MGIC Investment Corp (MTG) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment first-quarter earnings conference call. At this time all participants are in a listen-only mode. [Operator Instructions] . As a remind they are this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin your conference.

Thank you. Good morning and thank you for joining us on the call this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss first-quarter 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 include certain non-GAAP financial measures. The release and this informa -- 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 obligations to update those statements in the future in light of subsequent developments.

With this, I would like to turn the call over to Curt Culver. Curt?

Thanks, Mike, and good morning. Net income in the first courter totaled $182 million, a record for our company compared to $130 million last year. Diluted earnings per share was $1.90 versus $1.31 a year ago. New insurance written was 11.4 billion comprised of 8.9 billion of flow and 2.5 billion of bulk. Persistency ended the quarter at 60% versus 51% a year ago. Flow persistency was 63% versus 51%, and bulk was 49% versus 52% a year ago. With the lower new insurance written volume and the -- the low persistency rate, insurance in force fell to 172 billion, down 7% from a year ago. And our average premium earned was 72.5 basis points down from 74.5 basis points last quarter and flat from a year ago. We are delighted to see the significant improvement in the delinquency notices from 85,000 to 78,000, reflecting the usual seasonal strength in the first quarter, as well as the strength in the economy. Paid claims were up 149 million up from 142 million a year ago, and down 2 million from last quarter.

Our reflecting the significant drop in delinquencies, losses incurred were 99 million, which is 48% lower than the 191 million reported a year ago. The reduction of loss reserves was purely a function of the reduction in the number of delinquencies as we are experiencing higher severities coupled with basically a flat claims rate. Underwriting expenses totaled 68.7 million flat with a year ago. Our joint venture results continue to be excellent with strong quarters from both C-BASS and Sherman Financial, and finally in the quarter we repurchased 1.1 million shares and now stand at 95.7 million shares. In fact since 1997, we have repurchased approximately 28 million shares at a cost of 1.5 billion, most of which have been funded through internally generated cash flows.

As we look at the remainder of the year, we are encouraged by what is happening on the loss side of the business, as well as our productivity as a company and by our joint venture results. Our challenge continues to be growing our insurance in force, especially given that we are dealing with a smaller origination market and a market in which structured transactions to avoid our product continue to be a strong segment of the market. While we can't do anything about the size of the market, we are making progress against structures as single file loans accounted for just over $400 million or 5% of our first quarter new insurance written. Higher interest rates will also help. I also remain optimistic on mortgage insurance tax deductibility happening late this year, but lem r-- let me remind you I was also optimistic on that last year. In addition to the challenge of a lower level of new insurance written, persistency although improving still remains at historically low levels. Further more over the remainder of the year we think of -- it will only increase marginally from where it is today. So while we have a number of positives working for us we still have a number of challenges ahead of us also. With that, let's take questions.

[Operator Instructions] . David Chamberlain, [Trafelt]

Yes, thanks. First, just can you -- can you kind of talk about -- a little bit of the seasoning curves on your individual books of business on a [actual] year bases, how that is progressing on the bulk side.

Bulk?

Yes.

On the bulk side of business?

Yes.

Okay, Larry?

On the bulk side the delinquency pass of the newer books are as good or lower than the prior books. Probably reflecting the strength of the housing markets. We haven't seen any deterioration in the performance of the newer books relative to prior books. Does that answer your question?

Yes. I guess just secondly when -- when you guys talk about the seasoning of I think the '02 and the '01, and curious in terms -- if you feel they are near peaks or where they are in the life of losses?

Yes, what do we have left on those, Larry? They can't -- this is on the bulk.

On the bulk side again?

Yes.

On the bulk side, the '02, for instance is really kind of past peak as far as delinquency goes because, in part, the appreciation that has occurred since then and also the runoff. The '02 books of business have about -- only a quarter remaining of what we initially insured. Bulk in '02, about a quarter remains.

'01?

'01, 12 -- 13% of the original writings remain. Now the delinquency rates are high because the denominator, the in force is low, but if you look at an absolute delinquency count, they are past peak.

All right. And then secondly, on the -- on the single-file product, what kind -- can you give a -- maybe a -- any kind of origination or ap -- application numbers in terms of the fourth quarter, first quarter at this point?

Well, we just introduced it in the fourth quarter but -- and I did mention that we did over $400 million of new insurance written in the first quarter and I think about 600 million of application or commitment volume within that. Relative to single file, the acceptance is growing in the marketplace. We have had more originators, as well as more investors accept the product. We are also seeing -- we've had three of our competitors basically match our product, which increases the usage for the whole market when you have more acceptance within even our industry. So we've seen a number of positives relative to single file.

Do you have any, or have seen any reaction from the traditional lenders that are in the high -- high captives (ph) yet from the three of you not rolling out this product yet, you haven't seen any kind of reaction yet? Is that fair to say?

Yes, I mean they will accept it in some cases from certain correspondents is what we have seen to date.

Okay, great. Thank you.

You bet

Mike Grasher of Piper Jaffray.

Unindentified Speaker: Good morning. I'm just wondering if you can give us an update on incurreds, your outlook for the remainder of the year? And then if you could comment, if there was anything out there in terms of -- out on the regulatory front that may have you concerned at all?

This is Mike Lauer. Let me talk a little bit about the incurreds. As Curt pointed out, the incurreds were down significantly in the first quarter from -- from the fourth quarter and a year ago, primarily due to the decrease in the number of delinquencies. So the delinquencies were down 70, almost 7300 for the quarter, and if you -- if you factor in, the average claim rates and severities, that's pretty much all of the reduction in the reserve. We did have some severity increases on the existing delinquency. So for the quarter the reserve was down 50 versus paids and incurreds. The -- going forward, I would say this, on the earlier calls I said paids would probably be in the 600 to 625 range for the year and I'd -- I'd still would hold that for now. I mean, it's possible that we may see some continued improvement on paids, although it is too early to forecast that. So I would be -- I would -- at this point in the year, not seeing the rest of what develops economically, I would -- I would look toward this -- some increase in paids, and for the remainder of the year I would think that incurreds would about equal paids. Now I subject that, I guess to what happens to actual delinquencies, if in fact, delinquencies continue to trend down, the pure number of delinquencies, then incurreds could be less than paids.

So it is really going to be a -- a function of the economy for the balance of the year, the size of the book, and how they mature as to whether or not we see an increase in delinquencies, as well as some of the claims factors. So I guess net-net, I'd say that incurreds equal paids balance of the year. Maybe slightly higher on a quarterly basis than the second half of the year because you would anticipate the normal trend would be that -- that delinquencies would rise somewhat in the second and third quarter -- or third and fourth quarter, excuse me. If that doesn't happen, then we may see some adjustments.

Okay. And incurred, anything out there from a regulatory perspective?

On a regulatory, I think you all have seen the articles and Inside Mortgage Finance and other publications relative to what's going on in the title insurance world relative to capital -- captive reinsurance and also some insurance departments. I think we have seen comments from California, Colorado, and, I think, North Carolina relative to mortgage insurance captive reinsurance. For our part, we have not been contacted by any insurance departments, although I -- given what I've read, I would expect that to happen.

But relative to the captive arrangements themself separating from the title insurance world anyway, there are significant differences. And relative to our product and our industry's product, we have arranged and -- and each of these treaties does have an actuarial opinion from a national recognized firm. That concludes that risk is being transferred in the captives, and that the premiums seated are commensurate with the risks being taken by the captives. They have paid minimal losses, and I've talked about that publicly. But the function of most of these captives is catastrophic in nature and not to pay on the expected loss cycle. So that's why they have done what they have done on the loss side. So I -- I think relative to -- as insurance departments get more involved, we will go through this process with them. I won't speculate on what the outcome may be, but I think we will be hearing more about that in the next month or so.

Okay. And then in terms of your total writings or new insurance written, I think you may have said last quarter that you would look forward -- '05 to be comparable to '04. Is -- is that still the case?

Well -- and I think I talked publicly since then saying the bulk I don't think will be as high as we expected it to be year-over-year. We are just finding less opportunities there that make sense for us relative to the premium rates we feel we need to charge on those transactions. So I think that will be down slightly. And I -- and I think the flow may be down slightly also. So I -- I think in both areas, we'll see a reduction. Now bulk can change on a dime. You never know what is going to happen within that world. The spreads move, and new opportunities present themselves. And, opportunities there are $1 billion, $2 billion chunks, not a loan by loan, so that -- that's a caveat.

Relative to the volume, I mean, as I looked at January and February, which is our latest market share results, we are up slightly our market share. So the volumes that are writing are -- are down, not relative to market share, but as I said in my comments, they are down relative to the size of the market we are dealing with, as well as some of the opportunities we are losing the structured transactions. We are making headway, as I mentioned, on those structured transactions, but we have a lot of room left to make headway too.

Okay . Thanks very much.

You bet

Kenneth Posner of Morgan Stanley.

Good morning. I was wondering if you could -- if there's a reason why delinquencies would improve and severities go a little bit higher at the same time.

Basically, we -- relates to the size of the coverage that we are writing, Ken.

The average loan size, Ken, keeps going up every -- every month.

Okay. So severity is not going up per say as a percentage of the loan it's just -- ?

No. We are still seeing the same mitigation opportunities. It is merely reflect of either deeper more coverage or larger loans that we are writing business on.

Okay. Thank you. And then if I can ask a second question. It looked like the Radon line went down from the fourth quarter to the first quarter.

Average premium rates?

Yes.

Okay.

I'm just curious what factors might be behind that?

I think less bulk within it. I think -- is this the 72 -- the 74. I mean if you look at it year-over-year, Ken, we are flat at 72.5 basis points. But we did -- I think we are at 74.5 in the fourth quarter. We wrote --

we wrote 49 of bulk in the fourth quarter.

And therein lies why it went down a couple of basis points. It's still strong at 72.5.

Does the bulk -- did the bulk have a component of [inaudible] low end during the quarter or is it -- come in over time just like float, as long as it is in the portfolio?

Could you repeat the question?

Does it come in monthly?

The premiums from bulk, do any of them come in during the quarter when it is written as opposed to just coming in over time as it is part of the portfolio?

Well from we do a transaction -- we will do a number of transactions during the course of the quarter. Take this past quarter, some of them could have had an effective date of Jan. 1, Feb. 1, March 1, and the premiums are generally paid monthly from the point of inception.

So that is just like flow, isn't it?

Pretty much, yes.

And then with -- with this -- can you -- have you given a sense of where the premiums would be on the single file so we can gauge whether that would have an effect over time?

A single-file premiums are basically half of what our standard flow rates are for those LTV categories.

Ken, this is Mike. You can -- those are posted out on our web site, so depending on the LTV, there are different structures, you know for 90 versus 95, et cetera.

Generally there what happens, Ken, is -- it is a lender-paid product, which a good thing, and it helps relative obviously to the making a tax advantage because they can deduct that payment as part of the points or the interest rates that they have paid. But what they normally do on a typical 90% loan which would be about 25, 26 basis points is the lender grosses that up to a point and pays us a single premium at that point in time. So we have no persistency risk and then they add a quarter on to the note rate. So if it would have been a 6% mortgage with mortgage insurance at 50 basis points the borrower paying 6.5, what they are going to pay is 6 and 1/4 and 1% premium and no persistency risk and they will be able to deduct that interest.

And the reason for the lower premium rate, about half of what Curt mentioned there, is because on this product we've imposed, let's say underwriting criteria specifically limiting it to the higher FICO. It's generally 700 and above. So the premium rate is lower because we have improved the risk profile by requiring a high FICO among other things and we feel that is the portion of the market that has been primarily lost to the piggyback.

Right. Thank you very, very much.

You bet.

Richard Diamond, Inwood Capital Partners.

Since depending on who you speak to, MTG is currently trading below its liquidation value, given demand, your overcapitalized. What would it take -- what would be the hurdles to increasing stock repurchases at these very attractive levels?

This is Mike Lauer. The -- the issue would be to request what we call an "extraordinary dividend." And that would be discussion with the insurance commissioner and ask for an out-of-normal cycle dividend for the purchase of re-- repurchasing stock. We have done those in earlier years. We haven't done them recently. For the most part we have just been divying up a normal amount of the writing company's dividend and using that.

Would there be any consideration given these attractive prices to stepping up repurchases?

We analyze that, on a quarterly basis and look at operating cash flows as well as additional leverage and/or extraordinary dividend, so we continue to do that.

So there is consideration, yes.

Secondly, is it fair to say that you've maintained your credit standards in a challenging environment and have remained disciplined, and that if you wanted to grow in force -- book, you could have. That you just have chosen to remain firm on your credit, given your experience, throughout the years.

Well, there is no question because of our stance on captives and if you want credit quality, particularly the NINAS (ph) and the stated income loans where we have taken strong stands competitively, that we certainly could have a significantly market share than we have today if we hadn't taken those positions. But those were positions that for me are -- for our Company are well-grounded relative to the long-term benefit to our Company. You can make things look good in the short run in this industry, but it doesn't help you longer term. And we are about a long-term business. We are not thinking about that liquidation value.

I commend you on your discipline. Last question. If for some reason the California insurance commissioner decided that captive reinsurance was no longer permissible, wouldn't that be a bene -- benefit for the industry as a whole?

That -- that really -- I don't even want to speculate on what that might lead to or that they will get to that point. There's a lot -- I mean -- that would have to happen to make that. So I don't want to speculate.

But it is fair to say if it did happen, that -- that could be seen as a positive as much as anything else?

Everybody needs to draw their own conclusions on that.

Thank you very much.

You bet

Bruce Harting, Lehman Brothers.

So, you know -- Mike, just to be clear then, you have about 450 mill left between now and year end and in the remaining nine months on the paid. So expect the -- expect the incurreds to be about the same?

I think -- yes. What I tried to say, Bruce, was that everything is relative to the delinquencies, okay. And traditionally, we may even see a slight reduction in the second quarter on a number of delinquencies. That is generally the trend. But normally, we would see some increase in the second half of the year, and it is too early to forecast that. So if we don't see any significant changes in severity or claims rates on the delinquencies, then for the most part, incurreds ought to track paids.

Okay. And then the other question is, a lot of the ARM originations last year, particularly in the -- the low prime were two-year ARMs. Likewise, the year before. And last year a record amount of loan originations in the U.S. were sub prime or all day. Can you comment on any specific precautions you are putting in place on the underwriting side to protect against, these two-year ARMs, adjusting upward later this year and into next year?

Bruce , this is Lawrence Pierzchalski. On the flow side we really haven't seen much mix change in the way of ARM growth. On the flow side, 91% of the flow in force is either fixed rate or long-term ARM, five-plus years. And on even the most recent writings, probably 87, 88% is either fixed or long-term ARMs. So we really haven't seen it on the flow side. Now on the bulk side, we are probably somewhere around 60/40. On the end force 60% being ARMs, 40% or so being fixed. And on the bulk side, with each transaction, we get the data for each loan. So we'll know the LTVs and what not. So on the bulk side, as you know, it is not just high LTVs. We have a lot of lower LTVs, 80s and under, and we get in a way to underwrite each loan, vis-a-vis the data we receive on each loan. And we are keeping an eye on that. Some of the things you raised certainly are a concern, but we are in a different position. We can underwrite the loan. We can price the loan. And so on and -- and it has higher LTVs in many case -- or lower LTVs in many cases.

We -- Bruce, you are right on relative to the risk in the bulk side with two-year adjustables going upward, and -- and we did put higher claim factors in. I think it was late last year. So it increased our pricing, if you will, and maybe that has had a factor somewhat in the first quarter on our volumes, but we did -- we did recognize that within our -- our pricing models also.

Thank you.

AJ Grewal, Smith Barney.

Yes, hi. Looks like Sherman bought a bank in the first quarter to originate sub prime credit cards. Could you give us an idea how material that is or that will be and what is the strategy behind this acquisition?

Well, we are not going to comment on -- it wasn't a material transaction obviously for us, but -- or the size of the transaction, but the objective there is they will have access to capability of writing the credit cards to consumers that they have been doing business with. They will originate sub -- sub prime credit cards. So it is not going to run as bank per say but a credit card bank.

Thank you.

Jonathan Gray, Sanford Bernstein.

Yes. Of the total premiums earned in the first quarter, can you give us some idea of how much either in dollar terms or as a yield on the average balance was bulk as opposed to traditional?

I don't have a split on that --- I don't have the split on that right here, Jonathan. I can call you back.

Okay.

Good to hear your voice, Jonathan.

I am sorry?

Good to hear your voice.

Yes, I enjoy hearing it also. [ LAUGHTER ] Where were we? I guess -- I am wondering if the Company decided that -- that the -- there were regional markets that were -- that were ho -- very hot in terms of appreciation, and you concluded that those markets were significant to your total risk exposure and were likely to post a decline and a rise in -- in loss content at some point within the next 18 months or so. Does the Company have any latitude at all to try to smooth the -- the rate of return to investors. In other words, is there any way at all to set something aside in the way of a special reserve in light of what you know will be a rise in delinquencies prospectively?

No, unfortunately that's the issue with this industry. As you know it's driven primarily from current delinquencies. The issues that we have would be on the writing side and Larry can talk a little bit about contract underwriting and underwriting standards and -- and quantifying higher-quality borrowers. So we -- we would do that all prospectively by shifting risk geographically and also minimizing certain products, et cetera. But as to anticipating losses, no.

Well, let me ask you in light of the very strong aprec -- extraordinary strong appreciation in some markets where one would think at some point there would be slower appreciation and higher delinquencies and losses, possibly modest price declines in some of these markets. Is it reasonable to assume that the company has already adopted more stringent underwriting criteria?

Clearly a couple of things have helped us, first of all, Jonathan, because of that strong real estate appreciation or that business is being written, we don't have as much business being left there because it is run off. Relative to the flow side of the business, we really have to take what comes to us from lenders and, again, within those very hot markets, we haven't seen as much volume. If you look at California and the flow business, it is a small part of what we do.

On the bulk side -- so we don't worry about it so much in the flow side. On the bulk side, we do have that opportunity, and that's why we raise -- we talked about late last year we doubled, if you will, the claims rate that we are seeing in California to put into our pricing and anticipation of things happening there at some point because it has been so good. So we have taken those opportunities and markets on the bulk side to raise claim rates in our pricing in anticipation at some point in time things getting somewhat disrupted within those markets. I mean, if you look on the flow side, even with the hot markets that we've had, and we tracked this very, very closely relative to supply and demand in our sector, in our space, first-time home buyers. The $300,000 and lesser home. You are still looking at three to four months in just about every one of those markets as far as supply. Which is very, very good relative to historical standards. So where we can really control it is on the bulk side, and we have done that.

And relative to what we have on the books, too, you never know when you are going to see the declines you speak of or where. So you're always really operate by managing the geographic dispersion of risk, and no state is more than 10% of our book. And so, generally California will be highest -- it's probably 8 or 9% of our risk in force spread over years in California is a big place so we have a good geographic dispersion of risk and generally the problems are worse at the upper end where we don't participate much.

And frankly we have -- still have most of our book if we looked at that time geographically in the Midwest which has participated on the down side or very slow appreciation within these markets. So I -- I feel very comfortable relative to the book that we have.

I hate to preoccupy too much of the time here, but it was your answer that was very long. My question was pretty succinct. So I am going to push it if you don't mind and ask one more question.

We will try to be more brief next time.

One more question. Unless you rather I got back in queue. But let me ask the question first and then you can decide. How is that? The -- your -- your largest customers, your largest -- the largest customers for your -- for your re -- for your insurance product are currently in the process of being beaten up pretty badly publicly, and here I refer to Fanny and Freddy, of course. Whatever comes out as a future scenario it does seem that they will be weakened, if you will, diminished in their total role within the mortgage market. Maybe their market share remains the same, but they don't have -- they have been injured politically certainly. My question, just very general, maybe you can give us some insight. What implications does it have for your industry and your Company on -- on a net balance. Is it positive? Negative? Or just not clear?

That's a tough one to call. Clearly the concern that we had going back to 1998 when Freddy Mac made some changes to the charter, if you will. And then after that fact, numerous programs and products which were introduced that got into our space and got into the space of -- I would say the primary side of the business. We think the -- the Baker Bill is very positive in that respect relative to controlling new products and activities which will be beneficial to our industry and those of us that participate on the primary side of the business. I wouldn't like to see a scenario whereby the GSEs were privatized. That would not be positive to our business and I don't think it would be positive to the housing market. So all in all, I mean, there are some upsides and downsides. I -- I don't know how to categorize it as ultimately more positive than negative or neutral, but there are some pluses and there are some minuses to that, relative to the biggest concern which is franchise risk some time ago, I think we are on excellent footing.

Yes.

But we also recognize that they are, indeed, our partners and we are working with them on numerous programs and products, and probably more so than we had in the past because of the change politically, Jonathan. So I think there clearly is much more a sh -- a partnership. The overall market may not be as good to us in the next couple of years as what's going on with interest rates but I think long-term it's a very positive.

You know, it's interesting, having been -- having lived through the late '98 period, the Company's valuation has run at about 60% of what it used to prior to the political attack by the GSEs. One would think that investors would see them -- se the risk they pose to your franchise or could pose as being diminished along with the political clout. I want to get off line so I don't take up more of everyone's time.

Thanks, Jonathan

Ron Bodman of Capital Returns.

Still here despite all the discussion on the earlier questions. [ LAUGHTER ] I had a question in the -- in the captive area. I am wondering when the reinsurance agreements are set up with the captive entities of the originators, is there a broker -- a broke -- you know a reinsurance broker that is a party -- you know participates in the transaction or is it sort of a direct deal between the captive/originator?

It is a direct transaction. No broker involved.

And then -- so -- when the --- does the actuarial firm in the [pinion] you mentioned, is that ren -- is that updated annually? And are they also [opinning] on the pricing on that reinsurance deal or is it solely that risk is being transferred?

They are updated annually, and as far as risk transfer that is being -- and the pricing. So, yes.

But it -- I mean, are we to assume that it is, in effect, being done at a market rate? Or it is really a one-to-one transaction and we are not -- we are not really getting a look at the independent reinsurer with no affiliation to the originator as to what they would charge for like what you refer to as catastroph -- catastrophic coverage?

I would describe what the actuary does -- is they look -- one, I would say they recognize that when we write insurance it is potentially for 30 years given most of the business is 30-year mortgages. And so they, every year, look at performance over the last 20, 25 years, and the economy can go through cycles. We've enjoyed a pretty good run here, 10, 15 years is pretty good stuff. But in the '80s, last great recession interest rate cycle, things weren't so good. So they -- they look at that and what each year they do is add like -- what they did this year, add '04's experience to the overall 20, 25-year experience, and then they see how many scenarios there were at one per hundred, five per hundred, ten per hundred and 15 per hundred and they carve the premium accordingly to that lost distribution and the layer we are taking versus the layer the captive is taken.

And -- and do these captive reinsurers, to your knowledge, do they ever buy reinsurance from third-party reinsurers in essence to share or lay off the risk that they are assuming from you? Have they ever done that? Are they doing that currently?

I am not a-- I am not aware of any structures like that and I think all our agreements require them to notify us if they subsequently reinsure the risk.

Okay. Thanks a lot and good luck.

Thank you.

[Chad Yonker, Lichfield Capital].

Hi, guys, the question I have is about this new prepaid product you have. What I am curious about is how long do you think it will take to get the sort of uptick that you are looking for or what the lead time will be and what do you have to do to get it there? Is there an education process that needs to happen with the consumers or can it be handled on just the lender basis or what do you see there to make it happen?.

Well, I think it is all of the above. Clearly consumer ultimately needs to know more about it, and we have seen things on CNBC and others that talk about it now. It is funny, going through what we have gone through the last ten years relative to our industry, people always talked about avoiding it, and now we are seeing reports on how to use mortgage insurance, again, as the best execution. So that's part of the process. Mortgage brokers, understanding it. Real estate brokers understanding it. And those are all part of I think not only our Company but our industry's position to make more people aware of the product. Because clearly it is an education away from the piggy bank. Because it certainly went that way, as I mentioned, for a number of years. So the good news is that at -- an excellent execution to the borrower that you can have that conversation now.

And the other thing I would add is a lot of the seconds are tied to prime, in essence an ARM of variable rate. And over the last X many years now, we have seen flat-to-down rates, but now going forward and as of late, we have seen prime start to move up, so some of the borrowers are saying, [whoo], what did I get into here as the second adjust upward where as with our product there are no adjustments. Our premium, in essence, is fixed for life, and the premium on a piggyback is real the second interest rate which can move up.

One of things we are seeing -- I talked to a couple of customers yesterday of -- they are doing more refinances with single file of 80/10 or 80/15 loans whereby they are taking them to fixed debt or one note and it is a better execution for them. So that's good news to see a refinance of one of those transactions away.

And so -- but in terms of the timing and what are you guys doing exactly to get that -- get that message out there?

We are doing all of the above.

Chad, this is Mike Zimmerman. The other interesting thing to point out Curt mentioned earlier that 5% of out currant writings are the single file program.

In the flow side.

In the flow side which is one of the demonstration of market acceptance given that we just introduced it in the fourth quarter. I point out too that consumers are really focused on the monthly cash payment. And what Larry mentioned with rising interest rates on the second, et cetera, are driving people, the brokers, towards getting the transaction completed with that consumer. And we have other products that we have offered over the years for consumers that give the consumer benefit. Like unemployment insurance with a full insurance premium that hasn't been as accepted because of the cash outflow. So I think the 5% NIW is a good measure of the traction that has been taken.

Our strongest push, Chad, has been to deal with the mortgage brokers that are dealing with so many the consumers face to face and to get that education out. That really was the thrust of what we did in the fourth quarter and continue to do so.

Okay. Are you finding there is a conflict from a -- from a profit element standpoint for the brokers or for the bankers in terms of offering the product relative to the structured products in the 80/10/10?

On some, there is no question on the investor side that an 80/20 or something of that sort may be more profitable to the end investor than this product as they look at it. But still contend if you have the best execution to the consumer, ultimately that -- that wins out. And so that's what we are banking on.

Okay. Thanks. Great quarter, guys.

[Jim Kitsinger, Kitsinger Lotman]

Good morning, everyone.

Good morning, Jim.

The I have two questions. The first revolves around the expense structure. With writings under $10 billion a quarter and I will be an optimist and say that, the flow side is $40 billion for the year. The models for most people are kind of $70 million a quarter of expenses. Should that be collapsing as we go further along here now. You know because I just go back and I look at , when much bigger books were written, the run rate was similar to that. Am I missing something there or is it just the cost structure of the entire organization changed over the last five years?

I think a couple of things, Jim. The cost structure has changed in some degree with respect to certain fixed costs or accounting costs I would say we have today that we didn't have five years ago. The number of people pretty much are flat. We are -- but employee costs are up obviously, accounting for stock options, et cetera. So there is some account -- and premium taxes up probably 8, 10 million from about knife years ago. So there are some costs in -- in the business itself, not with standing all of that, we are continuing to attempt to try to take cost out of the business, and we are working on that.

I would say for the balance of this year, if we can keep costs flat to slightly up, that's what we are working on right now. Because we do have some inherent operating costs that are going up as every other fundamental business has with respect to retirement costs, medical costs, accounting for stock options, et cetera, and stock -- restrictive stocks, as well as premium taxes. So we are working on taking costs out, albeit at -- at a slow pace, because we are high fixed cost and -- and we haven't had much change other than the variable costs with respect to contract underwriting. And there, as you know, when that goes down, the revenues are going down too and it is kind of lockstep.

I was just wondering if there's much in contract underwriting expenses still in the kind of current run rate?

Say it -- say it again?

I mean, is there still a lot of contract writ -- underwriting expenses, in -- in the quarterly run rate of say 69 or $70 million bucks, Mike?

Yes, it is a significant piece of the operation clearly. And at -- at this point in time, I don't see that changing much on a month-to-month basis. Unless we make some significant changes, and there is nothing significant planned other than the normal things we are working on to take costs out.

Okay. Terrific. My second question kind of refers to the idea that, the provisioning was down significantly for the quarter relative to where where the claims came in. Obviously just some lagging indicators there, but over the years, I've -- and I guess I don't have the data here to -- to go back, but my recollection, and I am getting older as all of us are, is that very rarely have I seen a step down is this tramatic on the provisioning side, and then what you are saying, Mike, is it is going to bounce back up approximately $50 million per quarter over the next three quarters. Historically once this thing has kind of changed directionally it doesn't change back. I don't have the data on a quarter-by-quarter basis. I kind of always look at this on an annual basis. Can you shed some light or color on that?

Yes, I think if -- if you go back three years -- if you go back and think about '03 development and '04 development, we saw a number of things happening. First of all delinquencies are rising at a rapid pace, every month, number one. Number two, the factors of which that they were going to claim, the claims rate rose significantly. And every month the number of notices that were going to claim was going up significantly, and -- and effectively, you readjust for that every month. So if you have 80,000 notices this month and last month you had 80 or -- 85 or -- the -- the change, however, was more or less most significantly in the rate at which the claims were going -- or notices were going to claims. So we saw two things happening there. We saw a rapid increase and a significant increase, if you will, in delinquencies, as well as an increase in paids dollar amount and the rate at which they were going. So there was a continual increase in those factors.

This quarter what we saw is a significant reduction in delinquencies. I -- on a forecast basis, I can't forecast where the economy is going to be. But if, in fact, the delinquencies will stay flat, for the balance of the year, then every quarter you would have to match what the paids were unless there was some economic development favorable with respect to the number of notices that are going to go to claims. So if all things stayed -- remained the same, and you had a flat notice period -- or number of notices from quarter to quarter, then you would have to for the most part make up, if you will, for the paid amount. So I think we are in a changing environment. What we have done is topped off, if you will, the rapid increase in delinquencies as positive. I think the rate at which they are going to claim has flattened out. And we have seen the paids themself slow down. I think overall we are at a changing environment. Whether or not it continues or it slows down, I think we will have to look at it from the standpoint of what develops in the economy as well as the size of the book for the balance of the year.

And how -- how is the remediation side of it going relative to your expectations? And what is the inventory look like moving forward on a directional basis? I mean has it improved month-by-month kind of, Mike?

Well I would say this. That, first of all, the decline that we saw was across all markets. There wasn't any significant change in any market per say. So it was across the board. So that -- that was, I think . We were pleased with the size of it, although we thought that the direction would be down. In other words, an -- we anticipated that the delinquencies probably would decrease in the first quarter, but the amount by which it would decrease was positive. Okay?

Okay.

As Larry talked about, we turned the corner, if you will, on the bulk books, the '01, '02 book and the '03, '04 operating a little bit better so that's positive. Secondly the -- the question came up before, even though the severity is up, it is not because of -- of deteriorating market conditions but rather just the average size of the loan. So that -- that's positive. And then finally I would say that the amount of delinquencies going to claim was increasing significantly month to month through '03 and '04 and that has -- that has slowed down and flattened out and ends up slightly -- that's positive. So there are some positive trends.

Basically, kind of what you are saying to me, Mike, is all the levers on the credit side are direction -- directionally shifted, whether it's geographic, size, claims, directionally everything is shifted?

Yes.

Okay, terrific, thanks, guys.

Thanks, Jim

Brad Ball, Prudential.

Just a quick follow-up to that. So when you say that the incurreds will match the paids over the balance of this year, you are basically saying that the change in reserves will be zero?

Here, let me -- let me qualify it one more time again. I'm going to restate it. I said they could match. And I say that by -- by, first of all, qualifying and saying if there is no change to -- to the notices, the delinquencies, okay. If, in fact, the delinquencies go down, then there is some maybe positive results with respect to incurreds and paids. On the other hand, if the delinquencies go up, then the incurreds would be higher. And there is one other qualifier obviously. Even if the delinquencies were the same but the environment changed to the negative, and that is the claims rate deteriorated, except then would you see incurreds greater. But for the most part, I would see flat to slightly up when incurreds to paids.

And just to be clear you said in your opening remarks or Curt did that the improved delinquency numbers you saw were driven by two things, seasonal factors as well as an improving macro economy.

Yes, I mean seasonally as Mike mentioned and I did, we -- we always expect in the first quarter that we will do better, but this -- this exceeded our expectations. Which is reflected of the economy.

Right. Right and that's low unemployment and jobs growth.

Job growth -- yes, exactly.

High tax refund.

Okay. You had given -- given prior guidance with respect to C-BASS and Sherman that results in '05 should be, equal to or below -- not quite as good in '05 as '04. Are you changing that based on slightly stronger first quarter? What is your outlook -- ?

I guess I had say in C-BASS they were a little bit better in the first quarter and I would think that for the most part, that improvement would be -- you could factor that in for the year, and I would think for the balance of the year, I would think on a quarterly bases, they are about a push-to-slightly up from last year. Sherman was up strong in the first quarter. I think they will probably have an equal quarter in the second quarter to the first quarter or around there. And then for the most part, they would be flat third and fourth quarter. So they are having a little bit better year and look -- look to have a better second quarter.

Right. So overall, then it's a little better than your prior guidance.

Correct. Both companies.

Okay, thanks, I appreciate it guys.

David Hochstim, Bear Stearns.

Hi, thanks. I have sort of two follow-ups. One to Richard's question about freeing up some of the capital and the mortgage insurance subsidiary. The risk and capital ratio down to 6.4-to-1 in the March quarter and I guess I wonder, does the regulator care about that at all? Do they recognize what the long-term implications are?

Well, I guess I -- we talk about this all the time. But for the most part, I think it's a -- it's an ongoing conversation with them. It is not driven so much about where risk to capital is. It is the macroeconomics of the business and where the trends are, and as I mentioned several times, we -- we have been paying significant losses the last three years, okay. David, and I think all of that takes into consideration. But -- I am comfortable talking to them and, as I mentioned earlier, we continue to carry on these conversations and look about the use of capital with respect to repurchasing stock on a cash flow, ordinary dividends, or additional leverage and possibly some extraordinary dividends. And we -- we continue to look at that on a quarterly basis.

But -- but aren't the -- the claims payments reflected in that risk-to-capital number? Don't those flow through and reduce capital.

Sure.

So -- so I mean if you could run the business at 12-to-1 or 11-to-1 and you are 6.4-to-1, there is a huge difference there.

Right.

Yes.

Okay. And then just sort of following up on the C-BASS and Sherman question. How do we think about 2006? How much of the [inaudible] I know, I know, but just in terms of the first quarter, if we think about what was gain related and what was kind of recurring. I guess the recurring income in Sherman has been picked up but they have been selling some receivables, so how -- ?

I think we will have to wait farther into the year and talk about where their portfolio growth is and probably too early to talk about '06 on that. I think later in the year we will talk about -- have they grown their portfolio and where is it, et cetera. So I think third and fourth quarter would be a good time to talk about that.

Okay, thanks.

Thanks, David

[Operator Instructions] . Geoff Dunn, KBW

Thanks, good morning.

Good morning.

There has been a lot of focus on the IO business out there, and obviously not every IO is created equal. Can you provide a little bit of color on your IO book, maybe kind of the average LTV that that book might hold, echoing your comments earlier that the bulk business tends to see lower LTVs, and how much of that book tends to be short-term repricing IO versus a five-year-plus pricing IO?

The IO phenomenon is largely recent, let's say within the last year or so. On the bulk side, I guess the area of concern for the IO is the short-term IOs, ie. less than five years. Ideally, we like to see the IO adjustment out maybe seven to ten, but certainly five is, let's say, acceptable. Inside of five is what worries us the most. After seven years, we feel, one, most people will have moved on, either refinance or a new purchase. Two, in seven years, or more likely with time, you can count on appreciation and so on and so forth. So where we like to see it is at least five years. On the bulk side, most of the IO business is not only recent but also five years. So on the bulk side, they seem to have maybe got it right more so than on the flow side. On the flow side, the short-term inside of five years IO was primarily coming out of the three-year ARM segment, and there were probably 6, 7% recent writing, so.

Yes, in fact I looked at that. It was just over 5% of our new business.

So really I'd say the short-term IO issue is on recent flow business to the tune of about 6, 7% of recent writings in an on force -- in force basis, it's -- well underneath that.

And in terms of the credit quality on those type of things and the LTVs you see on those -- obviously with through flow, the LTVs are probably commensurate with the normal flow business but in terms of credit quality that you allow and restrictions on that. How does that look?

That generally prime -- prime paper. Prime high LTV paper on the flow side.

Yes, I don't see issues with what we are writing on the flow side. And as Larry mentioned on the bulk side, they have been doing the recast in extent to five, ten years since they originated the product. So I -- there as Larry mentioned, I think they have it right on the beginning. So we are just not seeing a lot of the interest-only business.

Yes. And it is really not a matter of so much of the credit quality as the ability of the borrower in three years when the three-year arm comes off of the fixed interest rate period and now adjusts at this time, we are pretty much at historic lows. In three years I would say -- most people would say rates will be higher so you have an interest rate adjustment coming and now you have on top of that, the IO adjustment, and you could very well see 40%, 60% payment shock depending upon what interest rates. That is the concern. The ability and how much a borrower is prepared to handle that potential payment shock.

Last question is a follow-up. One the things that we've heard out there is that a lot of the banks are pricing at current rates rather than considering reset rates on the shorter term. When you look at pricing on those shorter-term IOs, are you factoring in a potential reset price in that risk as well?

Well, on the ARMs, we generally have them qualify at what we call FIAR, fully index accrual rate, which is the -- not the start rate but should they adjust the index-plus margin and then generally the qualification ratios at the fully indexed accrual rate are 40, 45% debt-to-income. Did that answer your question?

Yes, to a degree. I will probably follow-up for a little more detail. Thank you.

Mark Patterson, NWQ Investments.

Yes, I was curious about the -- on the written numbers, the risk to insurance in force percentage. Sorry if you already talked about this, but it was down significantly to the 22% level, and it's been 26, 27% quarter in and quarter out. What drove that reduction?

The bulk percentage, is that what you are asking?

No, the total. Flow and bulk combined risk to insurance. You know the coverage level or penetration for the -- for the written piece this quarter.

Oh, for the new writings?

For the new written piece this quarter, right, it is down to 22%. It has been running 27, 26 and change.

[inaudible] follow-up, when -- on the bulk side, I think we actually wrote a little bit deeper coverage. So we may have some numbers -- because I am showing them to be consistent with prior quarter writings.

Okay. Maybe I have got something wrong. I will check back with you on that one. I want to echo Jonathan's comments. For some of us that saw what happened in '98, and the group never did recapture the -- the valuation levels. You know certainly there has been cyclical and possibly some secular issues, but seems like the group -- you guys specifically, but the group in general has remained pretty disciplined and allowing the rest of the market to take on the riskier tranches of the business as home prices have risen so significantly. It is just so hard to understand coming from the investor viewpoint to the valuation equation. You borrow some fed speak, it seems like a conundrum but -- [ LAUGHTER ] -- you guys have abundant capital in reserves, it seems like off pretty clear path of close to a $50 book value by the end of this year. So you are trading at one and one and a quarter book prospectively. It just -- I suggest you continue to buy back shares as much as you can and accelerate the process however you can and give the dividends how -- . That would be my viewpoint.

Thanks, Mark.

Thanks

Rob Ryan, Merrill Lynch.

Hi, good morning.

Good morning.

Can you give us an indication of the mix of the type of loans you are seeing in the bulk submissions that are coming through? And whether the type of competition is direct from, other mortgage insurance companies or more indirect from uninsured executions or from bond insurance?

On the bulk side, I would say the MI penetration is probably only about 10% of that market, so really with the spreads narrowing about a year or so ago, the -- the writings are down more so not just because of MI competition as it is the senior sub no MI and the willingness for investors to grab some of those lower-rated tranches at -- at narrow spreads. And so with regard to our bulk mix, we are seeing much more in a way of ARMs as in a general market. We are starting to see more in the way of IO, although albeit at five plus -- five years, not necessarily the short-term IOs, but that's once again consistent with the marketplace. A lot of cash outs, with the appreciation that has happened out there. It is a still -- it is a very strong cash-out market.

But that's consistent. That hasn't been a new phenomenon.

Right. So I would say our -- our writings are consistent, maybe better than the general market, because we take a harder view on all-day stated income NINA so we are probably in that area much less than the general market. Yes, if you looked at our market share -- I mean clearly there were much less opportunities because of the narrowness of the spreads. But I think within our mortgage insurance world and tracking market share in January and February, we are still only about 10% market share within those, which is down for us also. So not only did we have fewer opportunities, but within our competitors, the mortgage insurers, we did less also.

Thank you very much.

Thanks, Rob

I am showing no further questions.

All right, thank you. Thank you, and thank you all for your interest in MGIC. Have a good day

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