MGIC Investment Corp (MTG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MGIC Investment Corporation's fourth quarter 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 be given at that time. If anyone should require assistance press star then zero on your touch-tone telephone.

I would now like to introduce your host, Mr. Mike Zimmerman. Sir, you may begin.

Thank you. Good morning and thank you for joining us today on the call and for your interest in MGIC Investment Corporation.

Joining me on the call today to discuss the fourth quarter and full year 2005 results, our President and CEO, Curt Culver, Executive Vice President and CFO, Mike Lauer, Executive Vice President of Risk Management, Larry Pierzchalski.

Our earnings release of this morning, which may be accessed on MGIC's Web site located at mgic.com, includes additional information about the Company's quarterly results that we will refer to during the call, and includes certain non-GAAP financial measures.

During the course of this call we may make comments about our expectation 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 disclosed or discussed on the call, are contained in the quarterly earnings release. If the Company makes any forward-looking statements we are undertaking an obligation to update those statements in the future in light of subsequent developments.

At this time, I'd like to introduce Curt Culver. Curt?

Thanks, Mike, and good morning.

Net income in the fourth quarter totaled 1280.1 million compared with 134.5 million a year ago. Diluted earnings per share was $1.44 versus $1.39 a year ago.

New insurance written totaled 15.3 billion in the quarter comprised of 9.4 billion of flow business and 5.9 billion of bulk business. Persistency was 61.3% at year-end with our flow business at 64.8% and bulk at 49%.

Insurance in force held steady at 170 billion and the average premium earned was up slightly to 71.8 basis points versus 71.5 last quarter.

Paid claims in the quarter were 148 million, down 10 million from last quarter. Losses incurred were 171.6 million versus 146 million last quarter, which reflects the increases in notice of delinquencies to 85,788 compared to 78,754 last quarter, an increase of 7,034.

However, as we stated in our earnings release, we believe 5300 of those delinquencies are the result of hurricanes Katrina, Rita, and Wilma and will lead to a minimal increase in paid losses and the remaining 1700 increase in delinquencies follows a seasonal pattern in which we expect delinquencies to increase in the fourth quarter, and in fact have done annual so since 1997.

Underwriting expenses in the quarter at 70.8 million were flat compared to last quarter and also flat against the fourth quarter of last year. We had another excellent quarter from our joint ventures with income of 36.8 million up from 31.7 million last quarter and 33.4 million a year ago.

Finally, we continued to be an active buyer of our stock purchasing 3.2 million shares in the fourth quarter and 8.7 million shares for the year. There are approximately 815,000 shares remaining under our recent board authorization and capital planning will be a discussion point at our board meeting in two weeks.

Looking at next year, mortgage originations are expected to be down approximately 25%, 2.2 trillion, with a reduction almost entirely in refinances. As a result, I believe our volume will be down marginally in our flow sector and up marginally in our bulk sector with overall volume flat to down slightly.

Persistency should continue to increase, albeit slowly, throughout the year and finally lead to insurance in force growth in the second half of the year. Paid losses should be flat to down from 2005 and incurred should be in line with paids.

Expenses should be up modestly reflecting our option expensing, our staffing for international mortgage insurance as well as marginally higher operating expense.

Finally, our joint venture results, which were so strong in 2005, and in some cases the beneficiary of one-time transactions, particularly at Sherman, that we are budgeting a 5% reduction in their earnings contribution in 2006.

With that, let's take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Geoff Dunn of KBW. Your question, please.

Good morning, guys. I'm sorry, I missed -- could you just reiterate what you said about the expense expectations for '06, please?

The what?

The expense.

Basically I said that expenses will be up modestly reflecting the option expensing, staffing for international mortgage insurance as well as marginally higher operating expenses.

Great. And then I wanted to, a surprise question, focus on capital.

Yes.

You're near the end of your authorization you have a board meeting in a couple weeks, I believe, how much of a priority is it to focus on extracting additional capital, potentially pursuing a special dividend with the approval of the DOI and continuing to remain active in buying back your stock as we saw you do in the past year?

That is a high priority.

What do you think the likelihood is of, or how have your discussions with the DOI been going in terms of the feel for them allowing maybe a similar if not higher special dividend?

Well, MGIC has a wonderful relationship. We have great credibility because we've said what we've said has happened, and so that strong relationship, you know, leads to positive results.

They haven't turned us down on anything. So we expect positive meetings with them because of our operating results.

And then last question, can you talk to 80/10/10s? I think you've been pretty bullish in past calls as have competitors that the creep of market share loss has stopped. Where do you think we stand now, and what do you think the potential is for market share recapture in '06 for the industry as a whole?

Geoff, that still is the largest challenge for our industry. And we've got a group of originators in the last three years in many cases that piggybacks are all they know. That's all they've done.

And so we have a total re-education process that our industry needs to embark on, and through MICA we are, as well as certainly through the marketing efforts. That's one of the reasons our expenses will be up somewhat is we're dedicating those to marketing efforts relative to 80/10/10s and other piggybacks.

Now the good news is that the economics are now favorable towards mortgage insurance, particular with our single file product, but now we need to embark on the education process. It's like mortgage insurance 101. So this will be a slow process to regain in many cases even though I think the economics now are favorable towards our product.

Great. Thank you.

Thanks, Geoff.

Our next question is from Michael Grasher of Piper Jaffray. Your question, please.

Good morning, gentlemen.

I wanted to go back to the incurreds in the quarter. I think other incurreds you had 23.5 million roughly that were a reserved build and we saw delinquencies ex-hurricanes fall. How much of the increase in reserve's developed as -- [overlapping speakers]

[inaudible] 1700.

As a result of the hurricanes?

Why don't you ask that question again, please?

How much -- I guess the question is, how much of the increase in reserves developed as a result of the hurricanes? I guess ex the -- would there have been another reserve release if not for the hurricanes?

No, I think -- this is Mike Lauer.

As Curt mentioned, we did have a 1700 increase in delinquencies for the quarter, okay? And I would say that that's probably in the areas that would you think about, the Midwest and probably Texas and Florida. Those would be the prime areas. So that's where the increase was primarily attributed to.

We saw some deteriorations in a little bit of those markets but not significant. Claims rates in general held up pretty good for the quarter.

So what you see there is an increase primarily for that normal increase that we would call seasonal increase, if you will, in those areas, the Midwest and Florida, and some, if you will, adjustment for the affected areas, the 5300, but albeit at a very low level. Remember that as a new delinquency comes in we reserve very little for that.

The aging of the delinquencies is what drives the increase and the propensity that it's going to go to claim. So even for the new 5300 there'd be very little, and in this case, probably less because we think a high percentage of these won't result in a paid claim.

Which was a follow-up question. It's still fair to presume that we see a high cure rate here around these hurricane-related--

Yes, but not for a long time. Think it will take us all year to get through this issue and see how it resolves.

There is so much noise because the originators are not, they've all had plans, well, not all, but most tied to Fannie and Freddie whereby they have been collecting payments but they are reporting them delinquent to us. So within that process there's just a lot of noise that's going to play out over the next year.

Okay.

Another topic, premiums seated on risk sharing agreements looks like it continues to climb. Could you walk us through this? Is this more of a function of more agreements being written or a function of a change in risk being seated?

I don't know if it's been an increase, we're pretty flat relative to the percentage of contracts that we have outstanding. So if anything, it's just -- was a result of the flow of business changing from originators that may have different contracts or higher contracts relative to seated premiums. I don't know the particular number--

This is Mike. For the quarter, it was 31.9 million, and last quarter was 30.5, so it was up slightly, but we've been averaging right around in the low 30s, 30 to 30.5 for the last several quarters.

I was going to say, there hasn't been much change within their world so it may just have been the result of a billion or two of business that we did with somebody came in with somebody that had a higher contract.

Okay. And just to reiterate, you mentioned in terms of incurreds would be flat to down modestly?

Paids.

Paids.

[inaudible] claims would be flat, flat to down, yes.

With paids equaling incurreds.

Correct.

Thank you.

Thank you.

The next question is from David Chamberlain of Pimco. Your question, please.

Can't hear you.

My question has been answered. Thank you.

Thanks, David.

Your next question is from David Hochstim of Bear Stearns. Your question, please.

Could you just tell us what's going on in international MI and maybe give us some color of the environment from bulk business currently and what is the -- what would have to happen to rates to choke off some of the refinancings that would limit recovery and persistency?

Let me take the international mortgage insurance.

We hired Martin Wood. Martin was a Chief Operating Officer at Genworth relative to their international expansion and those that have followed that company, that's been their real growth engine, so we're excited to have Martin on board with the Company.

He's going through a process now of adding staff relative to opportunities and we're reviewing those opportunities and we'll review those opportunities with the board in two weeks. So it will be a slow growth poses but ultimately long-term for the Company it's the right thing to do. Relative to bulk opportunities, Larry?

Yeah, on the bulk said, I'd say the volumes are still quite strong. A lot of that business, the segment we deal most in, tends to be a lot of cash outs. And that's still strong. Appreciation is still occurring fueling that. So from a market side, it's still holding together.

Spreads widened out a bit over the last couple of months, so that works generally in our favor, all other things being equal. So as Curt indicated, we're looking for maybe a slight uptick in '06 of bulk NIW.

David, you had one more question I think in there, I don't remember.

I was really trying to understand, we've been waiting for three or four years for an uptick in persistency on the flow business. It sounds like you're still pretty cautions and obviously there's some risk of higher prepayments and refinancing still, but I'm just wondering what conditions would lead to a better, or a bigger increase in persistency, I think?

Well, the thing that would help the most, probably, would be a slowdown in real estate values because we're getting the uptick in interest rates, although much of that was mitigated by new instruments, that allowed you to start at low start rates. So you really, even though rates were up, you still had option ARMs and other things that allowed you to start at quite a discount.

But that works through the system. I think the thing that would help us the most is just the slowdown in real estate values back to the more traditional 3 to 4% increase.

I guess there's still some risk of the 2004, whatever's left in the 2004. Could you give us idea how much is left on the book from 2004, 2003, because I guess that's still vulnerable to refinancing, even if home values don't go up?

Well, 2004, probably about 40 billion in aggregate. That's the total book. Are you talking about just flow?

Yeah.

Yeah, because the bulk's pretty much on there for two years and then we lose it at a two and a half years or so.

We're chasing that down right now, David.

Okay. And then while you're doing that, could somebody talk about the seasonal trend in delinquencies that we might see in the first and second quarters and there should be decline in delinquencies?

Generally, this is Mike.

Generally we see, as you recall, a pretty good decrease in the first quarter and second quarter and then it kind of balances out and starts building again in the third and fourth. So hopefully, albeit the economy continues to grind out, although we're still concerned about the Midwest, you know. So I think that's the trump card.

As I looked at it, David, delinquency increases, I think it was three of the last ten years we've had where the first quarter actually went up and seven went down. And maybe we'll, when we finish that number say it on the general call.

Thanks.

Thanks, David.

Your next question is from Rob Rein of Merrill Lynch. Your question, please.

Rob, are you there?

Good morning.

I was wondering what you're seeing on the issue of tighter underwriting standards for some of the more exotic mortgage products that have been very popular and what the implications could be for your industry, and how the lobbying efforts or surveillance on the issue of tax deducibility, how that's proceeding?

Well, relative to the underwriting guidelines, I think the bank guidance that has come out from the four regulatory agencies certainly has had an impact relative to all the more exotic instruments, option ARMs, the pay options, the Meg ams, the all-pays, so clearly people are looking at that much more seriously than they did in the past, and I think in some cases are reducing their writings of those because of discussions with bank examiners.

That's a positive from the aspect of long-term credit, a negative relative to size of originations. But in the scheme of our world that's a positive. We'd just as soon not have mortgages done whereby borrowers may not be there a couple years from now.

So all in all, I think that what's happened in underwriting guidelines is positive to credit in the marketplace and certainly to borrowers long-term in not being foreclosed upon.

Relative to mortgage insurance tax deductibility, again, I'm, you know, and I've been saying this for two years, so I don't know what credibility I have out there, but we're very optimistic relative to it happening. We don't have opposition, per se.

I would say in Washington, pretty much everyone buys into it, our main obstacles that we add year ago, I think, have been mitigated, and they understand the situation much more clearly relative to helping build home ownership, particularly those in an affordability housing sector because it is targeted to lower income borrowers. This was rescored, and the score came down dramatically.

One, because of the impact of 80/10/10s and 80/20s, so that mitigated the score dramatically, and then they also looked at an offering on a going forward basis whereby the previous score had been looking back at all mortgages, and obvious that reduced the score dramatically. So I'm optimistic if we have tax legislation done. So we need a tax bill to get this added.

I don't see opposition in either the Senate or the House, so it's just a matter of getting it to be a priority. So again, I am optimistic it will happen, but we'll wait and see.

The issue of the score that you were talking about, that's the effect on --

That's the lost revenue.

-- revenue for the tax government.

Yes.

So that was a favorable move? You just need it to be put on the table and--

Exactly. We need champions.

Now within the Senate we had a pass this part of it their Bill and the House was the issue, in particularly the Chairman of the Ways and Means, and I think he understands the situation much better now and the importance of housing and this to housing, and so we'll have to wait and see but I'm optimistic that we've dealt with the issues we needed to deal with.

In addition to the concern about the Midwest in general, are there specific MSAs where you have particular concern and have you been decreasing your writings in those areas so that your exposure isn't that high?

I wouldn't say from an economic standpoint at this time there's MSAs outside the Midwest, the auto manufacturing areas.

Obviously California we keep a watchful eye on. The loss performance recently has been great, very low. But it is a concentration in terms of the amount of the bulk writings, it's 20-some odd percent, so we keep a watchful eye on California simply because it's about 20% of the bulk.

With regard to California the market continues to move along. I think year-to-year they had had upper teens in terms of house price.

The only maybe softening that we're seeing so far tends to be maybe in Southern California, San Diego in the condo market, but we're keeping a watchful eye in that segment, San Diego condos is not a significant portion of our California business.

What's the typical loan-to-value ratio in bulk compared to flow?

I would say probably 80% in bulk and 93 in flow.

Yeah, the bulk is just a tad over that, about 82%.

82 to--

Almost 94 now in the flow.

Okay. 82 to 94.

Okay. So you have increased collateral protection. Can you give us a feel for what rank California has turned out in your flow risk in force compared to maybe a few years ago?

Yes. It's gone down dramatically, and Larry is looking at that. I think it was about 4% of our flow writings this past year, which five years ago it was probably 10%. But let's -- get the figures rather than my recollections.

California dropped out of the top ten.

It's not even in the top ten. So what's the last date as far as percentage of business?

It's probably around 3%. We have 3% of the flow in force in California.

That gets back to the education process I talked to I think on Geoff's question, that we need to do relative to the piggybacks, because that -- California in particular, that is all originators from the last three or four years so it's a total re-education process there even though the economics may be on our side, in so many cases that's all they know what to deal with. So again, that's part of a concentrated effort that we're making on our company and our industry. Mike is dedicated to that also.

Great. Thank you very much.

Thanks, Rob. Earlier question of -- in force. Do we have '04-'03?

Yes.

What is it? [inaudible] Question?

Our next question is from Mike Ryan of DSC Advisors. Your question, please.

Thank you for taking my call, guys.

My question is around ARM mortgages. In the risk section you talk about 9% of the primary risk in force from the flow channel in ARM at 72% from the bulk channel. Then later, in the other information, you say, in the primary, the new insurance written, ARMs are only 11%.

So if I do the math about how much is bulk and how much is flow? I'm getting close to the 33% ARMs. I just wanted to know what I'm doing wrong.

So if you look at the flow business versus insurance written the flow business represents 61%. 61% times 9% would be about 5.5% weighted. The bulk business relative to that insurance is 38.5% times 72%, gets you about 27.7% for a total of about 33% of new insurance written is ARM product. Just wanted to understand kind of what I'm doing wrong in thinking about that, then I have a follow-up.

Okay. Let me try to answer that. First off, answering an earlier question --

This is David Hochstim's.

Someone asked about what percent of the flow '04 and flow '03 books of business are still in force. The flow '03 book, approximately 45%, and the flow '04 is about 68%, remains in force today.

Regarding the question on the ARMs, in total, about 75% of the flow plus bulk in force is fixed rate and about 25% is ARM. In terms of the two components on the flow in force, it's probably about 8, 9% is ARM in force, and on current writings it's about 11% of the flow business is ARMs.

On the bulk side, it's a little bit -- it's a lot different there. It's about 28% of the bulk in force is fixed so that's, what, 72 is ARM. And then on recent writings it's about 90/10, 90 being ARM, 10 being the fixed.

And the bulk market, that's the ARM product is largely a two-year, three-year ARM tied to LIBOR with prepays for the first two or three years.

Right. Okay.

So then the 11%, that was just solely on that schedule of information associated with flow?

Flow, new writings.

New writings. Current quarter.

And so it's even higher than kind of the 33% on new business if I used 90 rather than the 72 I used from up above.

So the follow-up question to that is on the ARM product. How much of the ARM product typically refis as soon as the kind of reset of interest rates begins? Do you have any sort of data on that? Is it 90% that it automatically refis as soon as --

No, well, speaking to the bulk, ARM product, the two-year ARM product, let's focus on that, that's most of the ARM product here we're talking about. Persistency, or cancellation activity, would ramp up from time of origination to the two-year mark, and once it hits that, 24-month period, you know, it, two things happen.

One it adjusts and it comes off the prepayment penalty. So for a couple of months, couple of quarters thereafter, cancellations spike, and it's not 90%, but I would say going into the 24-month period and a couple of quarters after that 24-month period we're probably seeing about 30% year-to-year kind of cancellation activity, but right around that 24-month period for a couple of months, a couple of quarters, it probably doubles, so about 50, 60% year-to-year cancellation.

So if you were to look at, let's just pick one of the products, a two-year ARM bulk product, if you looked three years in, how much of that insurance in force is still on the books?

Well, you know, rather than try to answer that, how about we just give you an idea of how much the bulk in force remains from the '03 book? We're about 25% of the '03 bulk business is currently in force. So we're --

Can you give me the '04 number as well?

52, 53, 54%, somewhere right in there.

And the '05?

How about 90ish.

Great.

You building a model?

I'm trying to look at persistency and, you know, I think the ARM product is going to have significant impacts on that. It sounds like it does.

It has two-year prepayment rates on the bulk side, which we plan on, so that takes it out of that sector. Particularly the on the flow which we don't have that much volume in.

Now to screw with you a little bit --

[ LAUGHTER ]

Those past books that we just commented on, they had a declining interest rate environment.

LIBOR generally declined probably up until, what, early/mid '05, so now the newer writings, they're probably being written into a rising rate environment. So you've got to ask yourself a question whether or not, you know, how much that is going to impact the persistency at the 2-year mark with rising rates versus maybe flat to declining rates.

When you get that model worked out, give us a call. We'd pay a lot of money for that.

[ LAUGHTER ] Well, one thing I do know is we're not going to see the persistency at the levels we've seen historically. It just seems very difficult to achieve that with the amount of ARM product and the focus of most of the ARM product, which is at the reset dates, a significant chunk of it refinances.

Yeah. And the other major component to keep an eye on, and this is all in the recent publications, too, on the bulk markets materials, aside from interest rate, it's the appreciation, because as I noted earlier, a lot of the bulk business is cash out. What helps cash out is appreciation, and if that slows, the cash out refinance activity loses a component there, the appreciation component.

Right.

Thank you.

Thank you.

Our next question is from Eric Wasserstrom of UBS. Your question, please.

Thanks. Just a couple of questions. I want to make sure I understood a certain element of your outlook.

With the decline in originations next year, almost all of it being refi, you indicated you expect the flow business to be down a little bit but it seems like most people think, including myself, that the purchase market is going to be more or less flat or slightly up. Does that differ from your view?

No. As I said, I think the originations will be about 2.2 trillion and though the entire reduction in refis.

Okay. So why, under those circumstances, would flow volume be down a little?

Because we've got $600 billion less opportunity from the refinances that we had this year. We still do probably at half the penetration rate that we do on purchase, refinances. So just the mathematics of that would lead to you say it's going to be a little less.

Got you. Got you.

And on the, you know, your risk to capital continues to decline although it sounds like the bulk is growing at a little bit higher level next year. Can you give us a sense of where you think that can go to, or are we kind of at the trough?

There's room for it to go up. We deal with the rating agencies at the end of each year and--

You're just talking about mathematically, aren't you? You're just talking about mathematically do we think that we're at 6.4, that that's the low point?

Well, I mean more conceptually, really.

I think in general, as persistency improves and we start to grow book, there you'll see splitting risk in force back on then it's a question of aggregate capital being built. So I think in general this is a pretty low point. I wouldn't see it going too much lower.

I would hope that we could put more risk on than we have been and probably start to, as you said before, we're probably at the trough. It might be a couple more quarters, but hopefully we continue to put additional risk on.

Just one last thing, gentlemen. How do you guys feel about the Alt A market in particular in terms of underwriting standards and the coming out of there?

We haven't been huge fans of it based on some past experience relative to the claim rates on similarly documented, I mean, if you had documented loans at different FICO scores, at the very highest FICO scores, we saw a seven times higher claim rate on Alt A versus documented loans.

Moving down the chain to 620s to 700 I think it was about four and a half times higher and below 620s, it was a couple times higher. So as a result of our experience we haven't been huge fans of it.

Now, it is becoming a bigger part of the market, and I think it is becoming, there are mechanisms being put in place relative to underwriting that gives us more comfort that what is stated that the borrowers relative to income and liabilities is indeed in the ballpark of what they are. So, you know, we're still not huge fans of it, but the process is getting better relative to our underwriting concerns.

Great. All right, well, thanks very much.

Thank you.

Your next question is from Ed Groshans of Fox-Pitt Kelton. Your question, please.

Good morning, gentlemen.

Good morning, Ed.

Just want to touch on, I thought a few quarters ago the insurance in force outlook was a little bit more negative. It seems like it's a little more positive now. Could you just walk through maybe some of the things you're seeing that will result in [inaudible] insurance in force being flat possibly down to maybe growing in the second half?

Well, one is we've lost a lot. So at some point you start growing it. But also the macro trends of higher interest rates, lower appreciation rates certainly are playing a role, and, you know, we've run off the huge '01, '02, '03, we're running those off and that had such because we had books there, as I've talked about that were averaged $92 billion of insurance, and now we're writing books of 60. And the books prior to that averaged 42 billion.

So the factors, higher interest rates, slower appreciation, we've had the run off of the, we've experienced most of the runoff from those huge writings of the early 2000s. All those are playing a role in us looking at and saying the second half of next year we think it will finally start growing.

We stabilized it this quarter, and so that's a good sign. So I guess that's why I'd say we're optimistic relative to that. The macro trends are positive.

Okay.

Can you touch on the increase in the GSEs loan limit to 417? Do you have an estimate of how much that would be of a benefit to you going forward?

I don't think we can quantify it. We just know it's beneficial to us.

Okay. And then the last, I'll beat the dead horse on the incurreds and the losses there.

Does the 5300, Mike, in your comments you said there's not a lot there. But in this quarter we see a pretty big lift in delinquencies, a big lift in the reserves compared to last quarter where we saw 26, 2700 lift in delinquencies yet reserve releases. Can you kind of walk through the different color, and maybe is it aging of the book and then can you give us some sense of the aging of the book?

Well if you think about it, there are delinquencies that we're talking about that are getting very old, obviously in the states I talked about, the Great Lakes primarily, the Midwest, if you will, and Florida and Texas. So there we have aging and higher delinquencies and higher claim rates and severity, too.

Severity is also a factor, okay? The average exposure, if you will, is increasing. So it's not so much the severity with respect to claim loss but rather the average loan in force.

So I would articulate that the increase is primarily dedicated to two things, the increase in delinquencies, primarily in those areas, as well as the aging. Unfortunately, that's a bigger part of our book, the Midwest.

When we start talking about Michigan and Illinois, Indiana, et cetera, those are large market share states for us and as they continue to go through slower economic times, that's where the balance, if you will, or the significant part of the increase is.

So as I mentioned, it's a function of the increase in delinquencies for the quarter as well as the aging. Another quarter of aging of delinquencies in those, what I would call the higher severity states, Texas, Florida, and the Midwest.

Can you give us any sense of how much of the additional reserves is related to the aging, and then I guess like a split between that and the additions for the new delinquencies, or do you not break that out?

I can't break it out right here. It's a very detailed model. But clearly there's a factor for the aging of delinquencies as well as the newer delinquencies.

Okay. And then I guess with the recent woes of the big three auto manufacturers, it doesn't look like there's really any light at the end of the tunnel in the near-term or maybe even the intermediate-term for the Midwest.

Well, that's what I mentioned earlier. I mean that is our concern that we'd like to see some improvement. The only improvement that we've seen there is very modest.

So that always will be our concern going into the first and second quarter, and that is, do we continue to see the normal seasonal correction, and that is reduction in delinquencies in those areas, or across the country, or, in fact, will the Midwest be an issue. So it's too early to tell but that's something that we keep our eye on. Okay. And then one more question, if I may.

You talk about some moderately higher operating expenses next year. If we're looking at our models would we be looking at lifting up our expense ratio compared to historical levels also or do you think it's going to be a wash with some or are we going to have revenue growth to offset the increase in expenses?

No, I would say that you've got to take the expense ratio up.

Up a bit. Okay. Thank you very much.

Thank you.

Our next question is from Brady Ball of Citigroup. Your question, please.

Thanks. It's Brad. Just a follow-up on the delinquencies related to hurricanes.

The 5300 number, I guess the question is, is that it, or would you expect to see further increases in delinquents into the first half of '06? I know that a lot of the lenders there have granted forbearance. Will we see some of that coming through?

The forbearance are already collected in delinquency. So while it has a forbearance, they're reporting delinquencies to us. So any uptick, if there is any, would be I think very small.

Okay. So that, again, hurricane related delinquency spike is largely done?

Yes.

And then you said not to expect significant paids resulting from this and I think you indicated a time line of about a year. Is that your expectation for when the insurance payments will be made and therefore people will be back in ability to be current on their loans?

The paids would be later than that, actually, if there are paids that result from it. A lot of these are going to be other insurance settlements, property and casualty insurance settlements that extinguish the mortgage once they get to that point. So again, the paids are a result of probably more than 12 months out.

Okay. They would. So does that then suggest that, again, if you're building reserves to reflect delinquencies today that may not result in higher paids, you would get some potential reserve release related to this recent reserve build at some point, maybe 12 months out?

Again, most of the build was related to the 1700, not those 5300, but to the extent that happens with those, yes.

I see. Okay. So actually I know some people had asked earlier about sort of the division between the 5300 and the 1700. You're saying most of the reserve build is actually linked to those 1700?

And the prior delinquencies.

Okay. That's very helpful.

Separately just looking at your forecast talking about the 2.2 billion for the overall market, next year, excuse me, trillion, what do you think the market share for MI will be in '06 versus '05?

MI penetration?

Yes.

Okay. I think we had on the flow side a total in '05 I think 9.2.

Correct.

And we're looking at 11.4 as far as an industry.

And you think that the main driver of that will be increasing acceptance of the single file product?

I think increased penetration resulting from the increase in interest rates that are going to make our product more favorable, even our general product. And also the general market will be significantly, on a percentage basis, higher on purchase transactions where we have a higher penetration rate.

Okay. And then just, I'm sorry.

So it's two-fold. It's just the general economics of mortgage insurance are more favorable against piggybacks and the market will be more dominated by purchase transactions.

Okay. And then just finally, your guidance with respect to [CBAS] and Sherman, could you just give us the basis for your expectations of the 5% downside in '06?

What they released as far as their expectations to us?

I'm sorry. They're just expecting business volumes to decline by that amount, and as a result, earnings decline by that amount?

They had a number of one-time opportunities, particularly at Sherman and they don't know if they'll have those same opportunities next year.

That has to do with it. The securities gain transaction. So they had an extraordinary year, and we certainly wouldn't plan for that to continue. If the happens that would be great, but we're not budgeting for that at the same level.

Okay. Thank you.

Thank you.

Our next question is from Mark Giambrone of Barrow Hanley. Your question?

Good morning. I just have one question.

Curt, you made a comment earlier about the economics for mortgage insurance getting better relative to piggybacks. I was wondering if could I get a little more color on that?

Well, it's on an interest rate basis, if you do the comparison of mortgage insurance versus an 80/20, or an 80/10, particular they're single file, the economics are, it's a better execution to the consumer to use mortgage insurance. And even on our general I think against 80/10s, it's a better execution, our general product. So with the rise in interest rates, it's very much helped us.

Yeah. A lot of the piggybacks tied to HELOC, short-term rates, you've got a pretty much flat yield curve so long-term rates have been relative flat, that's kind of more to our product in the HELOC component short end has risen, so that works to our favor.

Okay.

And then the last question I have is, you talked earlier about share repurchase being high priority for you in terms of capital use. Have you thought about dividends at all or what you might do there?

All of that, as Curt mentioned, capital planning is probably, next to profitability, number two on the schedule at our quarterly board meetings. And we've got one coming up in a couple of weeks, and we'll be preparing analyses for the board to look at and obviously all of that is considered. Stock repurchase as well as the dividends and in total, use of capital.

Those are both high priorities, Mark.

Thank you.

You bet.

Your next question is from Reynado Sancto of Inner Capital. Your question?

Hello.

Reynado?

Mr. Sancto, your line is open. You may want to check your mute button. He may have stepped away. Our next question is from Geoff Dunn of KBW. Your question?

Thanks. Sorry to prolong this call but two number questions.

First on your premium yield we've seen that coming down as you've lost some of that profitable '03 bulk book. Do you think that has stabilized and as you see a better purchase mix next year, do you think there's room for that to come up? That's number one.

And then number two, can you update us on what your regular quarterly dividend capability is from the operating company up to the parent and how much of an increase in that regular quarterly rate you expect for '06?

Well, this is Mike, let me just take the second question first, Mike Lauer.

The regular dividend is 44 million. I think we've got one scheduled for February. And then we plan to be meeting with the Commissioner and talk about increasing that appropriately during '06. So we'll have to update you on the next call.

If I remember correctly, though, that you've in the past talked maybe around like a 10% annual increase?

Yes.

And on the premium yield, on flow side, I would say that component is probably relatively stable. The one that tends to be more of a wildcard would be the bulk side, and it really depends on the type of transactions that we're involved in, you know, where the sweet spot is.

Some customers insure over 80s down to 60s, some insure over 60 LTVs down to 50 or 60, some want deductibles which lowers the premium rate, some don't. So it really depends on the mix of the transactions in a particular quarter year, and we really can't predict that. It really depends on the issuer and where the particular sweet spot is at the moment.

Some are very high FICO deals and some are the lower sub-prime-type deals, which obviously there's a huge premium shift on that.

Thank you.

Next question is from Mike Ryan of DSC Advisors. Your question?

Got that model built?

[ LAUGHTER ] Thanks for the follow-up.

One of the questions that I had is, one of the things you've benefited from over the last couple of years, there's been many, but one of the things you've benefited from is the raise in real estate values which has reduced the decline that's occurred in insurance in force and that average loan balances have gone up and so the actual number of loans that you've actually insured have declined at a more rate than the insurance in force. So if you had a stabilizing in pricing, you'll also have a stabilizing in that average balance until you'll no longer benefit from that growth. Is that thinking about it right?

No.

No? Okay.

What we've lost in the meantime with penetration or persistency rates, 47% two years ago, and then marching up to 61% versus what I think long-term, as I've talked about, the high 70s, to 80%, far, far outweighs any benefit we've got from property values inflating at 10% rather than 4% and the premium impact on that.

The loss of renewal premium there is significant.

So that has been probably the catalyst of the most detriment to our revenue than anything else that's happened to the Company.

Great. Thanks a lot.

You bet.

Ladies and gentlemen, if you wish to ask a question please press the one key. Our next question is from Jordan Hymowitz of Philadelphia Financial. Your question, please.

Yes, two questions, guys. One is, the bulk severity trended up a little. Can you comment on that, please?

27.1, 27.5, no that's --

27,100 to 27,500. It's really --

Bit I mean that's just quarter-over-quarter, the last four quarters, it's trended up a little bit while the flow severities remained very flat if you looked--

Well the average loan within the bulk channel has grown much more than the average loan within the flow channel, and that's kind of what you're seeing.

You mean the average loan balance?

Yes. [overlapping speakers] Has grown much faster than it has on the flow side.

Okay. Second question is, would it, would you think that the increase in expenses next year would approximately equal the increase in paids a little bit next year, so net-net the current quarter run rate, ex persistency trend, is a good number to look at?

You know, they're not related, really.

I know that.

Paids were --

Paids are flat to down and expenses are up.

Correct. But for next year you said you expect paids to be up a little bit and incurred to match them.

No, we said paids would be flat to down and incurreds to match.

Oh, okay. I'm sorry, I must have missed that. That's it. Thank you.

You bet.

Our next question is from Paul Miller of Friedman Billings Ramsey. Your question?

Actually, it's Steve Stelmach and just a point of clarification on the paids.

Flat to slightly down. What's giving you the confidence that that's going to be flat to slightly down in an environment where most people think credit losses are going to be higher next year? Is it just the mature portfolio?

The current level of delinquencies.

Okay. All right. So nothing more than the seasoning of the portfolio?

Right.

Yes.

Okay.

Thanks, Steve.

Thanks.

Are there any other calls?

Your next question is from Ted Crawford of Maple Leaf Partners. You question, please?

Thank you. Apologize if I missed this earlier but I'm wondering what percent of your refis you typically recapture?

This is Mike Zimmerman.

It's difficult for to us calculate that on a recapture basis of an individual borrower basis. So it's difficult.

In answer to the general mortgage market, mortgage, an individual mortgage service or recapture only about 25% of the loans that prepay. But most of the borrowers that prepay with mortgage insurance are doing it because of price appreciation and they're moving, trading up into their next house. So you're usually not taking out mortgage insurance with your second or third home. And we're primarily a first-time home buyer product.

In the environment we've been in, in the last four or five years, I'd say very few. Prior to that, I remember looking at it for the Company when I was involved in marketing and I think it was around 22, 23%, but I'd say it's been very few.

Very few recaptured.

Recaptured, yes, because of the appreciation.

Okay. Thank you.

Operator, we have time for one more question.

Our final question from Eric Ribner of Northstar Capital. Your question.

Hi, guys.

Hi.

Can you just give us a sense for the interest level of your sales force that they're receiving from mortgage brokers or other originators for your products now that the ARM product isn't nearly as attractive?

Well, in some cases, they're very interested.

Are you educating, you know, a lot of the mortgage brokers who really haven't used mortgage insurance as a --

I talked about that a little bit earlier. That's one of our huge marketing pushes, and you're going to hear more about that in the very near future relative to re-educating a customer base that, not so much on the ARMs, but relative to the use of piggybacks versus mortgage insurance.

And on both coasts in particular you've got a segment of originators that kind of grown up over the last three or four years with piggybacks, and that's gotten to be their first priority rather than mortgage insurance. And so that is our number one mission at the Company relative to marketing through our sales group as well as our underwriting group and our marketing materials is that re-education of brokers. And you'll hear more about those efforts later in the first quarter, I think.

Thank you.

You bet.

All right. Operator.

With that I'd like to thank everyone for their interest in MGIC. Have a great day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect. Good day.