MGIC Investment Corp (MTG) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation third earnings call. [OPERATOR INSTRUCTIONS]. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Great, 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 third quarter results for 2006 are Chairman and CEO Curt Culver; Executive Vice President and CFO, Mike Lauer, and Executive Vice President of Risk Management, Larry Pierzchalski.

Before we get started this morning, I wanted to remind all participants that our earnings release this morning which you may access on MGIC's website, located at www.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 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 on the call are contained in the quarterly earnings release as well as recent SEC 10-Q and K filings. If the Company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments.

To begin this morning's discussion, I would like to turn the call over to Curt Culver.

Thanks, Mike, and good morning. Net income in the third quarter totalled $130 million compared with $142 million a year ago. Diluted earnings per share was $1.55, flat with a year ago. New insurance written was $16.6 billion versus $16.1 billion last quarter and was comprised of $10.8 billion of flow business and $5.8 billion of bulk business. Like last quarter, a significant portion of the bulk business was comprised of transactions that included deductibles before our coverage, and as a result were written at lower premium levels.

On the flow side, mortgage insurance penetration continued to increase with SingleFile comprising of 10.1% of our flow new insurance written versus 9.9% last quarter and 7.5% in the first quarter. Persistency also continued to move upward, ending the quarter at 67.8% versus 64.1% a year -- a quarter ago. The flow persistency rate was 71.4% and the bulk rate was 55.5%, with a combined quarterly rate at 69.4%. With the increase in new insurance written ratings and the persistency rates, insurance in force grew to $173.4 billion, up 2% year-over-year and our second consecutive quarterly increase. Obviously, longer term, this is very positive to our growth in earned premiums, which saw a small sequential increase in the quarter.

Losses incurred in the quarter totalled $165 million, up $19 million from last quarter reflecting the expected seasonal increase in notices, which approximated 3,000 notices, as well as the continued increase in loss severity, which I'll discuss in a minute. Paid claims in the quarter totalled $157 million, down from $162 million last quarter. As we discussed on our call last quarter, we had approximately $12 million of claims that we paid in the second quarter that would have been paid in later or earlier quarters had it not been for changes in the bankruptcy law, Ohio foreclosure processes, or the hurricane moratorium. This quarter we had a $5 million impact. The net result would put paids for both quarters in the 150 to $152 million range. The driver of the level of paids in the third quarter was a significant increase in loss severity, particularly in the bulk business.

In fact, on a count basis, we paid approximately 400 fewer claims in the third quarter versus the second quarter, certainly a positive sign as we look to next year. However, the bulk severity was up 3500 in the quarter. Why the growth in severity in bulk business, well, I think there's really three things. First, the larger portion of the bulk paids came from the '04 and '05 books where the loan sizes are significantly larger. For example -- Or for instance, the average bulk loan insured in'03 was $147,000 versus $184,000 in 2004 and $212,000 in 2005. The other area of impact was the average coverage level is about 2.5 percentage points higher in the later books than the '03 and prior books.

And finally, we did see some deterioration in loss mitigation opportunities in the bulk area, although not in the flow area. It's all interesting -- it's also interesting to note where the claims are coming from. As we discussed, MGIC is the largest writer of mortgage insurance in 45 states, which gives us great dispersion of risk. However, our market share advantage in the Midwest, particularly Ohio, Michigan, and Indiana is significant. Unfortunately for us today, these states have experienced economic weakness for some time. As a result, even those -- these states account for 12% of our risk in force, they accounted for one-third of the paid claims this quarter. Relative to the other areas of our financials, underwriting expenses were down slightly from the second quarter and up slightly from a year ago. Joint ventures contributed $0.42 versus 55% last quarter and $0.34 a year ago.

Finally, we repurchased 2.7 million shares in the quarter and have repurchased 5 million shares year-to-date. While we have not yet completed our outlook for 2007, at this time we expect overall mortgage originations to decline from approximately $2.5 trillion this year to a range or in the area of $2.2 trillion for 2007 down about 15% with refinance activity accounting for almost all of the decrease. We expect that the industry's penetration will continue to recover, primarily due to the impact of higher rates, especially on ARMs and HELOCs and the growing acceptance of SingleFile and SingleFile type offerings.

In addition, the refinance activity that will occur should be dominated by ARM borrowers moving to fixed rate instruments as a rate differential between the two is expected to remain very narrow, and in fact, we're seeing that happen today. This all bodes well for the level of new insurance written. We also expect persistency will continue to move moderately higher, which should increase insurance in force and the resulting earned premiums. With that, operator, let's take questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Geoffrey Dunn from KBW. Your line is open.

First on the severity side of things, as we move into the later vintages, are we at a decent run rate given that we're probably focused more on the '04, '05 books right now, or should we expect the relative severity to the average-low statistics that you provide in the press release to continue to climb? And how does that also affect your guidance for the remainder of this year on paids?

This is Mike Lauer, let me talk about guidance on paids first and then Larry can talk about where we see severity going. As Curt mentioned, this quarter the paids were about $157 million and about $5 million of that was a carryover from those items we discussed in the second quarter, so net we were about 152. Going into the fourth quarter, we would anticipate paids to be at approximately the same level currently, about 157, maybe up slightly for some seasonal increase.

With respect to incurred, I would expect that incurred would equal paids or higher. Again similar to this quarter, subject to what happens to delinquencies. Traditionally, we would continue to see some increase in delinquencies in the fourth quarter, albeit maybe less than last year. You recall last year, we had a significant increase due to the hurricane-related areas. At this point in time, we're looking at paids at the current level or higher with respect to the fourth quarter. Incurreds to equal paids are higher and then subject again to any increase in delinquencies.

Relative to next year's forecast we did see a decrease this quarter in actual paid claims, although it was kind of offset by the severity increase. And I think going into next year, although it's earlier and we'll give you an update later in the first quarter in January when we release year-end results, we would anticipate that we'd turn the corner on some of the book, so we would see some decline in the number of paid claims. But I think again, as you mentioned, it will be offset by severity increases. So at this point in time, we're looking at relatively flat year to year changes, '07 to '06 on paids. But it's an early forecast and we again would update that in January.

I'll turn it over to Larry.

As far as the bulk claims go, we'll continue to see the shift from the older books where the average was around 140, 42,000 into the '04, '05, '06. Curt mentioned earlier '04 being approximately $184,000 and '05, roughly $212 or so. '06 is probably going to come in around $240 or so. So on the UPBs, there will be a continued shift to higher UPBs for the next few years as the older books die off and the newer books come online and each book sequentially there is up in UPB.

The coverages, '04 to '05 to '06 are roughly flat. So it will be more of a UPB driver sequentially '04, '05, '06 and a constant coverage environment. And then once again, the mitigation opportunity. In the past, we've had more mitigation opportunities on the bulk because of the deeper coverage and the lower LPBs, so that will be market dependent going forward.

So if I look at the math correctly, if you're moving to 16, 17, 18% severity on a 240-type number, we should probably see that average bulk claim severity move towards 40K or higher?

Over what period of time are you talking?

As we look at the '05, '06 books seasoning out into '07, '08, you would expect your average claim severity on the bulk side to move forwards 40,000 or higher than that?

Yeah, I'd be probably a little lower than that.

[multiple speakers] On the premium side, you've had erosion on your premium yield as you do more SingleFile and as you see the '03 bulk book runoff. Do you think we've reached a floor on that, or do we see more deterioration from here?

On the bulk business, a couple of factors. First off, as I think Curt mentioned in his intro, a lot of the bulk right now has deductibles so you see the revenue impact right away but the deductible benefit will become noticeable later on. Early the life, obviously there's revenue, no claims. So presence of a deductible doesn't really add value early on, but that will come online.

I would think because we haven't had the opportunities on the bulk side, Geoff, with the narrowness of spreads to do some of the other business that we traditionally do, I think some of that has to come back next year, so I would think we're at or near the bottom on that 69 basis points, which is still very high relative to our industry. But I think we're near the bottom there.

Okay, great. Thank you.

Our next question comes from Andrew Brill, with Goldman Sachs. Your line is open.

Thank you. Can you talk to what you're seeing in the Midwest as far as delinquency patterns relative to prior periods? Has it improved at all? Is it getting noticeably worse? Some commentary would be helpful.

It's probably not getting better. We're seeing Michigan, Ohio, Indiana, they're probably over 35% of the paids. They'll continue to be in that area. Delinquencies are still coming in. The cure claim rate isn't getting any better. The news out of the auto industry is for continued cuts in employment for the next couple of years. So I wouldn't expect any improvement in the auto belt for a couple of years.

And this is Mike again. On a reserving basis, I would say with respect to those markets where we did see some reduction in claim rates, that the number of notices going to claim. In the Midwest, we would have increased the factors. In other words, anticipated a little bit higher rate that we've experienced. So not a significant change, but albeit, not an improvement vis-a-vis other markets.

Just with regards to home price appreciation outside the Midwest, can you talk to what you're seeing there and how that's impacting loss mitigation in markets other than the Midwest?

Well, I think I saw a number of the other day quarter to quarter and this was a number, I think it was first or second quarter, was something like 1.5 quarter to quarter or just shy of 5% annualized. So that number down nationally is lower than where it's been. And then if you look market by market, there's obviously some doing better and some doing worse.

Demand for our sector still is quite strong, but clearly in the Coastal markets, Phoenix, Vegas, you're seeing an increase in inventory, particular on condominiums. Again, not a lot of that impacts us other than the impact that they may have on the region and what it does on the lower levels of housing, if you will. On our flow business, we really didn't lose any mitigation opportunities, so it really hasn't impacted us relative to the flow business. It was only on the bulk.

And on a month supply basis, nationally, the last number I had was something like 7.3 up from 4.7 months supply a year ago. Nationally, California is about 7.5. So in-line nationally where a year ago it was 3.2 or so, well below. So that will -- obviously is a sign that the market has slowed. When the market slows, the price appreciation will be down and that obviously takes away some mitigation opportunity.

The beauty of it, though, again relative to us is the increase it helps with our persistency. We're going to have these books longer than we would have and have had over the past few years and that has been a real challenge as a Company is growing revenues because of that loss to persistency. For us to slow down real estate values, although it's painful in some local markets, on an overall basis is very helpful.

A follow-up on the persistency. With the recent uptick in refinance activity, does that concern you at all as you look to persistency over the back half of the year? And I think earlier in the year, you talked about insurance and refinancing if they continue to grow for the back half of '06. Do you think that recent uptick in refinance activity that we've seen at that share, up to the 45, 46% range could impact that?

We're running about 20% right now. We don't participate like the general market does. Andrew, I think the benefit of it is, what you're seeing refinance are people at option ARMs into the fixed rate mortgages. Taking a bigger picture, I would say it's very positive for us.

Thank you.

Our next question comes from Steven Stelmach from Friedman Billings. Your line is open.

Good morning. Just to circle back real quick on the premiums. You would they would probably trough at the 16.9 basis point area. Is that solely because of the mix shift issue, or do you expect to see higher premiums on flow and bulk going forward and maybe less use of deductibles? And secondly on the coverage levels, you mentioned that as the reason why for the higher severities. Can you give us an idea where you expect coverage levels will go or where they're trending over the course of next year?

Yeah, as Larry said on the '04, '05, '06 book, we're pretty flat on coverage levels and we would expect that on the '07, probably 31% on the bulk side. That's a constant -- that's up from 28 four years ago. But on larger dollars, that had an impact.

But in terms of severity, we're not going to see much change due to the fact that --

No.

Got it.

No, not on coverage levels. More just larger loans which we got a higher premium rate on. So that risk should be mitigated for that fact alone. Did you have another question?

And on the premium level, you said it troughed at 69 basis points, is that solely because of mix shift? And if so, do you guys expect premium levels to go higher over the next course of the year?

I think we would be in this range, although this may be the low side. Within that, my assumption is on the bulk side we'll do more traditional transactions that don't have deductibles, where there's a higher premium rate involved within those.

Okay. Thank you.

Our next question comes from Ed Groshans with Fox Pitt. Your line is open.

You talked about some lost mitigation opportunities in the bulk, but not in the flow. Can you give a little more color around that?

Traditionally over the last year, about 42% of the claims we've paid on the bulk side, we had mitigation opportunities on either to buy the property and resell it or to work out a situation with a lender to sell it prior to foreclosure or soon therefore and mitigate a loss less than the percentage which is our ultimate responsibility. So 42% of our claims. In this quarter, it was slightly less than that, in the neighborhood of 35%, which is what our flow business is. And our flow business stayed constant at that level. We generally had more opportunity in the bulk, as Larry said because we do have lower LTVs and higher coverages. So you have more opportunities to buy properties or pay this option payment where we split the difference with the lenders. We lost a few of those opportunities.

And was that decision from MGIC's end or the lender's end or something else coming into it?

It generally deals with real estate values. You don't have as much opportunity to mitigate that loss because the property -- you deviant to acquire -- you just pay the percentage.

Okay. If some of the predictions are out there for home prices to be relatively stable to down, we would expect that these mitigation opportunities would be less going forward?

You would expect that they'd be fewer, although not significantly fewer.

So more like around the level we're seeing today?

I don't know, but it won't be far different.

You mentioned for this year, new insurance written was going to be relatively flat compared to last year. You still holding on to that at this point in time?

We didn't say a volume figure for next year yet. We're still working through that. What I did say, the general market will be down 15%. We think that our mortgage insurance penetration or our industry's penetration will improve -- we don't know if it will be enough to offset the market yet or not. We're going through that as we look at our market share, which continues to increase also. So looking at those two factors, we're not sure if they offset each other yet, but we'll talk about that next quarter.

Okay. I guess, from looking at the net premiums written and the discussion concerning more structured deductibles in the bulk, more SingleFile in the flow, are we going to see the returns for the overall business come down in future periods? Is that the way we're heading, or do you think we'll be able to hold stable?

On the bulk side, we haven't had those opportunities for almost a year now relative to our traditional business, and we've done so many of these transactions where there's higher deductibles and lower premium rates these past, three quarters anyway. I think at some point risk comes back into the marketplace relative to spreads widening and we have many more opportunities. I think that's a tremendous opportunity for us to increase that. Now the SingleFile should continue to increase and I don't know where that leaves us on a net basis, other than I think we said we're at the bottom at around 69 basis points.

Okay. I guess, then, Curt, it seems to me that revenue, even in that situation, still going to be somewhat challenged. It seems to me that insurance in force going forward is going to grow, but it's going to grow with lower premium product.

Well, on the flow side, that may be the case, but not the bulk side.

Not the bulk side?

No, that's what I've been trying to say. As spreads widen, we have tremendous opportunities to write other business. There's no question the challenge to this industry and so many who certainly go after the credit side of the business, but the challenge, which I feel quite good about as many of you have heard me talk about, but the challenge is growing revenues. I think as we move forward, the trends are very positive to help that start again. Now, also, the international business will start kicking in next year. So we have other things going on to grow revenues. But that is the challenge in this business, not the loss side.

Okay, thank you.

Our next question comes from Mike Grasher, Piper Jaffrey. Your line is open.

Just a quick follow-up on your discussion around the ARMs refinancing out to fixed rate security or fixed rate loans loans. Do you see or feel like there's an opportunity there to pick up some of those, or have we already seen the depreciation in the market as to where they no longer -- their appreciation as gone to the 80% LTV?

No, I think there's an opportunity. Because, frankly, a lot of those are 100s that may show up as 80s, but they had a 20% second or HELOC financing with it, and as a result, I think there's an opportunity there.

So assuming the appraiser is straight up, we're okay with opportunity there.

Assuming that.

Just to confirm the authorization you have less is 5.8 million shares, is that about right?

It's about 4.9, I think.

4.9. 4.9, okay. And the means to continue on that?

That would be subject to extraordinary dividends. Each dividend we would have would be extraordinary would have to be approved by the commissioner.

Thanks.

You bet.

Our next question comes from David Hochstim, Bear Stearns. Your line is open.

Hi. I was wondering, can you just talk again about the increase in average claim size and bulk. It looks like it went up about $3600 from the second quarter to the third and was down by 100 from the first to the second and the average loan size has been an issue for a while. Why is there so much of a fluctuation from quarter to quarter?

Well, in this quarter, David, we certainly had more claims come in and we've quantified it, but I don't to give that number out from the '04 and '05 vintages than we did on the '03 and priors. So that had a huge impact on severity going up this quarter. Not only for the unpaid principal balance, as I mentioned, but the fact the percentage coverage was 2.5 basis points higher. And then you add on not a huge, but a drop in mitigation opportunities and that all added up to $3500.

And when you're reserving, so presumably, as you see those delinquencies come in, you're reserving for higher expected claims, the higher average loan price, the reason the reserves didn't go up a huge amount.

David, really for the last several quarters, I think four or five, the driver of the increase has been in severity side. I think if you recall the last few quarters I've been talking about some improvement in claim rates in some markets and increase in claim rates in the Midwest, but overall also increasing severity each quarter. We have seen in the delinquency calculations, if you will, the defaults that are coming and staying delinquent, higher loan averages and more exposure. So it was reserved for.

Presumably, you have some sense of what the average claim size will be over the next six to twelve months already too?

Yes.

and just the comment that Curt made about the third of the claims paid from Indiana, Ohio, and Michigan, are those -- is that one-third consistent for both flow and bulk, or is it --

Yeah, it was 37% for bulk and 33% for flow.

Wow, okay. And then could you just -- I think you mentioned what the U.S. made the quarterly persistency rate was for flow and bulk?

69 -- that was combine combined.

The flow of the quarterly rate was 74, and bulk, 48.

Okay. And that flow, do you think the flow rate can still creep up a bit?

Yes.

Okay. And finally, Mike, could you give us a sense of what was different in C-BASS earnings sequentially, or what the outlook is in terms of recurring income?

I think nothing significant in the quarter. C-BASS was down, obviously, because as you recall in the second quarter they had a significant operation. And I think going into the fourth quarter for both C-BASS and Sherman, we're looking at something very close to what they did, each of them, this quarter. So no significant change.

One last thing, just on the tax rate, if we assume there isn't a huge increase in premiums earned and losses incurred remained elevated, than the tax rate is probably going to stay down [multiple speakers]

In theory, it moves subject relative to the mix between investment income and operating income. This quarter, operating income went down because incurreds went up. We had a slight increase in yields or the quarter too. But if incurreds stayed at this level, then the tax rate is 24, 24.5, something like that. It depends on the mix of the incurreds to operating income.

Okay, thanks. Howard Shapiro, KW Asset Management.

Just one question, what home price appreciation assumptions are you using in your loss severity calculations? And has that changed materially?

I would say our base case over next year nationally is 2 to 3%.

And has that changed, has that gone down or up, I assume not up.

Down.

Thank you.

Our next question comes from Rob Ryan, Merrill Lynch. Your line is open.

Good morning.

Good morning.

You touched on this giving a little bit of a growth expectation for '07 from international. Could you describe your basic strategy or what you're looking at most significantly? I've heard you mention Australia specifically, and the progress that you've made.

Yeah, Australia, we still haven't received our licenses, but we're well on our way. We've secured a major customer relationship to kick that off. Hopefully early next year. After that, I think it's pretty well known within the industry where everyone is going, so everyone has their eye on Canada, so we're working hard there and certainly India is of interest to everyone in the industry also. So I'd say those are the three markets that are targeted. Although, say those are the three markets that are targeted. Although, Australia, we should be writing for sure early next year.

Thank you.

You bet.

Our next question comes from Matthew Roswell, Stifel Nicolaus. Your line is open.

My question has been answered, thank you.

Our next question comes from Brad Ball, Citigroup. Your line is open.

Thanks. Guys, following up on the comment on paids, you said it was up 5 million, or had a 5 million impact this quarter from the issues that we saw in the second quarter. Could you give some detail around that 5 million? And you also said you expect paids to be around the same level in the fourth quarter. Is there any carryover of those issues that affected both the second and third quarter?

Yeah. The 5 million would be broken down. Four million was related to the bankruptcy, which probably would -- I'm sure we would have paid in 2007, but was pulled forward because of the change in the law October. So 4 million was pulled four, 1 million was pushed back related to the fact that Ohio couldn't process foreclosures and they had judges to do so as well as the GSE moratorium coming off in hurricane areas. And again, those are credit-related problems, they weren't related to the hurricane at all, but there was a moratorium put on counties that impact the credit as well as property damage. So 4 because pushed forward and 1 was pushed back into this quarter. Last quarter, it was 8 and 4.

And in terms of the guidance for the fourth quarter, you said 157. Will there be any impact there?

I don't think so, maybe $1 million, something insignificant in the scheme of things.

Okay. So the way we should look at it on a normalized basis, around 152 this quarter rising to 157 or 156 next quarter.

Yeah.

Okay. Then separately, with respect to your underwriting expenses, I guess I had kind of expected expenses to come down even more than they did over last quarter over last year and perhaps continue to come down as industry originations continued to decline. Is that to be expected, or the fact that you highlight that purchase originations are flattish and it's really revise it or down, is that really what's keeping expenses up?

Let me say on an operating basis, they are down year to year, but we have two items we talked about the last couple of quarters that are extraordinary. One is the acquisition of Myers Internet, which I believe is about 2 or $3 million a quarter, so $2 million versus zero last year.

Which is offset by revenues on the other side.

And the option accounting was, I think, a couple million. So we have those comparisons year to year that aren't. So on a net basis, we probably are down.

And also, again, the industry opportunities, the realities were relatively flat on our own business. So we're -- there's lesser opportunities, but we're still basically flat on our own opportunities. You wouldn't think expenses would come down too much.

And I would add to that the investment we're making in the international business. So we've got three items there that are in expense this is year that weren't there last year.

Got it. And actually a follow-on to that, you mentioned in the response to an earlier question that you were taking some market share. What do you think is driving that? Is that the SingleFile product, or something else?

Good work ethic.

Okay.

Our business is one of making your calls, getting your job done, having effective programs, and making people aware of those. And I think we're doing -- that's certainly a driver, but that's the driver of our whole company. Probably more specific to your question, we're doing a little better with larger customers than we had. We were punished pretty severely for our stance on captives three to four years ago and we're slowly regaining some of that share.

Fair enough. Thank you.

Our next question comes from Eric Wasserstrom, UBS. Your line is open.

Thanks, my questions have been answered. Thank you.

Our next question is from Brad Berning with FrontPoint.

The bankruptcy law changes I think you said was an $8 million pull forward last quarter, $4 million this quarter. So the $4 million delta there. How much was the actual frequence of loss in there --

Severity of loss you mean?

Yeah, severity of loss, I mean. So we know how much of the frequence improvement this quarter was related to that. And also, what were the other factors that helped out the frequency, what are you guys seeing?

Yeah, on the bankruptcy, those claims are probably the same size of any other claims. The severity is no different. What happened with the change in the law last October, it pulled all these filings forward as we talked about, about 4400 were pulled forward when we generally run at 1500. We're paying claims on those today. Normally, we would get about 1500 delinquencies per bankruptcy a month and pay those throughout a year. But these all got pulled forward into these quarters. Actually, that should help us in 2007 because we pulled a lot of bankruptcies forward and we're seeing fewer delinquencies related to bankruptcies. It's one of those things we're paying now and it helps us later. But the severity should be right on top of all our other claims.

So approximately a third of the frequency drop this quarter was due to that delta change. What was the other element?

I'm not quite sure what you're asking us?

The frequence change, can you define that for us. You said fewer claims defined this quarter.

About 400 fewer claims. Actually we would have paid more claims -- we would have paid -- that would have been bigger if we didn't have the bankruptcy change. But it's just the size, the book is smaller and lower inventory. And that's something we expect to happen next year, that trend continues.

More a function of the size of the past size of the book.

The size of the inventory of delinquencies we have being smaller.

Okay. So you're not -- I was wondering if you were seeing any positive economic factors anywhere in any of this --

I don't think we changed the factors on claim rates at all, did we?

No. Book to book to book, I think the delinquencies and claim paths are pretty much in line with one another and it's more to the fact that in '03 or so between bulk and flow, we probably wrote $90 billion for a year or two there. Those books now have past their claim peak area and we've moved into the $60 billion between bulk and flow years. It's more a size of books and the age of those books that's causing the decline in claims going forward.

That's helpful. Thank you.

Thank you.

Our next question comes from [John Ikarotzi from Hope Life Capital.] Your line is open.

My questions have been answered. Thank you.

Our next question comes from Terry Shu from JP Morgan. Your line is

Most of the questions have been addressed. Let me go at it one more time. When you talk about the increasing severity and you explain the reasons why, was it in-line with your expectations and your pricing for the bulk business? Should it have been a surprise?

No, it wasn't in fact. That's what I was trying to comment on earlier. Over the past several quarters, we have been increasing the severity size on the reserve calculation. We saw the increases coming with respect to the exposure on the delinquencies.

It seems like investors and analysts are a bit surprised. Is it just that we haven't paid attention to the trend or listened carefully? Should one worry about it? I just want to understand better, is it some kind of a new worrisome trend, or completely in line with what you would expect as well as the pricing assumption.

Yeah. I'll let Larry talk in a minute about the pricing assumptions, but obviously internally, we saw it coming because we have the detail and the delinquencies and each quarter I talked about increasing the severity size of the reserve calculation. We were increasing the severity and I think I articulated a number of times, not because of any lost development, but rather because the underlying loan averages were increasing.

And importantly in-line with your pricing assumptions, can one assume that.

Correct.

The other issue on the paid losses, after the second quarter there was quite a bit of investor concerns, analyst concerns and you can tell from your stock price action and you explained that as well as far as timing, the bankruptcy filings and such. It appears that other -- and there are only a few other players in the industry that it's not a universal trend in terms of the pulling forward of payment because of the bankruptcy filings. Why would that be? Is there something particular about your book, or is it the Midwest concentration?

No, I really -- I can't comment on what others are doing. This is what happened to us.

Okay. It just seems like the explanation makes expense, but it doesn't seem to be wide or broad.

I don't know if everyone tracks bankruptcies as closely as we do, but it is what it is for us and that's how we report it out and it has had an impact on us, obviously.

And finally, I guess the one minor negative that impacted results was this mitigation thing that you mentioned, because home values have been weaker and therefore you had fewer opportunities and maybe it's stabilized, maybe it's not. It's not a big impact, but that is one new element that kind of crept in, is that a fair comment?

Yes. And clearly as you go into slower markets, that's something you have to expect to happen. That you won't have quite as many mitigation opportunities.

Right. And the whole Midwest thing, it is what it is, your market share and your -- but that has been kind of festering for a very long time, doesn't seem to be getting any better, but there's been no deterioration, more or less as you expected?

No, those are stable claim rates and again, long-term the Midwest has been -- I'll take our market share advantage there all the time. It's just one of those points in time where it's a little weaker.

Okay. Thanks very much.

Thank you.

Our next question comes from Ken Posner of Morgan Stanley. Your line is open.

Good morning.

Good morning, Ken.

A couple questions, if I might. First of all, can you be a little bit more specific, Curt, on what you mean by decline in mitigation opportunities? Specifically, what kinds of things can't you do today?

We actually bought the same number of properties and resold them this quarter as we have in previous quarters. So it wasn't a deterioration on the acquisition side. But we have this other area which is called presales. Our obligation can be anywhere from -- well, it's 31% on average. And that 31% is what we owe the lender if a claim foreclosure happens. We can pay 31% of the claim and they go on their way.

We can pay 100%, we get the property and resell it, or we can work with the lender to do a presale, whereby, they arrange working with us a sale either prior to foreclosure or after foreclosure that is less than what the 31% would be. It was in that area of the presales that we saw a small decline on the bulk side. On the flow side it stayed flat, but on the bulk side, we saw a small decline in those opportunities of presales and working with the lenders to sell those properties, which probably relates to the fact that some of the values weren't quite as strong as they had been a quarter ago.

Great. In this environment of housing slowing down, a lot of people are concerned about credit, as you pointed out a little bit earlier.

Yes.

Can you remind us the extent of captive coverage of your flow, bulk, and how far away are we from some of those attachment points actually starting to limit losses in scenarios that are a little bit tougher in the housing market?

I think, what is that, 48% of our flow business have captive arrangements. Those that are -- we have some that are quota share arrangements, I think four, five, I don't know, a few numbers. Those are always in the money.

Right.

On the other side, again, I expect -- well --

A lot of the --

It is catastrophic coverage that those arrangements are, Ken, and I don't see catastrophic situations happening. The extent those would get used would be very, very minimal because I just don't see that type of coverage happening.

Do many of those attach, if I remember this right, around 4% on a cumulative claim rate, is that about right?

Yeah, 4 or 5% generally.

And how close are we to that level right now? Is that still a ways away?

The newer book where is the appreciation is probably in question, they're just starting out, so it's years away, potentially, from getting that 4 to 5% because it just takes that long for loans to become delinquent, go through the process and end up in a claim. If there is any offsets because of those reinsurance agreements, it's a few years away.

And that would be in the really catastrophic scenarios, which some people are quite worried about. Can you give a little bit of an update on the situation. You talked about the dividends. Is there any capacity on your part or any interest on your part for borrowing the holding company to buy back a little bit more stock?

Not any additional leverage, Ken, at this time, no. Any buybacks, we would continue our upstreaming of special dividends from the writing company.

Okay. So no additional leverage. If I could ask one -- two more quick questions. People in the media and everywhere seem to be focusing on every little wiggle in subprime vintage delinquency rates. Can you talk a little bit about the early trends in your '06 bulk writings versus the '05 and '04 vintages. Are you seeing the kind of deterioration in the early development of these books? And obviously it's a very early development.

Let me remind you also, only about 10 or 12% of the bulk business is subprime. It's a very small part of what we do. I'll let Larry comment on the bulk in general.

I'd make this comment on both the bulk and the flow. If you look at the books of business since 2000, probably the best book was '03 because of the environment. Aside from the '03 book, all the other books including the most recent books are in a pretty tight ban. The newer writings are kind of in line with the prior writings with the exception of '03, which is probably at the low end of delinquencies and claim spectrum.

I just want to make sure I'm hearing this, I was just flipping through the papers this morning and there are reports pointing out or alleging that there are significant deterioration in the early trends for '06 vintages versus '05 and it doesn't sound like you're necessarily -- For subprime and alt-A .

'06, we're still in the process of writing and on the bulk side, we have deductibles in a large part. So at this point, similar to what you say may be true, but it's not material development.

Yeah, we're not seeing it Ken.

Thank you very much.

Thank you.

Bruce Harting, Lehman Brothers.

What's your California and Florida exposure? Can you remind us at the end of the quarter? And what was the persistency for the most recent quarter, Curt or Mike? And finally, have you raised pricing, have you been able to change pricing around in the Midwest, or have you seen the captives pulling away or less willing to participate with you?

Let me answer the captive part. No, there's been no change relative or change in pricing. Those are filed rates on the flow side. On the bulk side, we always change pricing, deal to deal. That's just a standard part of practice relative to what we're seeing. On the flow side, no changes. And on the captives, none of them are impacted, if you will, so there's not a reluctance to write business there because it's part of a bigger picture of someone doing business nationally.

For the risk in force, California, Florida, 8%, 9%, respectively.

California's 8, Florida's 9, that's total bulk plus flow. And you asked persistency. Did you want the quarterly run rate, Bruce?

Yes.

For the entirety, it was 69%. Flow to quarterly run rate was at 74 and bulk at about 48.

Okay. Thank you.

Thanks, Bruce.

Our next question is from Geoffrey Dunn of KBW. Your line is open.

Can you tell us what the unencumbered cash is at the holding company that could be available for buyback?

It's kind of unique. We just issued the $200 million, we've got about $180 million up at the holding company.

Anything -- when's the next $55 million scheduled to come up from the operating sub?

We would ask for that this month for I think it's a November quarterly dividend.

Okay. And any specific plans to invest the capital you have at the holding company to any of the new international initiatives?

No, those are --

No, no. The money at the holding company is really to pay down the March debt and any capital with respect to the expansion would come out of the writing company.

Okay, great. Thanks.

You bet.

Our next question comes from Ed Groshans of Fox-Pitt. Your line is open.

Thanks for the follow-up. Just listening to the call, the Midwest is 35% of paids, yet severities were quite a bit higher in both flow and in bulk. And I guess I'm a little bit confused, because my understanding would be that the Midwest, while maybe having a little bit more of the paids would not have such a big lift in severity as opposed to some of the other regions. So if I'm thinking about that right and I kind of take a hair cut for severity in the Midwest, does that mean the rest of the bulk will receive a fairly larger increase in severity on the coast or other areas of exposure?

The coast at this point, namely California and Florida aren't producing many delinquencies or claims at this point. So, no. The increase in the severity is not due to any softening in Florida and California. Once again, on the flow side, it was $1,000 or so quarter to quarter and $3500 or so on the bulk. The factors driving the bulk is we're moving into the claims of the '04-5 vintages which have those higher UPBs along with deeper coverages. And then on the bulk --

I'm sorry, but, it would seem to me that the whole price appreciation in the Midwest has been running somewhere in the range of 3 to 5% over the past several years, not the 15 or 20% that we've seen in other regions. And I don't see how that would drive a $3500 increase in severity.

Again, it comes back to the loans -- first of all, we don't keep those loans if they've appreciated that much, Ed.

Right.

They cancel out on us. But it relates back to, again, and I don't know how many times we have to say it, we just paid more claims from later books of business that have higher principal balances and we paid 2.5% more on the coverage for those. But in fact, the average severity year to year is up in Ohio, Michigan, Indiana, Illinois.

Yes. Surprisingly as it may seem, early '05 the UPBs many Ohio and Michigan have grown a claim 75,000, 80,000, and now we're 85 to over 90,000. So there's been an uptick in the average UPB. Even places like Ohio, Michigan, Indiana, and so forth.

All right. Thank you very much.

Our next question comes from [Will Seaton from Gallahan]. Your line is open.

Can you talk about the competitive environment in Australia you mentioned you were going to be writing next year, and any captive seat arrangements that are expected? And I think you mentioned that national home price appreciation you're expecting 2 to 3% next year. What happens --

I'm sorry?

What happens if you have to reevaluate that?

Well, in Australia, Jenworth and PMI are far the most significant writers there. They account for 100% of the business. So we'll be moving into that space. We're hiring local people that have good relationships and as I mentioned, we're already in line with a major customer that's doing business there. So we're looking forward to competing there. On the captives, there hasn't been a movement there on captives.

There's a few around, but it's not as dominant as it is here in the states. The other thing is, the MI market, there's a little different. There's probably two pieces. One on the 80 and over, LTVs like here, it's done because of capital relief. There's no Freddie Fannie there, but they have the capital rules. If you have an over 80 LTV on insured, if you get it insured, you have capital savings. But the other big piece of the market is the homes for the loans are either in a bank portfolio or they get securitized. There's no Freddie Fannie to put them to. All the loans that get securitized, the dominant credit enhancement is mortgage insurance.

100% mortgage insurance. When there's a securitization, there's a double A and triple A by virtue of the double A 100% cover of PMI. That's a big chunk, I want to say about two-thirds if you look at PMI, Australia, or GE. You'll see a good chunk of their Australia portfolio being 80 and under. Those are kind of the dynamics.

There was something else?

If we had to reevaluate our base case home price appreciation? We do that every quarter.

That's a constant part of what we do. We look at it each quarter and determine business plans accordingly.

So if it came in that you thought national home price appreciation would be flat or zero percent, what would be the impact? Would you adjust your reserves or --?

Well, again, our business is very local. We can talk about what our base case is on a national basis, but within, that you're dealing with 80 metropolitan areas that are all moving at different clips, and particularly on the bulk side, as get those properties in, we have different claim rates that we estimate on every one of those based on where they are locally. Every market is moving differently. The Midwest hasn'tappreciated as much, it will probably be the area that will appreciate the most in the next five years. So all of those things come into play. You don't put a national band on and say "this is what's going to happen". You look at each region on what you're doing business and evaluate it locally.

Even though the claim side might be elevated because of a weaker housing market, persistency generally improves and the bulk market spreads widen and maybe some of these hedge funds and whatnot that are very active will be a little more conservative, allowing us a bigger opportunity there.

Just as a follow-up on the Australia, what's your initial assessment on the credit trends there? And what kind of margins do you think you can get there?

Well, the credit trends are not as strong as they were, but they are very, very strong. So I know the existing companies and looking at what they've done and where they're going, that doesn't bear as well, for someone coming in new, you're looking at very low loss ratios. They've been non-existent. That's very positive and we look for double digit returns.

Thank you.

Operator, I think we've got time for one more.

I'm not showing any further questions.

Even better. Thank you all for your interest.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Everyone have a great day.