

And have you seen the recent vintages seasoning and differently than the traditional pattern? I ask because with the intensity of the refinancing boom, the question is whether that changes the seasoning curve?

Well, on the flow side we call it a bell shaped curve. The more recent books, that being since '99, 2000, are higher paths than the mid 90s.

Reasons for that largely is because we didn't do 97s and 100s back then, we didn't do A minus, we didn't do Alt A and a number of other things. But we do get paid more premium.

So the more recent books are higher than the books from the mid 90s. But the most recent, the '03 and whatnot, are on paths lower than the '00, '01, '02 path. And likewise on the bulk business, the more recent books, the '02, '03 books are at a lower level than the '99, '00 books.

As far as the shape goes on the flow, yeah, they come out normal but because of the high degree of runoff, they're going to be the bell shape without much of a tail. They're going to be front loaded so they're coming out normal because you have most of the population throwing off the normal delinquencies, but now we've lost so much of those books that they rapidly fall once they get out a couple of years and the runoff has occurred. So they'll be front loaded distortion, not much of a tail.

And you mentioned that the '03 paths were on a lower trajectory than the previous years. To what would you attribute that change?

Well, we made some product adjustments on the Alt A side. Some customers had a few issues on they were doing some of the A minus and some market adjustments. So customer and product adjustments we curtailed some of the higher risk customers in the product lines.

Predominantly in that Alt A area in particular.

And so just to make sure I heard your earlier comments, are you looking for delinquencies to be flat to down in '05, is that what you had said?

Yes, it could happen. If these trends continue and we were monitoring that all through '04 as you noticed we had a decrease and then a slight increase late in the second half, but we're encouraged by the delinquencies and I would say except for one or two markets like the midwest the rates have been reasonable, too.

This is very helpful. Thank you very much.

You bet.

Our next question comes from Brad Ball of Prudential Equity Group.

Thanks. Good morning. You mentioned that the, just now that the delinquencies late in the second half had a moderate increase. Is there some seasonality to that?

Generally there is, yes.

Yes. If you go back in normal markets we see a decrease in the first two quarters and an increase in the second two. That just happens to be the way the general market kind of works with respect to delinquencies year in and year out there may be an aberration in one year. But for the most part year in and year out we see a decrease in the first and second quarter and then they gradually build, although this last year we had a modest increase in the second half versus what happened in the previous year.

Okay. Separately, on the average premium earned rate you've commented briefly on the uptick, linked quarter relating to bulk and more A minus in your mix of business. What should we expect in terms of the average premium earned rate going forward? Will this trend of improvement continue or given the bulk NIW is going to level off or decline, it won't be as significant going forward?

Well, a big part of it also you didn't mention was the fact that we're doing higher LTVs and ARMs on the low side. I think that contributed probably more to that uptick than the A minus and bulk did although all four certainly worked in concert relative to expectations. I really don't know.

A lot will depend on mix again. I think, I don't think they will stay at this level. They might just tick down a tick but not significant change.

What are your forecasts in terms of, you talked about the $2.3 trillion market for '05, do you think that ARMs remain as much in demand as they have recently, will that begin to wane as rates rise?

No, as rates rise it might even put more pressure on them happening. So if rate rise you'll probably see more ARMs in the market.

Okay. Great. And just to ask a question from earlier a little bit differently, could you update us on your outlook for consolidation in the industry over time and whether or not MGIC has an interest in deploying some of your excess capital into areas outside of U.S. mortgage insurance?

Well, relative to the consolidation question I think over time it has to happen. And whether we participate in that or not, I don't know but I think it needs to happen for the industry say given how our industry is changing along with our customers. Relative to, do we have an interest in investments or mortgage insurance outside the U.S.---

Or even non-mortgage insurance.

Or even non-mortgage insurance? If the returns are such that they're at levels higher than what we can achieve here and businesses are synergistic to what we know and understand then we have an interest.

Great. Fair enough. Thank you.

Our next question comes from David Hochstim of Bear Stearns.

Good morning. On the persistency sort of forecast you talked about low 70s and I was wondering if you could break that into the bulk and flow pieces?

I think the, on the flow side, David, we may just get to the 70s but the bulk is running in the 50s. So that's why I say you've got to model up bulk and flow and we give you enough information to do that.

Right, right. We are at 64 on flow and this quarter, and your low 70s that's a year-over-year number not the quarterly run rate?

That's a year-to-year.

Year-to-year and flow.

That would be the peak if we got to 70.

On the bulk side, too, the size of the books are also going to distort the overall persistency number because as we talked about these large '02 and '03 books on the bulk side throwing off delinquencies peak delinquency years now. On the persistency side, a lot of those books are two to three-year ARMs with two to three-year prepays.

And now the newer business the books aren't that large so you've got two large books of business, the '02, '03 in two and three-year ARMs about to hit the ends of their prepayment penalty. So those books will throw off a lot of cancellations there as they come off of their two to three-year prepay period, and the books on either side once again being smaller it's going to look odd I guess from a persistency standpoint much like from a delinquency standpoint.

All right. I mean if we looked at just the flow on its own then the numbers must be, if people look at historical persistency rates and the industry was in the 80s---

Right.

And now it's, I mean people are talking about lower numbers but a lot of it's just distortion from bulk.

Well, no, as we've talked, we think the best of flow business gets now is in the high 70s at the absolute best. So our low 70s is, it's, that would be, we'd be pleased with that happening.

Okay. And then another question. Just on Alt A and bulk it seems there's still a fair amount of Alt A business and you've talked in the past about having difficulty pricing it appropriately. Is there something different about the Alt A business you've been writing in recent quarters or?

Well, the Alt A on the bulk side, in our bulk business in general we see a fair amount of 80s and under. So to the degree somebody's walking in with an Alt A program and putting 20% down, that business is, performs better and I would say easier to price.

Where we think things get a bit iffy is Alt A on high LTVs where somebody's walking in without a lot of income documentation and not putting much in a way of a down payment. It's early, but we think that business performs at a higher loss level and if appreciation rates slow, that may, that business may deteriorate.

We did improve pricing on that, David, and also what we've tried to do differently is just accept it with certain customers that were very comfortable with this part of a piece of their business that they're going to send to us. So we've really tried to deal with the Alt A from serving those customers that we have a lot of confidence in.

It is a product I think fraught with fraud on a wage earner basis, anyway. This was a product that came to market many, many years ago as one for self employeds and somehow have all been to wage earners and I think in some cases just to help them afford the house. And we try to stay away from that type business.

And are you doing more interest-only hybrid ARMs in bulk as well or?

Well, bulk interest-only is more prevalent both today on the bulk and on the flow side. On the flow side we estimate that the short term IO product probably is about eight or so percent of recent writings. There wasn't much IO business prior to '04, it's pretty much an '04 phenomenon. So we think as of last quarter or so short- time IO side about 8%.

In your business.

In our, yeah, at MGIC.

And is that classified under ARMs? So is that---

Typically the short- term IOs would fall in the ARM category. Typically concentrated in the three-year ARM with a three-year IO.

Okay. And then finally, could you just give us some maybe additional color on geographic changes? I guess you talked about California impacting your bulk business more than your flow business because of your mix. Have you seen any benefits from some appreciation in midwestern states that is limiting the increase in claims or do those claim rates still reflect relative weakness in those markets?

Midwest is still weak and as I mentioned before, one of the few markets where we saw increase in delinquencies, David. More recorded.

Thanks.

Thank you.

Our next question comes from Geoff Dunn of KBW.

Good morning. I think most of the questions have been answered already. First a number question. Can you update us on the remaining authorization on your buy back?

I think 4.6 million shares left.

When you talked about the premium yield maybe only coming down a couple of ticks as we move forward, can you reconcile that with the fact that a couple of those big '02, '01 bulk books, which I think were pretty attractively priced are rolling off right now. How is that being offset? Is that just the flow business getting back to a higher LTD mix or is there something else occurring?

Well, we're still writing 15, 16 billion of bulk at what we think is attractive pricing.

Not quite at that level, but high levels. As well as I think more to your point, though, yes, on the flow side.

So the flow is seeing such a dramatic enough change to provide that off offset?

Yes.

Okay. Great. Thank you.

Our next question comes from Mike Grasher of Piper Jaffray.

Good morning and nice quarter. Most questions have been answered. Maybe you could provide a little bit more color or background in the single file product and how that's progressing as far as its acceptance in the market.

As far as the acceptance of it really we went through a pilot with a large aggregator and now we're expanding it to others within the marketplace. From a consumer side, it's been nicely accepted where offered. People have to understand it.

As we've talked about previously there are a number of originators when you get high credit score borrowers that just offer a second mortgage and don't even get to the mortgage insurance. Now this has given them a discussion pointed to so because it is sold basically as a non-MI product, tax deductible and put in as part of the rate. So it's got a lot of consumer benefits.

We've informed, I don't know, 45 to 50,000 brokers in the marketplace relative to the product itself and now we're working on adding aggregators of that so the brokers can sell it in to deliver it to Fanny and Freddie who both accept the product now.

So I'm real pleased with the initial acceptance of it and it should be. It's a wonderful transaction for consumers, it lowers their mortgage insurance cost by about 50%, and allows it to be tax deductible. So it's a good execution for the consumer and as a result of that, I think it will ultimately play through as being a strong product for us.

Okay. Thanks. And just as a follow up with the share repurchase, Mike, the current, you've got 4.6 million shares outstanding in terms of your ability to repurchase, I wouldn't expect that authorization to advance any further. Is that fair?

Well, what I said is that we've got four, six authorized. Relative to cash flow, we've got about a couple hundred million with respect to normal dividends. Anything beyond that we would have to arrange for some type of financing and or an extraordinary dividend.

Right. Okay. Fair enough. Thanks very much.

Thank you.

Our next question comes from Bruce Harting of Lehman Brothers.

Are there any additional underwriting variables you use on the ARM flow business you're doing to adjust for what, I don't know, in '06 could be the first year of relatively significant repricing of the three one product? And do you underwrite for that first increase in payments or can you just talk a little bit about that '06 risk? And if that's the right year, thanks.

Well, on the flow side I think only 13, 14% of the recent business is ARMs

Yeah, 13.8.

And most of that is three-year ARMs. And the debt to income ratios relative to fix are a little tighter, but I mean people move to the ARMs to help affordability. And so you are exposed to the payment shock three years out on our flow side but it's not a big number, 7% is three ARMs, a few percent one-year ARMs and so on and so forth.

We don't underwrite it any differently, Bruce, and that's one of the things that's changed, at least in my career, that in the old GPM days that we had, or by downs people did it at the what was going to be the adjusted rate. Today they don't do that and that's one of the reasons why we talked early about the dangers of this product in that it had about a 45% price adjustment three years out even without rates increasing.

And as a result of that, what we've tried to do is just limit, talk about it, talk with the agencies about the dangers of it and try to limit the production of it both in the general market and then in our portfolio. But as far as the underwriting of it, as you know what's happened is pretty much delegated to DU and LP within our industry and so if they approve it we accept it. So we've got to deal with through either limiting it in our portfolio or pricing it differently.

Virtually all the one- year ARMs have a Neg Am feature, right, and the payment shock is only limited to about 7.5% higher payment and the difference would go into principal. Is that true on the three one?

We call it potential Meg AM, yeah. So you are recast that but again, I sometimes wonder if the consumer knows what they're getting into.

And I think the market is pretty, oh, maybe unaware of some of the payment shock that can occur because over the last ten years the interest rate environment's been flat to down so if anybody's been in an ARM it's been, no payment shock or the rate went down. But from these levels going forward it's likely to be a different story.

Did you tell us the persistency rate for the most recent month or quarter in addition to the twelve-month rolling number?

We didn't but Mike Zimmerman is looking it up as we speak.

Thank you.

And maybe we'll get back to you with that. With all the paper we have on this table I'm sure one of them has that number on it.

It's definitely here.

But we'll interject that, Bruce, if we find it with the next question.

Thank you.

Our next question comes from David Chamberlain of Trafelet.

Just a follow-up question on the JV income and Sherman and Sea Bass. What are the, what do managers say in there in terms of as they do look out into '05 and '06 in terms of the sustainability of those revenues?

As we've said in the past especially this year they both had relatively strong years and our outlook for '05 is flat for performance for that. And that would be the guidance.

Given how strong their years were in '04, '05 flat would be a great year.

Okay. And then, just related to that on Sea Bass, what is kind of, in this quarter was the makeup of [come again] sale revenue from securitizations versus last quarter? I'm curious.

I don't have it with me.

I don't have it with me right now. Mike and I, we can get back to you on that.

Okay. Great. I'll give a call on that. Thanks.

Mike has got the number I think.

For the annual number that we talked about was the 60.2% for the quarter. And this is the entire bulk combined, is 58.8, and for the month of December for the bulk, 53%.

What's the full year?

I said the total number. I don't have the breakouts. So we saw a little bit of surge in cancellations in that last month of the year.

Hector, any more questions?

Yes, our last question comes from A. J. Grohl of Smith Barney.

Hi, thanks. I understand there's some lenders out there that are providing loans where the first six months payments is deferred and I just wanted to get your thoughts and find out if you guys are involved in insuring any of those types of loans?

Yeah, we've been seeing some of those ads for those types of loans. At least the ones I've seen is six months, no interest, but then they hit the borrower for a couple of points up front.

2.5 points.

Basically collecting the interest up front for the six months that they give them off and typically then rolling that maybe into the loan amount. So it's just another sign of some of the things the market is doing given the price appreciation that's occurred relative to the income growth and affordability becoming an issue. So you'll see more ARMs, maybe more Alt A and more products like this. To my knowledge we haven't insured any of this yet.

It hasn't been widely accepted in the marketplace because of the strong points. In essence it's all prepaid interest. I think consumers are savvy enough on that and as a result we haven't insured, as Larry said, probably any of those loans.

Thank you.

I'm showing no further questions. Mr. Zimmerman, I'd like to turn the conference back over to you.

Thank you, Hector. With no more questions thank you again for your interest in MGIC and have a great day. Thanks.

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