MGIC Investment Corp (MTG) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the MGIC third quarter earnings conference call. At this time, all participants in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, you may begin.

Thank you. Good morning and thank you for joining us this morning and for your are interest in MGIC Investment Corporation. Joining me on the call today to discuss the third quarter results of 2007 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 would like to ask all participants to try and limit themselves to one question and a follow-up and then return to the queue to provide as many people as possible an opportunity to ask a question. Next, as we have indicated in this morning's press release we have posted on our website some supplemental information pertaining to the characteristics of our primary risk in force which we think you will find valuable. Finally, I want to remind all participants that our earnings release of this morning which may be accessed on our website 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.

In our press release of this morning, we provided certain guidance for the remainder of 2007 and for the full year 2008. Additionally. 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. 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. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than during this call or the issuance of the press release. With that I would like to introduce Curt Culver. Curt?

Thanks, Mike, and good morning. For the third quarter we reported a net loss of $372 million a diluted loss per share of $4.60. Obviously, it was a difficult quarter for us as we recognized the impairment of C-BASS. We experienced a number of one time expenses related to our terminated merger with Radian, and we experienced further deterioration in the housing markets, particularly in California, Florida, and the Midwestern states tied to the auto sector.

While our business fundamentals are strengthening daily, the dominant theme of the quarter, and in fact next year is losses. The books of business written in 2005, 2006, and most of 2007 will be difficult books financially. These books feature weaker underwriting, and will play out in an environment of deteriorating real estate values. In fact, we modeled an approximate 10% decline nationally in real estate values impacting these books. And on an MSA basis the change are even more extreme.

Our guidance for the fourth quarter and next year as Mike mentioned is included in our press release. Frankly, the loss side has hit us much harder and more quickly than we could have ever anticipated. From the loss guidance estimates, we have seen revised from our industry, as well as a number of mortgage originators who are no longer in business, it was not anticipated by many. The ramp-up of loss performance relative to delinquencies, the severity and the cure rate deterioration in California and Florida has been at speeds not seen in previous books of business. In addition, the Midwest auto sector continued to weaken when we would have expected to see improvement at this stage of development.

As I reflect on the quarter and the near term outlook, I can't help but think about what we could have done differently. We knew the problems of many of the loan types and underwriting processes that were in the market and in fact, I talked openly about such issues on these quarterly calls. And with the bulk business we had significant California and Florida exposure and tried to hedge that risk through our home reinsurance transactions. Unfortunately, while we did get three transactions done, we missed the mark by not hedging more. In addition, we significantly raised our bulk pricing in California -- on California loans by a factor of 4 times recent claim experience and by a a factor of 2 times loss experience in Florida. In late 2005, in expectation of a downturn sometime in the future, but frankly, we would have never expected the quickness and steepness of this fall. The key question now however is not to dwell on the past but rather what will we do to return to profitability sooner.

To that end, we have implemented new underwriting guidelines effective November 1, that will allow us to better manage our risk, particularly on loans with multiple high risk factors. We also are in the process of implementing a number of premium rate increases on these loan programs and while there are a multitude of pricing changes, in general the premium rate increases will be implemented on loans above 95% loan to value, on loans categorized as A minus and on loans categorized as alt-A, or loans that have minimal documentation. In addition, while we have always managed our expenses closely, we will continue to look for opportunities to be more efficient.

In the past, many of you have heard me say that I felt the franchise risk to our Company was on the revenue side, not the loss side. That insurance companies need to have losses so customers continue using our product and don't self insure. In one of those be careful what you wish for moments, that indeed is what is happening. Losses are significant and will dominate our financial performance in the near term. However, the positive revenue aspects driven by the losses will have a significant long-term positive effect on our Company. When we started the year I felt slow MI penetration would increase from 10% to 12% by year end. It now looks like it will be closer to 16% by year end. We felt persistency on our flow business would grow slowly but not hit 80%. Again, it looks like our newer vintages will hit 80% and may even exceed that.

Over the past four years, we have struggled with insurance and force growth having lived through 42 months of enforced declines before it hit a low point of 167 billion a year and-a-half ago. Today, we are at 197 billion, and growing at a double-digit pace with double-digit growth expected next year. Credit quality starting late in this quarter and going forward should be some of the best vintages we will write, even without many of the underwriting changes and pricing changes we are making.

Finally, even with the credit challenges that we face, we remain in a very strong capital position to deal with such issues. Our business is one of insurance. By the the nature of our business, there will be market disruptions that will impact financial results in the near term. We are in one of those periods now. However, as we emerge from this disruption in 2009 our Company's future should be as bright as it's ever been with strong domestic fundamentals to go along with a growing international presence. With that, operator, we'd like to take calls.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Howard Shapiro.

Hi. A couple of questions. Given your new loss guidance for 2008, have you had any discussions with the rating agencies? Are they still comfortable with the ratings they have on you and your capital adequacy? And then, just if you could clarify, does your guidance for next year assume a 10% decline in property values? Thanks.

On the 10%, that is over the next year and-a-half, I would say, Howard.

Okay.

On the other, on the rating agencies, Mike and Larry have met with and I'll let Mike describe those meetings.

Howard, we met with the rating agencies over the last two weeks. They've seen our forecast. And I guess with respect to their comments, I think I'll -- I saw one of them was out this morning, Fitch reaffirmed, put us on negative watch. I think I'll let the rating agencies publish something today. Okay.

Our next question comes from Geoffrey Dunn.

Good morning. Looking at your delinquency mix, I wanted to get a gauge of what that's looking like in terms of '05 and '06, and even early '07 vintage, mainly to try to gauge how much more severity creep we could see as that moves forward over the next year?

Well, the inventory build-up in the quarter, roughly 10,000 items, was split about 3400 items on the bulk side and 6800 on the flow side. Most of that build-up, bulk and flow, had to do with the newer books, specifically the '06 book and as far as that goes, the '06 book is still on its upward leg of delinquency development. The bulk business as Curt mentioned in his opening remarks, a lot of Florida and California, so on the bulk severity, we see that continuing to increase through '08 at a pretty good clip. On the flow side, we see an increase but much smaller magnitude, given the lower proportions of California and Florida in the flow portfolio.

Can you just give me an idea of your current 90,000 odd loans in default, what's the mix of '06?

'06 is about 20,000.

And just a last follow-up, what's the pricing differential on average between the '06 loans and the '05 loans on your book?

On the flow side, probably not much different because the rate card is there. And on the bulk side, I guess there was -- the mix is quite different from book to book and the presence of deductibles. So I guess rather than give you that number, which I don't have at the moment we'd have to talk more than just price and factor in and give you a feel for the mix differences as well.

Okay. I'll follow-up. Thanks.

Our next question comes from the Steve Stelmach.

Could you just give me an update on -- I think in the second quarter you guys talked about sort of loss mitigation through fraud protection. Have you seen any sort of mitigating factors that's helping you guys in that respect or are you guys still sort of paying out losses and what could be the presence of fraud?

Well, fraud has been present in the past and still is and more so on the bulk side than the flow side. Our -- we're paying more, so the absolute number of fraud cases is probably up a tad, but as a percentage of the flow and the bulk paids, we're not seeing any material change.

Okay. And then second question is if you're looking for break even results in '08, could you just give us sort of your feel for liquidity and cash flow for '08 and sort of get as comparable with your liquidity position. I know your debt service is relatively small.

Liquidity at the holding company, we've got about 230 million right now at the holding company and recently received $100 million special dividend from the writing company, 50 of it paid in September and 50 paid in October. So we anticipate having somewhere around $300 million of cash at the holding company by year-end.

Okay. Year-end '07?

That's correct.

Thank you.

Our next question comes from Mike Grasher.

Quick follow-up here to Geoff's earlier question. Can you elaborate on the rate of change that you may be seeing on the '05 book? You mentioned the '06 book still on its upward leg. Can you clarify the '05 book?

Well, the '05 book, it's a tale of two cities, in a way. That the first half of '05 is doing better than the second half and up until a couple of quarters ago, the '05 book was on a delinquency path akin to '03 and '04. But beginning early this year, mid-year, certainly, instead of topping out and following the flattening curve of '04, the '05 delinquency kind of just kept on trucking. It's more of a second half of '05 story than a first half '0 story. The '06 book is above the '05 book, given its stage in life, relative to the economic environment.

Okay. That's helpful. And then just a quick question on operating expenses. Should those fall back into about a 75 million run rate on a quarterly basis?

Yes.

Okay. Thank you.

Our next question comes from Eric Wasserstrom.

I just wanted to follow-up on Howard's line of questioning. And I realize that you've made some commentary about the rating agencies publishing, and just some commentary a moment ago about liquidity at the holding company. But can you help me frame or understand the factors that would require you to need to raise capital?

Well, I guess we need to raise capital if there was an issue with respect to the rating agencies and none of them have said that with respect to capital. They're concerned about the industry and they're concerned about our operating loss this year and they're -- I think their overall concern is not capital or liquidity but rather when the return to underwriting income, that's the major concern.

And can you talk a little bit about your -- the safety of your dividend at this point, given you're projecting zero operating income or less for the next four, five quarters?

I think the operating -- I guess the question there concerns liquidity at the holding company, cash flows with respect to getting dividends out of the writing company, that's a quarter to quarter decision as we ask for special dividends and the dividend issue would be discussed at each of our quarterly Board meetings and then we announce after that. And we would also announce if you will any decision with respect that we have, with respect to special dividends.

Great. Thanks very much.

Our next question comes from George Sacco.

Hi, I apologize if I missed this. But the guidance you gave for growth of insurance in force, 8 to 10% for 2008, that actually seems a little bit low, given what we're seeing today and the type of market share gains the industry is seeing. Is there something, maybe a capital constraint or something that's keeping you from growing faster than that?

No, it's the -- the factor that would limit it to that would just be the fact that we're doing very little bulk business within that number.

So it's basically bulk shrinking but you're still getting potentially high double digit type growth in the--?

Yes, we're talking 10% growth.

Overall, yes, but no growth on the bulk. Might be declining on the bulk.

Understood. Okay. Okay that's good. Thank you.

Our next question comes from Brad Ball.

Thanks. Another try at the capital adequacy question. You guys said yourselves that you thought your capital position was strong. We can't see what measures the rating agencies use. But what do you use to define strong capital? Is it your risk to capital ratio? Can you give us a hint as to what risk to capital ratio the rating agencies would tolerate?

Well, I think you'd have to talk to them about it. But we're -- yes, obviously we're at 7 to 1, somewhere around 7 to 1 risk to capital and that's a very strong position relative to any kind of industry standards and -- but again, as I mentioned before, their discussions and their public releases recently have not been about capital adequacy in the industry. As a matter of fact, they've said just the opposite. More concerned about the short term underwriting losses, if you will. They're just concerned about how long the duration is, if you will, during this period.

So the key ratio you focus on to say that your capital is strong is the risk to capital ratio?

That's correct.

Correct.

Just a quick follow-up. You raised your guidance for paids significantly for next year. But it seems like what remains uncertain is what will have to happen with the reserve account. Reserve building was significant this quarter. Can you give us any visibility on what kind of change in reserves we might face going forward? Was this quarter a major catch-up and should be viewed as unusual or is this a run rate at the 370 million range?

Well, I think the key with respect to the incurred and the reserve build-up as you said will be a function of what happens again, with delinquencies. Clearly this quarter we had some significant changes, albeit, not only a change in the level of delinquencies but average severity as you probably noted was up significantly, especially in the bulk side and the level of paids that are increasing out of California and Florida markets, et cetera. So there were increases in delinquencies, significant increases in severity, and then finally, increases in claim rates by most of the states.

However, going into the fourth quarter, if we see a similar increase in just delinquency levels, I think you would see a similar incurred number and reserve build-up. So it will be a function of what happens primarily to the delinquency level but also what's happening to the underlying severity. I think the only guidance I can give is that with respect to incurreds, it will be paramount to the underlying development on loss rates and equally important, on what's happening to the pure level of delinquencies. Clearly, we had a significant increase this quarter. We hadn't experienced that before and I can't remember when we had an increase of 10,000 in a quarter and we saw that late in the quarter, and our concern would be if that continues.

As Larry talked about some of these books kicked off significant changes in July, August, and September. If that continues, then we could see a similar increase. And relative to next year, again, it's a function of delinquency levels. Do they continue to build or level out. And then there might be some leveling, if you will, of incurreds.

Thanks.

Too early to call that.

Our next question comes from David Hochstim.

Following up on that, how do we think about the loss reserve? Because you keep putting -- so this quarter you're putting in almost 400 million. Next quarter you might put in another couple hundred million. Do you ever use that to pay any of these claims? Because you're basically paying claims and building reserves.

Well, David, what I said again is that we're experiencing month to month increases in delinquencies and severities. You saw that in this quarter release as that the severity on the bulk business I think jumped up 10,000 per case. And the cases in California are increasing significantly. If we continue to see that build-up, yes, there probably will be that type of increase on a quarter to quarter basis. We need to see some, if you will, leveling off and we have not seen that yet, especially the last three months. So to answer your question, in the fourth quarter, if we continue to experience the same type of acceleration in severity that we saw and some deterioration in claim rates and increase in delinquencies, you would see the same level of reserve build-up, I think, to the point that some of these markets start to level off then we'll report that out and there will be changes accordingly.

I don't know if Larry can speak to this, but is it possible to say that in some books of business and bulk or some places in California or Florida you're seeing a measurable acceleration in the maturation of those policies and that basically delinquencies are not only occurring at -- are reaching higher levels but it's happening faster and do you have any sense yet of what the ultimate peak delinquency rate could be? I mean, I guess -- people are asking about seasoning of the '05 book. If you see the losses in the '06 book and in '07 and '08 instead of '09 and 2010, can you tell that's happening or?

Yes, David, going back to Curt's comments about the speed and the extent to which some of these markets have changed, California had basically thrown out very little in the way of claim activity and we knew at some point here that was going to soften. So we were pricing California starting late '05 certainly into '06 at four times what it had been performing at in the hope that we would keep an eye on it and if it started deteriorating, as at some point we knew it would, we would have a bit of a cushion there to react and adjust accordingly. But beginning in '06 there with the California specifically, that book went from boom to bust and quite rapidly. So it is coming out of the blocks a lot higher, steeper, and is akin to Michigan, maybe a tad worse if you compare delinquency curves and who would have thought between early '05 and early '06, California would have gone from virtually no claims to being on a par with Michigan.

But I guess what I'm wondering is, do you think it's going to get a lot worse than Michigan or it just got as bad as Michigan faster than you thought?

Well, we are modeling at the MSA level. Curt kind of threw out that 10% nationally decline. But a lot of the MSA's in California, if you look at a Moodyseconomy.com, some of them are worse than that. And so we're using those kind of declines to project California '06 in conjunction with looking at its actual path trajectory and even comparing it back to the late '80s and early '90s when Southern California had a similar event. So to answer your question, when it exactly turns is still to come. But we're looking at it a number of different ways. One model using price outlooks at the MSA level. Actual trajectory and comparing it back to the late '80s, early '90s.

And the quarterly results, David, are very telling. Once we do see those plot points on what the next quarter brings, it will give us a greater indication on when it turns and we haven't seen that yet. I'm hopeful, as you are, I think with your questioning, that it peters out sooner because of the velocity of the change. But we'll have to wait and see and we have no indication of that yet.

There's a number of factors that are still kind of moving around. One of which is being the cure rate. So it's not just a matter of analyzing or making a call on new notice activity and a stable cure rate environment. We've got rising notices in a declining cure rate environment.

Is it possible that part of the problem is that you have more investor loans that you realized and -- if that's the case, is there some misrepresentation on the part of the lender and you have some recourse.

Well, again, as Larry mentioned earlier, we check every claim we pay relative to the conditions under which it was insured and deal with that accordingly. I don't think it's because we had a lot more investor loans but I think some of these markets had a lot more investor activity which also affects their neighbors. With the declination of values, decline of values in those markets impacting everyone that lives there. I think we're experiencing some of that relative to the markets in which we did. We do have homeowners but that many of the neighbors treated it as an investment, that impacted the value significantly.

Right. But that would be hurting -- that would be affecting severity and that would explain the increase in severity. But it wouldn't necessarily explain the delinquency because if you're lending to a homeowner you have a pretty benign employment environment still.

Yes. Agreed.

I think a lot of people buying as owner occupied had a bit of a speculative attitude going in.

Or weak credits, which we've talked about.

Okay. Thanks.

Our next question comes from Andrew Brill.

Can you just talk to how the '07 book is tracking relative to 2006 at this stage? (Inaudible) a report this morning mentioned that looks as if '07 is tracking in line to worse than the '06 and then I guess just as a follow-up to that, to the extent that it is tracking worse, do you still think we could see improving delinquency experience in '09.

The '07 book is performing akin to '06, maybe a tad worse but by and large in line. I think the next few months, the new insurance will improve significantly. The only now is by and large Freddie, Fannie, conforming, the high LTVs are being underwritten tougher. The alt-A, some of the players are gone. So on and so forth. If you just think about -- let's say some of that hit mid-year, so loan apps starting the third quarter converting into fourth quarter new insurance written for us. So I would say the first two quarters certainly and into the third quarter, new insurance written for us, but in our pipeline, commitment pipeline, we're seeing improved mix characteristics and so we think all in all, '07 then will be akin to '06 and then '08 will improve because some of these higher risk segments, the underwriting guidelines and the pricing changes that Curt talked to will be in effect.

And I guess as a follow-up, can you just give us a sense of how much of the increased loss orig. in this quarter related to the provisioning for new delinquencies, as opposed to the provisioning for the aging of existing delinquencies?

Yes, this is Mike Lauer again. I would tell you this, that the most significant impact on the reserve to the tune of maybe 4 to 5 times, was the severity. The coupled with the some of the rate changes, not so much the delinquency level. So what Larry talked about before was the significant increases we have seen in severity as well as deterioration in cure rates, as a major impact of the change, not as much as the new delinquency change.

Thank you.

Our next question comes from [Amanda Lyman].

Actually, it's Donna Halverstadt, I had a follow-up to some of the liquidity questions. When you disclosed that you had drawn the $300 million on your credit facility, you said that you drew the entire line. To the very recent rating agency comment that said that the 300 million could be increased to 500 million. One, is that true? And if so, is there any sort of mac clause or covenants that would prevent you drawing that additional 200 million?

There's no covenant problems on it.

You do have an additional 200 available under that line?

That's correct.

Okay. And then one other follow-up to liquidity. The 65 million payment on account that you made to the IRS on July 2, do you have any sorts of tax sharing arrangements in place that would let the writing companies reimburse you for that outside of the special dividend process?

We have a tax sharing agreement with a writing company.

Did they upstream 65 million?

Yes.

Okay. Thank you.

Our next question comes from [Steve Madsen].

Steve? Are you there?

Sir, if you're using a speaker phone, please lift the handset or check the mute button.

Steve? Why don't we go to the next question, operator.

Our next question comes from Geoffrey Dunn.

Just a couple follow-ups, can you give us your current liquidity at the holding company?

230 million at September, round numbers.

In terms of assessing your capital position with risk to capital, I don't think that number has -- the numbers have been skewed over the last 10 years as you've gone into more nontraditional risk. Do the rating agencies put much weight on that number? And if they don't, which is kind of what I've been hearing, is there a risk that could you come at a disagreement in terms of where your capital really is?

No. Because we meet with them several times a year. And of course, they run various risk scenarios and in the event -- if they were changing their model and telling us we were short of capital, they would indicate that, okay?

Okay.

But I mean, generally, you judge this industry based on the risk to capital level. It's 7, 7 to 1 is a pretty conservative level right now to be at. Obviously, you're correct. It's not the same 7 to 1 that it might have been 20 years ago when we were 22 to 1. If you think about that we were 20 to 1, 15, 18 years ago and AA. It's changed. It's probably lower than it was. But they don't publish that. But certainly they've added and have published some things that they've added additional stress tests for the various different types of new products in the industry.

Last question. You mentioned that a lot of the provisioning this quarter was mainly related to severity. And going back to the previous comment about, if the trends we saw this quarter continue with the month to month jumps, there is no reason we wouldn't see another big provision. If '06 is a more expensive year than '05 and it's only 20,000 of your 90,000 delinquencies, why wouldn't we expect those trends to continue and for continued big reserve building, given your comments?

Well, I think it's a function of Florida and in California, again, in that mix. If that would continue, in fact you would see that. I think I tried to state that, that in fact, if we had the same type of changes in the fourth quarter as we saw in the third quarter, you would see the same type of build-up.

Last question. Do you still expect '05 delinquencies to peak at the end of this year and for '06 to peak by the end of next?

'05 I don't think is going to peak this year. Probably a good chance next year, just because of the burn-off and the levels. I find it hard to sustain itself and I guess before I lose the thought, keep in mind, captive reinsurance on the flow business, the '05, '06, '07, we have about 40, 45% of each of those books covered by reinsurance, most of which is excess reinsurance and it acts as a backstop, if you will, and I think we talked about it in prior calls and using these projections, we think these captives come into play on a material level of mid-'09, certainly late '09, depending on whether it's a 4, 10, 40 type of structure or 5, 5, 25. So even with some of these high loss scenarios, given the captive reinsurance and the revenue streams we're seeing, we think roughly 40% of these flow books by virtue of the captives has about an 80% or thereabouts loss ratio backstop provided by these captives.

Thank you.

Our next question comes from Howard Shapiro.

Just two follow-ups, if I could. Why wouldn't you plan to raise pricing, even on your core flow business? Just given kind of the fact that that risk is being repriced generally across markets and delinquencies are rising, even if that sector.

Well, Howard, I mean, have you to look at the longer term picture of pricing on the flow business and the reality is, if you look at the last 20 years, the pricing is adequate. And allows double-digit returns. We're going through a space here in a couple of states whereby it's not going to -- it's going to run at higher loss ratios in particular, but that doesn't speak to the national pricing or what will happen in California and Florida two years from now when these vintages, the late '07, the '08, and the '09 play out. Are going to play out very nicely. So it isn't one where you can easily change. I mean, even as Larry is telling the captives where they kick in at 4 or 5 per 100, we're not going to get the benefit of that until '08, probably '09 and so these books are going to still run very close to those numbers. So the flow business is still running other than a couple of states very close to pricing models and in fact in many states, better than. You can't change it annually to reflect that.

And aside from the market or competitive issues with price increases on the flow business, we have to file in 50 states with 50 regulators and when you go through that process, it's not just looking to one or two books as of late. They'll look at the last 5, 10, 15 years even before they'll justify your rate increase.

Okay. And then just one other question. Are you noticing just given the kind of very sizable, very fast increase in delinquency, any problems on the part of servicers in terms of handling these delinquencies and working through them and how might that be affecting your numbers or your alternate loss severity?

Our claims department has been at work with a lot of the servicers over the last few months, certainly, assessing their loss mitigation efforts. We are working on customized plans of loss mitigation, loan modification plans with some servicers, with some servicers we're putting MGIC people in place to help with that effort. We have also hired outside third parties to help connect with the borrower, which is one of the major obstacles in pulling off a loan modification, delinquent borrowers tend not to answer their phone or door. We're coming at it from a number of different aspects.

Okay. And just one -- I'm sorry. You were going to say something?

No.

Okay. And just one other question. Are you noticing that, I guess when you're working through these, and you ultimately reach the borrowers that you're having better success than just kind of the straight delinquency process? I guess what I'm getting at is is the industry so overwhelmed right now that it looks maybe a little worse than it actually is once you kind of get through to the borrowers?

The servicing industry overwhelmed? I mean, from a reporting process, I think things are pretty well automated. So I think we're getting all the delinquencies that are out there. But if the servicer is overwhelmed or not interested in focusing on loans with insurance, that's why we're putting people in place to make sure that work gets done.

Okay. Thanks.

Our next question comes from James Shanahan.

Thank you for taking my call. I had a -- a lot of my questions have been asked and answered. The one clarification, though, when you talk about you have a 10% nationwide decline in home prices assumed over the next year and-a-half is I think what Curt said and some higher assumed home price depreciation in certain coastal markets, I think you mentioned California specifically. What kind of home price appreciation are you actually assuming there in California for some of those MSAs specifically? High teens?

Larry will give you some of the models we're working off on those numbers.

Yes. Once again, Curt threw out that 10% nationally. But we work off of the MSAs. And then you've got to overlay these MSAs with the specific exposure and loan products we have in place in these various MSAs. But Riverside is 9 to 10% decline from fourth quarter. And these are two-year in our pricing models, forecasting models, we look at the two year appreciation. So these are two year numbers. So Riverside, 9, 10% negative. L.A., 7, 8% negative. Phoenix almost 20% negative. Vegas, 18% negative. Parts of Florida, we've got Orlando, 13% negative. Tampa, 6. So on and so forth. Rather than rattle off more, once again, we have a internal market score that we look at that projects the outlook price change two years. We also look at and quite heavily the adopt the Moodyseconomy.com outlook. And they cover basically all the MSAs. We do look and prefer, [Casial, or Weis] but it doesn't cover many MSAs.

Okay. And one question, one more question, how does the creation of this credit rescue fund impact MGIC or other MI companies, if at all?

The -- we're talking about the Citi Corp.?

Yes, the 80 million to $100 million Fed orchestrated credit reserve fund.

I don't think that will have an impact.

Our next question comes from [Rob Brian].

I assume that's me, Rob Brian from Merrill.

I think it is, Rob. It sounds like you.

On maybe a little bit of a brighter note in terms of things that limit losses somewhat, you by book year explain what your expectations are for the timing and the magnitude of reimbursements from captives, like sort of '05, '06, '07, when it hits in, what kind of attachment points there are, what it actually does. I understand the 80% backstop for those flow books. But the timing would help. And then on the bulk side, how much of a benefit are you getting from writing your 2006 transactions about a third of them with deductibles?

Okay. The captive question first. As I said earlier, on a material level, they kind of kick in on an incurred basis. At this point we're forecasting middle '09 to late '09. What I mean by that, is material 100 million or better at that point. Prior to that, certainly we've got quota share but quota share is only--.

It's about 7%.

7, 8% of those books and that's in place now and will -- as our losses increase, that benefit will increase but on a relative basis it's 7, 8%. But the real kickers or help comes from the excess layers and once again, we pay the first 4 or 5 per 100, so that's even on the '05, '06, that's the first leg. We're paying the first 4 or 5 per 100. We don't see that being consumed until middle, late '09. And that's when the materiality kicks in to 100 million or better than. I'm sorry, I forgot the second question.

Bulk deductibles, the '06 bulk and deductibles, any benefit there.

Well, yes, the '06 -- that goes back to an earlier question, somebody asked about the bulk pricing compared to the year prior. One is the mix and two is presence of deductibles. And we did have more in the way of deductibles. Some deals had none and then some deals might have had 100 on a blended basis I think it was 20, 30 basis points overall.

20 basis points.

On some of the bulk business in '06 we're paying because there is no deductible and some we're in that deductible layer.

I think about a third of that bulk business in '06 was -- had deductibles in front of it, Rob, which is about 6 or 7 billion out of the 18 or 19 that we wrote.

The rough size of the deductible, number of loans per 100, how many have to occur that you don't pay until the payments kick in?

Well, offhand, I think it was in the area of about 100 basis points but let's assume that's in the ballpark. On these bulk loans, typically severity might be 30, 35% and that's in line with stuff that's been published in the capital markets, average severity. So if that's the case, 3 per 100 or so would consume those deductibles.

Okay. And on -- switching back to the captive mortgage reinsurance. Yes or no, are you anticipating hitting attachment points for all three years, '05, '06 and '07 and if you do, do you anticipate going through the mezzanine layer and losses start to come back to you because it is not a complete excess of loss, it's only a mezzanine.

The first question, yes, we think '05, '06, '07 all consume, not to the same degree, but they get into the 4 and 5 per 100s. And we do not see them consuming the second layer and getting into our layer.

Into our layer.

Great. Thank you very much.

You bet.

Our next question comes from George Sacco.

Just wanted to get some historical perspective. If we go back to the 1980s, how high did your loss ratio peak on an annual basis? And how many years was it over 100%?

George, this is Mike Zimmerman. We can -- we can look that up and call you back. That's in the perspective.

That's a different book of business.

That was 100% insurance.

Just, I understand things are a little different. I'm just curious as to how long more so I guess did it persist? Was it three years? Four years? I mean, how long did it take I guess to kind of run through some of that business, maybe?

Well, it was probably that time period, but again, what happened then was 100% coverage all the way around between us and Fannie and Freddie and so you had severe market deterioration and oil patch states where you had incidences sometimes 30 to 40 per 100. So you owned all the housing within that. This is not the case here.

Right.

These are more isolated houses, et cetera. So it's a far different story.

Okay.

And we can pay 25% and cut and run.

Okay.

George, not specific to your question but back to that captive question from the prior caller, I just want to make one other comment and that is, those comments we made, that's overall general to the book. Specific lender captives might do better or worse. Some lenders produce better results than others. So actual results may vary by lender. Thank you, Larry.

Our next question comes from Scott Frost.

Yes, could you give us an idea of what holding company expenses are expected to be for 2007 and for 2008?

We don't have any -- all the operating expenses are down in the writing company.

So just dividends and interest is what you pay.

That's correct. Primarily, yes.

Operator, next question.

Yes, sir. Our next question comes from David Polson.

Thanks. I'm trying to understand how conservative the reserves are, kind of reflecting other questions much earlier. You normally have paids being a lot less, or I guess materially less than reserves for like a prior period. It's maybe 20 to 30% less. Does that mean if you have paids -- a paid prediction of 1.2 to 1.5 and current reserves are 1.5-ish now, that we should assume just more build-up in the next few quarters, sort of catch up to that paid prediction?

Well, once again, as I said before, a lot of this is going to determine what happens specifically to the acceleration that we saw. Does that continue for X number of more quarters or does it start to flatten out. So it really is going to be a -- and you're probably not going to be comfortable with this. It's going to be a quarter by quarter review. We need to look at the development in each of these markets and the level of the delinquencies and see when they start to slow down. Clearly, if they don't slow down and they stay at these current levels then you would see those type of ratios. But it can change, depending upon the mix and what happens to severity in each quarter and as Larry and some of the other questioners talked about earlier, the turn at which some of these books slow down. Right now, they've not slowed down with respect to delinquencies and claims rate and we need to see the turn. We have not seen it yet. So I think we have to monitor it quarter to quarter.

Well, can I then just assume that you're being somewhat conservative or that you're being kind of exact in your reserving right now. You're saying 1.5 is what we have and that sort of in this case versus what we have done in prior years, that is sort of being in line with paids, more than it is in the past. And that if let's say the acceleration continues in fourth quarter, we would see the paid losses being projected upward.

Yes, I think two things. Each quarter obviously we will give you an update on what the experience has in the current quarter and if there is a significant change in delinquency and a change in the factors we're using, you would see a continued build-up. In the event that some of those factors begin to mitigate, we'll talk about that and we'll have the discussion and talk about maybe a lower level of build-up.

Okay.

I can't be any more I guess clearer than that. Right now, I clearly in the environment we're in, it seems to be changing quite rapidly and we need to see some type of mediation. We've not seen it.

Okay. Just one other quick thing. This -- I haven't seen Moodyseconomy.com. Is this 10% decline nationally, does that essentially match them or is it some kind of modeling off of various MSAs predicting a decline.

I mean, I think that's a ballpark estimate of their overall national forecast for the next -- over the next two years. But more important than that number is specific MSAs and how much volume we have in those MSAs. So I hate in a way using that national number, because it may not reflect our portfolio.

Okay. Great. Thank you.

Our next question comes from [Sai Lund].

Hi, Sai Lund from Morgan Stanley. First question on the covenants which were brought up earlier on the bank facility. Is there still the minimum net worth covenant in the credit facility. Was that adjusted at all when it was upsized.

It was not adjusted, it's still the same.

Still 2.25 billion?

Yes.

Then also, what was the statutory net earnings in the quarter?

I don't have any stat statements in front of me.

Was the C-BASS loss -- I presume that the C-BASS write-down was also included in stat results?

Yes, it would be.

Then is there -- given what would be a stat net loss, is there a potential need for capital infusion down to the opco in 2007 or 2008 and was that why the credit facility was increased.

No, the stat numbers, I don't have them in front of me. But the stat numbers ironically would be probably positive this year, because the release of contingency reserves. So you're thinking about two different types of -- we're talking about statutory statements versus GAAP. So that wouldn't be an issue.

But the C-BASS write-down I believe would be an issue, though, because it is down at the operating Company, is that right?

That's correct.

It's at the writing company. You have to take into account the release of the contingency reserves as well to get the stat net income.

We can go through that offline. But on a statutory basis, we've got release of contingency reserves as part of the statutory calculations and on a statutory basis I'm sure that we're positive in '07. Okay. On a forecasted basis.

Okay.

I don't have it in front of me.

Okay. And then so we can't assume a stat net loss in 2008? Because I know you were talking about a GAAP net income net loss for 2008.

You could have a GAAP net income loss in 8 and a stat positive.

Okay. We can talk more offline. I would like to talk through the mechanics of the writedown at the opco on C-BASS.

Our next question comes from Jordan Hymowitz.

I had a question. You guys have, seems like a fair amount of capital to surplus 7 to 1. Where do people start getting concerned? Is it 10 to 1, 13 to 1, 15 to 1? Forgetting the gray area, where do you think is more of a bright line?

Well, as I said earlier, 15 years ago we were 20 to 1 and we were AA plus. But things have changed. You would have to ask the rating agencies where they get uncomfortable. Is it 15 to 1 or 17 to 1. I can't answer that. Because none of them use just that number. Okay? They look at capital but they also look at a number of other things including the book of business, obviously, and other issues and run various types of stress tests and against that, they get comfortable and give a rating and clearly, it's not just the risk to capital. And it varies -- it can vary by company because of other leverages. You could have a low risk to capital on a statutory basis but have a significant amount of leverage issue that they would have issues with and would rate negatively accordingly. It really is a rating agency issue.

Let me ask that question differently. To the extent that some MI companies have been running much higher risk to capital ratios because their credit has been much better, if their capital credit deteriorates more toward the mean, the risk to capital ratio that the regulators would be comfortable with would move towards the mean as well?

Once again, you really need to have discussions with Moody's and Fitch and S&P and they can air some of that out there. They'll all be publishing some more information I think--.

Today.

In the next couple months. In the next quarter they wilt be issuing reviews again and talk a little bit about it. It's not just the risk to capital.

Okay. Thank you.

You bet.

Our next question comes from Steve Stelmach.

My follow-up question has been answered.

Our next question comes from Jonathan Adams.

What percentage of your claims reach a maximum payout and has that percentage changed over the past year?

Well, total claims in the quarter, total being bulk and flow, 75% were the percent options, so that would be the full payout, if you will. 18% or so were pre-sales and about 7% were acquisitions. Last quarter, the breakdown was about 71% option, 19% pre-sales, 10% acquisitions. So you can see from quarter to quarter, things are moving to the percent option and the acquisition, pre-sale, mitigation opportunities are diminishing and that's why we're boosting our efforts, loss mitigation not so much to pre-sales or acquisition, although those are still in place, but it's more of the loan modification aspects rather than acquisition.

Okay. Thank you.

Our next question comes from Al Copersino.

I had a quick question about sort of following up on the credit facility questions. How much debt capacity would you say you have? I don't hear you saying you need to tap it at this time. But I'm curious what that capacity you would say you have overall.

Well, I mean it's -- that again would be a function of the rating agencies, where they're comfortable. I mean, clearly we could probably take it up a couple hundred million debt to equity ratio is relatively modest. But I don't think much more than that. So it's not a significant amount. They look at two things. They look at debt levels relative to equity and double leverage and they also look at your ability to fund that at the holding company.

Again, the holding company expenses would be roughly 80, 85 million for dividends.

40 something for interest, yes.

40 something for interest. Thanks very much.

Our next question comes from [Peter Largos].

Actually, it's Nandu Narayanan from Trident. I guess my question really relates overall to the loss experience you've had this quarter and what you would expect for the housing market going forward? Because already based on everything you've been saying, the losses you're experienced, the delinquencies, everything have been a lot worse than you anticipated just a quarter again. I'm looking at your numbers from last quarter's 10-Q, you have roughly what, 56 billion, $57 billion of risk in force and about 4.4 billion on equity, something in that range.

Clearly, the -- given the potential for much more significant losses and given that we seem to be at least in the worst housing market since the great depression, your very survival is in question, if in fact things get appreciably worse in the housing market. What is your central scenario here in terms of what's likely to happen? Because we haven't even seen a significant downturn in the economy overall, we've not had a recessionary conditions yet in the economy or anything even remotely like that yet. There's a reasonable possibility that things could get dramatically worse. Obviously given the discussion we've had about the rating agencies. The rating agencies in the last few months based on their downgrades have all been supplying debt and everything else have demonstrated that they really have no idea. Their models are terrible.

So where do you come out on this? Because clearly you're the insurance company. It's your capital. You're survival that's in question. If in fact things get much worse. Where are you your assumptions different from the rating agencies and how bad do you really think it's going to get?

Well, we discussed as far as in stressing our book that we're utilizing the numbers that Larry had relative to market deterioration and clearly, I would say that's a stress scenario and leads to the numbers that we forecast for next year. Now, I mean, if you want to paint the world as going to end picture, which you are, I mean, so be it. I don't agree with you in any respect. Employment is very strong and again, if you travel across the country, we certainly are having a hard time hiring people everywhere we are. So I don't see any issues relative to employment. I see new underwriting standards relative to business going forward. I see new pricing relative to business going forward. We have modeled in I think very draconian loss estimates relative to how we think books would play out. And with that, we are more than adequately capitalized as the rating agencies will tell or have told, going forward.

So I -- I look at it from a totally different aspect. We've got so many good things going on in the business fundamental side of the business that we are in the insurance business. And we're paying some losses based on what's happened from '05 and '06 and early '07 and we've got more than enough capital to pay those losses.

You mentioned our risk in force. Overall, even though the bulk is weighted towards California and Florida, overall we're still distributed pretty well geographically. No state is more than 10%. I think Florida, 9%. But aside from that, the geography on a time path, roughly half of the book is '04 and prior. So looking at those older books, we're really not seeing any elevation to those delinquencies. They may not be declining as quickly as once, but they're not increasing, if you will.

And if I can also add, Larry, as we said, earlier, the '05, '06 and '07s have about 40% of the flow book also reinsured out which will cap our losses at certain levels at about 80% loss ratio. We've got -- we're in a strong position.

I guess, though, if I just look at your current loss experience for this quarter, correct me if I'm wrong, I mean you're realizing losses on loans which are basically delinquent already for two or three months or more, correct because it takes a little bit of a lag before the delinquency happens at the level of the mortgage holder and it shows up as a claim to you. You're not even seeing the full impact perhaps of August, and the turmoil in August and the continued deterioration of the housing market we've seen since then?

No. And we've modeled that into our numbers in the fourth quarter and next year though, where we think the numbers will be, and as I said, I think a draconian or stress scenario.

In terms of macroeconomic assumptions, do you make any assumptions about unemployment, how bad the economy might get given the housing market? Because clearly what's been--?

That is your decision on how you want to do that. Thank you.

Operator, we have time for one more question, please.

Our next question comes from [Robert Boes].

Hello, I would like to follow up on David Polsons line on paid to incur. Could you give us an idea on the relationship, how it's trending with paid to incurreds say like from prior, maybe your prior quarter, second quarter to what you're doing in third quarter?

Once again, are you asking what -- about the fourth quarter, what the trends should be?

No. Just, you're seeing the ramp-up in reserving. Your relationship of paid losses to incurred losses, 2Q versus 3Q.

Yes. I think it's going to continue to go up. If we assume, as I said earlier, if we assume we're going to continue to have another increase like we had in delinquencies in the fourth quarter, which we could have, traditionally you would see an increase in the fourth quarter, and if we had similar types of severity changes, you could see the same type of build-up in the fourth quarter. But it will be dependent upon delinquency levels and some of those changes. But we'll report that out again after the fourth quarter.

All right. Very good. Just one more. Did you say you're going to do a supplemental? I'm looking in particular for the number of loans or the delinquency rates by LTV and vintage. Is that something you guys are going to put out?

No, what we did do on the last page of the supplement we put on the website, is there's 2005, '6, and '7 vintages with some select criteria, and delinquency rate is included in that for those vintages for bulk and flow.

But not on LTV striations?

That's correct.

That's it.

That's it? Well, thank you. It's been a spirited call. I understand the significance of that, clearly as we said, the losses dominate but please don't lose sight of all the good things that are going on relative to the Company and the strong capital position that we are in to deal with those issues. Thanks so much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you, and have a great day.