MGIC Investment Corp (MTG) 2007 Q4 法說會逐字稿

Welcome to the MGIC Investment Corporations fourth quarter earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a 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.

Thanks. And thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the fourth quarter of 2007 and full year 2007 results are: Chairman and CEO, Curt Culver; Executive Vice-President and CFO, Mike Lauer; Executive Vice-President of Risk Management, Larry Pierzchalski. As we've indicated in this morning's press release we've posted on our website supplementing information pertaining to the characteristics of our primary risk enforce which we think you'd find valuable. I would like to add all participants to try to limit themselves to one question and a follow-up and then return to the queue to provide as many people as possible the opportunity to ask a question.

Finally I would like to remind all participates that our earnings release of this morning, which may be accessed on our website which is located at www.MGIC.com, includes additional information about the company's quarterly results that we will refer to during the call and include certain nonGAAP financial measure's. During the course of this call we may make comments about our expectations about the future. Actual results could differ materially from those contained in the forward-looking statements. Additional information about these factors -- about those factors that could cause actual results to differ materially from those discussed in the call are contained in the quarterly earnings release. The company makes any forward-looking statements we are not undertaking an obligation to update the statements in the future in light of the subsequent developments. Further no interested parties should rely on the facts that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the press release. With that I'd like to introduce Curt

Thanks, Mike. Good morning. For the fourth quarter we reported a net loss of $1.47 billion and for the year a loss of $1.67 billion. As mentioned in our earnings release, the quarterly results included two one time items. The first is a pre-tax premium deficiency of approximately $1.2 billion, as a result of our decision to stop writing Wall Street bulk transactions. Due to the complexity of this issue and the significance to our financial results, Mike Lauer will spend a few minutes discussing the premium deficiency reserve after my comments. The second one time item is a $33 million after tax charge related to the equity losses incurred by C-BASS in the fourth quarter that reduced the carrying value of the $50 million note from C-BASS to zero. Obviously these financial results are unacceptable so the question then is what are we doing about it? As we discussed last quarter, we have made changes to strengthen underwriting quality and pricing.

On November 1st of last year and on January 14th of this year, we implemented underwriting changes on loans which exhibited multiple high risk factors, and in addition pricing increases on loans above 95% LTV loans categorized at A-minus and loans categorized as Alt-A. Even though the changes have already made an improvement in our commitment volumes, for instance, flow loans above 95% totaled 42% of our commitment volumes six months ago while in January of this year they totaled 27.5%, and early in February the numbers are even lower. But while as I said we made these improvements and commitment volume we feel they are not enough to help us return to profitability in a market where real estate values are declining. As a result, we have made further underwriting changes to require more equity and higher FICO scores than markets that are declining, such as: California, Florida, Arizona and Nevada and Michigan.

While these changes will negatively impact our volume, we feel they are essential to making the 2008 vintage a profitable one. With our risk to capital ratio at it 10:1, MGIC has sufficient capital to meet even the most stressed of claims scenarios. However, the current MI business environment is exhibiting some of the strongest business fundamentals I have seen in my many years in the business. As a result, we have hired a financial adviser to assist us in exploring adding capital to our company to capitalize on the following opportunities. First, low -- MI penetration is at an all-time high somewhere between 17% and 20%. This is up from 10% a year ago and somewhere around 8.5% 18 months ago. As evidence of the significance of the penetration increase our flow NIW in the fourth quarter was up 108% year-over-year and 75% for the year. Even with the underwriting changes our industry has introduced I think penetration will still run in excess of 15%.

Second, persistency has returned big time reflecting the decline or slowing in real estate values. Our flow penetration in the fourth quarter was 78.7%. And our flow quarterly run rate was 83.6%. Frankly as you've heard me discuss before I don't think we hit 80% again. But now it looks like we will exceed it for a number of year's. The persistency improvement coupled with the penetration increase I mentioned earlier helped us grow our insurance enforce to $211.7 billion which is up 20% year-over-year.

Third, as I mentioned earlier the underwriting and pricing changes we introduced on November 1st, January 14th, and again last week should return our mix to profitability on the 2008 book with even a better outlook thereafter. While these changes will cost our company some business, it will be business better lost than insured and won't put us on a path of long-term profitability, just as we experienced after the losses of the mid-'80s' and the subsequent underwriting pricing changes our company made at that time.

Fourth, our company is really well positioned to compete. Our full market share grew to an estimated 25.5% in the fourth quarter up to 24% as a number of lenders moved business to MGIC in response to market conditions. And while we may lose share to reflect our underwriting changes, we will lose it for the right reasons. More important our share advantages are our expense advantage especially given the commodity nature of our product. MGIC's expense ratio is 36% lower than our publicly traded competitors and 31% lower than our industry's. I think this will also serve as a deterrent to any private equity money that may look to enter our industry [denoble] as they struggle to compete for the business in an efficient manner.

Fifth, while captive reinsurance will help us immensely in dealing with the 2006 and 2007 books of business, which Larry will discuss later, long term they are not positive for our business. Interestingly we have had two lenders recently discontinue their captives going forward and at least one other major customer considering such a move. Sixth, our international expansion will pay huge dividends long term, not just in driving higher revenue and earnings for our company, but also in providing even greater geographic dispersion to our already strong position. We feel the opportunities in Australia and Canada are huge for us with even greater opportunities longer term and newly developing markets such as India.

Seventh our country places a huge value on housing as indicated by the speed in which the simious package was put together. As well as recent discussions to place a moratorium on foreclosure through Project Lifeline and the almost universal bipartisan support of making MI tax deductible. While the stimulus package will not be a panacea nor Project Lifeline, they will create an opportunity for ARM resets and weaker credits to refinance into fixed rate debt insured by FHA or other lenders. As I've outlined we have tremendous opportunity in the years ahead. And while 2008 will again be a difficult year as one which we could -- should see many more opportunities emerge. To that end you have my commitment and that of my coworkers that we will maximize these opportunities to return our company to profitability as quickly as we can. With that, Mike could you discuss the premium deficiency?

Thank you. As noted in our release, the piece of business we were talking about, the Wall Street bulk transaction, represents approximately 145,000 loans, about $25.5 billion of enforce and about $7.6 billion of risk enforce at year end. During the fourth quarter, that particular book of business exhibited significant deterioration with the declining tier rates and escalating severity claims. As a result we made a decision to discontinue that business and calculate it on a run-off basis net present value of the future premiums and losses offset by the reserve we've established at year end. What's important to understand about that calculation, that $1.2 billion charge is a GAAP charge, the P&L, with the offsetting liability. But it's not a stat adjustment. So we will have a difference between GAAP and stat each year as we roll through this transaction.

Secondly, what you need to understand is that we will adjust that liability account each month and quarter to our GAAP financial statements. So next year as you think about the modeling, the $1.2 billion should be a credit to P&L. At this point in time based on our estimate runoff of the book, we would see -- we would estimate that that credit could be in the range of $500 million to $700 million in '08. And then subsequently in '09 we will have to get farther down to see what the value will be in '09. It may even be some [pale] in 10'. But for modeling purposes you want to think about that liability account coming back through the P&L in the range of $500 million to $700 million. But again we will update that calculation on a quarterly basis as we go through reporting in 2008.

The discount factor we used relative to those calculations was [4.7]. And pretty much everything else we've -- I think we outlined in the press release. And I think let's open it up for questions.

Operator, if we could take questions? Denise?

(OPERATOR INSTRUCTIONS) Our first question comes from Howard Shapiro of Fox-Pitt.

Hi. I just have a couple of questions if you don't mind and I will get back in the queue. Mike, I want to make sure I'm understanding the accounting. You say that you will have a credit of $500 million to $700 million in '08. But won't that be offset by any continued adverse delinquency development in the -- in '08 on the bulk business?

I guess separate it first of all in the normal bulk business that we haven't discontinued, there will be any normal loss provisions provided. With respect to the piece of business that we discontinued, we will have the normal reserve accounting for those delinquencies as they come up and in paid claims. However, if it's amount equal to, if you will, our calculation, there will be some relief, give or take the adjustment. What I'm trying to say to you is the way the book is -- we have it forecasted off so you have some idea about how that liability comes back. We think it's in the range of $500 million to $700 million. Of course, we would -- we'll give you updates on that on a quarterly basis. But you're correct. The normal loss reserve provisioning and claims goes through the statements that they normally would with a [contra] for this runoff of this liability.

Okay. And another question. Just if I think about this, you have right now separating out the reserve of $1.4 billion you have in place for the bulk, you have $1.2 billion reserve. You're expecting life of vintage losses on the bulk of $3.5 billion. And you are expecting no net income in '08, so we could assume that the provision level in '08 is going to be somewhere in excess of your revenues, so let's call it $1.2 billion or so. Is it fair to say that you are expecting in aggregate on your current exposure $5 billion to $5.5 billion of actual paid claims over the vintage, or am I looking at this --

Overall?

Over the life.

Over the life.

Yes?

Yes. Around $5 billion, Howard.

Okay. That's very helpful and I'm going to squeeze one last in and I apologize.

You are taking up all of our time, Howard.

I'm sorry. One more last one. On the bulk business, when you look at the loan characteristics of the bulk business, what in your opinion is driving the change in the significant divergence in behavior in the bulk business, and how much is fraud a factor, do you think?

Howard, I would say one of the main drivers is the geographic distribution of the bulk business. California's 20% some odd of the bulk. Florida is another 12%, 13%, you put those together 35%, 40%, and those markets went from let's call it boom to bust rather quickly. In comparison on the flow side, California is only 3%, 4%. California was never much of a Freddie/Fannie conforming market and MI -- flow MI wasn't used much. Aside from that, you've got the biggest piece is the '06 bulk. So you have a large book at its claimed peak if you will playing through. We drop writing significantly at beginning of '07. So it's that '06 hump if you will moving through the normal course of its life.

Yes. I think, Howard, as you look at it and I think heard Larry mention this recently we think that '06 will be at 150% to 175% loss ratio. The seven book by the way only did $7 billion or $8 billion in '07, probably as a break even because we increased pricing and we got better geographics in that. So it's kind of the late '05 and '06 that are the issues. And geographic -- the lack thereof of geographic dispersion the issue.

Okay. Great. Thank you so much.

You bet.

Our next question comes from David Polson of Bear Stearns.

Thank you. Have you talked to the agencies about this quarter yet and --

Yes.

And how do they feel about this $1.2 billion of --

They knew about it. We had talked to them for quite some time.

Okay, and maybe I'm kind of a little slow on understanding the whole thing. Why do you have to do it because you just stopped writing bulk? Is this a regulatory --

Well, it's an accounting issue with respect to this business that as I said in the fourth quarter we recognized that as you test the premium sufficiency with respect to the business it was clearly on a negative path. In other words, the premium's expected present value the premiums were going to be less than the paid claims with respect to some of the new forecast we prepared. As a result of that you need to recognize that and then subsequently we made the decision to discontinue the business, too.

Right. But it sounds like the discontinuing of the business prompted you to do this without --

No, I think the issue is the deterioration that we observed. Okay?

Okay. Yes. Okay.

In other words, recognizing that the premiums were not sufficient to cover the losses.

Right. Okay. That's fine.

In addition to recognizing this accounting position, the deficiency of the premium, we made a decision to discontinue it.

Right. Now, if you -- why -- maybe explain a little better like how you are booking this liability and why is this such a heavy liability if in fact you are expecting some turn this year and in '09?

I think you lost me here.

David, can you try that again?

Why is the --

The liability is the net present value of the expected premiums are less than the claims we were going to pay.

Okay. So --

So the book is going to run off negative. So we recognize that today in the fourth quarter.

Okay.

And the $1.2 billion is a calculation of those future premiums discounted as well as the future pay losses offset by the existing reserves and the net number is $1.2 billion.

Okay, so what is this $500 million to $700 million coming back, or this is literally a positive --

David, this is Mike, a -- why don't we set up a call and I will walk you through the mechanics of that. But it's basically the amortization back out as those books start to work their way through the rest of their lives.

Right. Okay.

-- negative next year. We've already recognized that this year.

Right. Okay. Better I understand this more offline. Okay. So let me -- okay, with regards to the agencies just in the last point, I mean, when I see Moody's refirm you and the status of the same, and when S&P recently put you or put you on negative watch, I mean, does this -- had you told them about this before those actions?

Yes.

Okay, thanks a lot.

Thank you.

Our next question comes from Eric Wasserstrom of UBS.

Thanks very much. So just two points of clarification, please. One is so the issue about the capital rates that you are seeking, it sounds like it's entirely to fund new business opportunity and not related to any claims bank capacity issue. Is that correct?

That is very correct. As I said, we were 10:1 and meet the most stressed of claims scenarios.

And have you contemplated what form that might take?

There is a variety -- I'll let Mike talk, but we were looking at a variety of forms.

Yes. We were looking at everything. There is reinsurance opportunities, convertible debt, etc. And so just about every avenue that you can think of we are looking at relative to costs. Because the market right now is pretty excessive.

Right. And then can you just touch a little bit on your debt service at the parent company and how you are think being that given the --

We have about $290 million that the holding company and our interest cover is about 42%, 45%, and common stock dividend is about $8 million. So we have got ample four or five years of cash flow there.

I'm sorry. The common section was $8 million?

$8 million, yes.

Great. Well, thanks very much.

Thank you.

Our next question comes from David Chamberlain of Oppenheimer Capital.

Hi, just a follow-up on the capital question. When you guys think about the growth opportunity and your writing is up 100% year-over-year and your book growing 20%, What -- if you add -- how do you think about capital? What do you need if you wanted to grow the current rate, is there any steps you can give us in terms of the quantity if not the type of capital that you need to raise?

I think -- suffice it to say that we are looking at a mix and the green at which we will raise it will be a function of economics, too. As I mentioned earlier, some of the rates right now are pretty excessive. But clearly as we look out, Curt talked about the opportunities in the business, even though we had a strong growth year last year, we don't see that same opportunity this year because of some of the underwriting changes we made. But longer term we think there is some opportunities for further growth and we like to be better positioned for that. So the timing of which the capital may be an issue we may do it later than earlier, depending on what the market is and what the costs are.

Okay. Just a quick follow-up on that. It sounds like the -- on a statutory basis which is really in terms of capital raising that this set up of the bulk [contra] asset does not factor into what you need to grow. Is that fair?

That's correct. Yes.

Thank you.

Our next question comes from Amanda Hindlian of Goldman Sachs.

Hi. It's Donna Halverstadt. One quick question. You had mentioned that two lenders have discontinued the cap just going forward and that a third might. Could you give us a feel for what percent of risk enforce relates to those two lenders? I'm trying to get a better sense what of these are big lender or small lender and whether or not you expect most lenders to move that same direction of discontinuing cap.

Actually, there are a major customers, but had done -- haven't done that much with MGIC. Although they have done it with other companies and so we will be significant relative to their impact on the industry. So I would say it's relative to our financials and significant, more relevant however is the fact that these are major customers. Again, the industry they have done a lot of reinsurance that are discontinuing these going forward, which -- I mean, that's a very positive sign for all of us in the industry.

And do you expect others to follow suit?

I know others are reviewing it. As the capital required within this and long-term capital and it's difficult to get it out, and now they are even though net positive, they are going through probably a couple of years whereby they have losses in it and where many of their management is at a higher level, let's say at the bank CEO level doesn't want to fool around with that relative to the mortgage group. So I think it's certainly something that is being looked at much more closely than what it was a year ago.

Okay. Great. And also like David, we wanted to better understand how or why that $500 million to $700 million comes back so we will call you offline on that as well.

Thank you.

Our next question comes from Rajiv Patel of [Senova].

Hey, guys.Thank you for taking the call. Just a question on credit. The -- since the year end we've had the rate cuts and a lot of different initiatives being implemented. Hopefully for the positive and the housing industry. Can you comment on what you are seeing in your book subsequent to 12/31, and then provide an update on your claims guidance?

Yes. Let me tell you on -- I mentioned this, but on a commitment volume which is indication of loans that we received applications but not yet insured, so this is a volume we received in January, which was a strong month for us. Just to give you an example as I mentioned, 100% loans in July of last year were 39% -- 100% LTV were 39% of our volume in January it was 24.8%. And early in February we haven't had that many days yet, 19.4%. So we've seen that mix change rather dramatically. Full doc which is the world we want to play in -- we've always wanted to play in but the market took us a little bit elsewhere, was 69% of our volume in July of last year. And in January it was 75%, then February 82%. So that's another wonderful change for the business. FICO is over 700 or around 46% in July. 53% in both January and February. So you are seeing the mixed change which is very, very positive relative to a profitable, a very profitable 2000 vintage.

I guess just to clarify, I was looking more to see the performance of your '05, '06, '07 vintage. Are you seeing any signs of improvement given all the changes that have occurred in January, or is --

That wouldn't have any impact. First of all the underwriting changes have no impact on the '05, '06, '07 books.

I just mean more like the capital markets changes like the rate cuts and such.

Well, the interest rate -- the fed cuts mean nothing relative to performance. But the stimulus -- I mean, as I talk -- my comments should help our whole industry, MGIC in particular, relative to offering refinance opportunities to people going forward that may have ARMs or have weak credits that they can refinance, but that's way too early. It hasn't even been signed yet.

Yes. And then on the claims guidance.

'08 is still the same we announced a couple weeks ago, about $1.8 to $2 billion.

Okay. Great. Thanks a lot, guys.

Our next question comes from Michael [Manzini] of Bear Stearns.

Hi. So one question I had was actually do you have the risk to capital ratio at the operating sub? Do you have that number?

That's that 10:1.

Okay. So what about at the holding company?

12:1? There is no such thing. Let me say it this way. The MGIC risk to capital is 10:1 on a consolidated basis based with some of its other insurance subsidiaries, it's about close to 11:1. But there is no risk for capital at the holding company.

Got you. I realize you got an few questions on this so I like to join that call on the other piece as well.

Think about it this way. Think about it this way. It's the calculation is perfect and next year obviously there is a deficiency because we calculated that out on a net present value. So the premiums would be less than the pace. And let's say it was $500 million. That $500 million would flow back as a credit out of that liability account. Now that can change relative to these calculations. But I was trying to give you some kind of range of where that liability could run out in the next 12 months.

Can you -- basically discontinued operations accounting. So basically you are saying we basically have -- no, it's not.

No. It's a premium deficiency. The book next year -- the premiums are going to be less than the pace. Okay? So we -- that particular delta, that margin we reserved for. And we reserved for it on a GAAP basis. And if the calculations work perfectly, and it was a $500 million change, that's $500 million will come back as a credit. That adjustment. Subject to some new things that could happen relative to --

Sure, sure. I'm trying to get my --

The magnitude of it, I think, is in the range of $500 million to $700 million so it at least gives you some guidance.

I think the piece you might be missing is that as time goes forward they will continue to book actual loss development and actual premium development. And part of that is -- the point is part of that deficiency we already booked here in fourth quarter of '07 here.

Alright. I guess the question is, so typically the trigger for recognizing provision or increasing reserve has been delinquency. So this appears to be kind of a different approach.

That's correct. That's correct.

That's I guess what maybe other callers and myself are having trouble understanding the new -- the kind of different application, more conservative, certainly, but understanding how it is first of all that you kind of quarantined this one piece of the book and said, we are going to basically -- we don't have delinquency on this yet, but we know the losses on this subset of the book are going to be this. So --

The premium deficiency, exactly. We calculated that there is a premium deficiency on this piece of the business and we've recognized that.

I see. And then the -- alright, I will follow up later. I'm still a little foggy on the recapture part, but maybe that's something you guys can put something out later to clarify how it looks from your end. Okay. Thank you.

Operator.

Our next question comes from Si Lund of Morgan Stanley.

Good morning, guys. Thanks for the call. My first question it relates to the credit facility, that I believe is fully drawn right now.

Right.

Do you have plans to adjust the net worth covenant in the --

No. We don't.

-- in the facility?

If we had to have a conversation with them about that and we did recently it's not a big issue for them. It's a small group of lenders and we advised them that there may come a time for us to talk about that, but it's not a significant issue for us.

Okay. And is the according feature you mentioned on the last call still available?

Yes.

Okay. And second, on the capital rates that you've mentioned, you put parameters around the magnitude of the size of this? Because we have seen other companies notably the financial guarantors try and raise capital and it's been a challenging environment to raise capital. So could you try and put some parameters around what kind of instruments you are looking at?

As I said before, we are looking at all the things you would think we would. Reinsurance. Some kind of convert debt and other things to boost capital. So the question is, for us is, where is the market price for that today? And what is an economic decision for us to make? So granted, we were look farther down the line for uses of capital so we have some time, but right now it's pretty expensive. But we are taking it -- we are taking time to look at it and see if there is an economic advantage for us to put some capital on now.

And while I'm biased, I would say the opportunities in our industry are so significant that it's clearly a different discussion than you would have with a financial guarantee side of the business.

Okay. And then final question, as far as the statutory results and will there be any dividends you can take out of the operating company of 2008?

Yes. They would be with the approval of the commissioner. All of ours have to have approval.

Okay, but based on the regulatory formulas you are able to take out capital in 2008?

With approval from the commissioner.

Thank you.

Thank you.

Our next question comes from Steve Stelmach of FBR.

Hi. Good morning. I want to circle back unfortunately real quickly to the capital level. Your capital is down about $1.5 billion from its peak or where you started in 2007. Is that -- Is assume that's not the magnitude you guys are discussing, is that a correct assumption, or should we think about something else?

No.

As far as the capital rates?

In term of the side of the capital rates.

I don't think we were thinking in terms of that size. I think something lesser. We will see what is available in the marketplace. There are tremendous opportunities within the marketplace going forward. And we have to as Mike said look at the cost. The impact, the delusion, all these things and what's available and make the call.

Okay. And there's another way to think about it, I guess, is historically you have said you feel comfortable running at a risk to capital ratio of around 12:1 to 13:1. You have been as low as 7:1 at some point. Is that sort of still the range that you feel comfortable operating your leverage at?

I think we could run at 15.

15? And your rating is okay with 15?

I think so, but a lot will depend on everything else. I think what kind of business we were writing in '08 and margins and capital position, etc. But I think 15 is -- would be adequate.

Okay. So you still have room to lever, you don't need to fill that $1.5 billion hole yet.

Yes. That's one of the beauties. We don't have a gun to our head to do something now. And also impacted were the financial guarantee companies were slightly different.

I appreciate that. Thank you.

Our next question comes from Howard Shapiro of Fox-Pitt.

Okay. I told you I would get back in line. Can I ask you a question on the accounting relative to Project Lifeline? If we are to see large scale modifications and cessations of foreclosure activity, from an accounting perspective, how does that impact you? Do you change your frequency assumptions? And if the loan is modified by cutting the balance, are you responsible for that, or is some other party responsible?

Howard, they just announced that program. So -- I've got tell you the relevance of it I don't think will be that significant. It will be a marginal improvement relative to claims performance. So as we sit here right now, I don't think we'll change anything on the accounting side. Now to the extend we could modify loan that is very beneficial long-term as we have done this, and we have done this a lots with Fannie Mae and Freddie Mac, about half of those loan questions modify end up curing long term for us. It's something very positive. But to wrap framework about how positive and how to treat it yet is too early to call.

I think we need more information. I think what you are thinking about is if we get a significant amount of delinquencies in that program will you account for them differently? Right?

Right.

And I think we need to know more information.

I would say right now no.

30 day -- right now it's 30-day moratorium.

Okay. Thank you.

Our next question comes from Josh Smith of [CIA Kreff].

Hi. Thanks for taking the question. Let me try one more time on this $1.2 billion if I could. Basically, you front-end loaded this loss for '07 and you expect to get -- if you had done nothing, you hadn't done this premium deficiency, this $1.2 billion would have manifested itself over the next few years. Is that fair?

That's correct. Perfect.

Second question I have is on the captives. Have you done an analysis -- I know it's not allow this and you don't have caps on the book but have some benefit from it. Will you look at the total amount you could recover from them and compare that to what's actually funded?

Larry will go into that right now, Josh.

And I have one more follow-up after that.

I would say the focus will be 05' 06', '07 books. The '04 and prior given development to date and how much is in force largely those excess of loss associated with '04 and prior are not going to be impacted. With regard to the '05, '06, '07, just to give you a feel for the risk associated with captives from those books about 41% of the '05 is one captive or another, 7% or something is a quota share. 14 is akin to a 5%, 25%, 5%, 20% or so is a 4-10-40. And then '06 about 7% or 8% quota share, 11% 5-5. 25% and 24% other so -- or so four 10-40s. Totaling 43%. And 07, about 9% of quota share, 10% 5-5, 25% and 28% in the 4-10-40, about 47%. So back to the '05 book, aside from the 7% tied up in quota share, the excess of loss comes into play at the 4% 400 and 5% for 100. At this point in time we were forecasting about 5% for 100 lifetime on that book. Now some lenders' books perform a little better than average and some worse than average.

The point is aside from quota shares I guess if the 5% for 100 turns out to be correct. The 5-5-25s on average do not get and the 4-10-40s get in a tad. That would be fully funded if you will. There is about $600 million collateralized in these trust accounts of -- and some of that is for the old risk and some is for the new risk. The old risk, '04 and prior, is not going to get hit so that leaves more available to cover the '05, '06, '07. Each year we stress each and every captive. And just to give you a feel, we stress in the new books to the levels of 12% or so per 100, and the '06 books just a tad less than that. But the point of the story we were stressing the '05, '06, '07, probably 8% to 12% per 100 and basically everything -- every captive is funded enough to cover that liability associated with those books because there is money in the trust accounts from earlier books that are not going to get hit. That make sense?

That does.

Our forecast in '05 and 5% per 100 area, '06, '07, although early, 6% to 7% per 100 and we are stressing the new books within the captive analysis somewhere between 9% to 12% per 100, and we got enough to cover that, and so the forecast we got some room for further deterioration and still being able to meet these.

I think what's relevant there is Josh, is if you look at the '06 and '07 books about 45% of the flow business is covered under excess of 4% per 100 or 5% per 100. And so people can stress them and we stress them quite highly as Larry mentioned. And as you stress that, half the flow business is covered by a captive. So it comes out of the lender's captive rather than MGIC. So as I mentioned, they are important in '06 and '07. Long-term I don't think they are important. They will be helpful in the dollar recovery -- I don't know if we estimated that, Larry, in the --

Yes.

It will flow back to us.

On a paid basis, this year by and large the only recoveries will be vis-a-vis the quota shares on a paid basis. Now we are get quotes to penetrating some of these excess layers on an incurred basis. Meaning that there is a delinquency here and that the delinquency now given our reserve estimates would take start taking some these into the captive layers, these excess captive layers. But on a paid basis it will probably take another 10, 11, 12 months for that delinquency that has now been reserved penetrating the layer to actually turn into a page. We are starting on a paid basis quota share mostly this year, on an incurred basis we were starting to penetrate some. But on a paid basis excess of loss it will probably be, by and large, next year.

Are you able from an accounting perspective to get the benefit once it's incurred? Or do you have to wait for the paid?

On an incurred basis.

Then finally question on the $1.3 billion loss reserve or total loss as you put up in the quarter, what were the assumptions involving cure rates there?

Well --

Have you maxed out on --

I guess what I would say is -- and Larry can talk more about it. The cure rates are deteriorated in a number of channels and that raised the claim rates. Okay? And Larry can talk specifically about the markets. And the flow book is different than the bulk book relative to geography mix and product mix. But clearly it was a very difficult quarter with respect to both the number of delinquencies, curates declining claim rates raising and severity and average coverage. But, Larry, you want to talk specifically about some markets?

Well, the California and Florida markets obviously the cure rates have fallen quite a bit. It used to be well above average and now they below average. And so that's a big impact. I would say relative to the losses and delinquency inventory it's more than a matter of falling cure rates than increasing levels of new notices. They are just not curing out to the degree they used to. And in particular from those two markets, the auto belt is not getting any better, but it was an issue that was present for a few years. So that's still contributing. But I would say one of the encouraging signs last few months here, the cure rates in most markets have shown by and large stabilization. So we will wait to see what happens here in the first few months of this year to see if it continues the hold and maybe even and starts improving. That would be a good development.

Thank you.

Thanks, Josh.

Our next question comes from Kevin Shields of Deep Haven Capital.

Thank you. Wanted to find out what the statutory book value was at quarter end. That's my first question.

I don't have the stat book.

Statutory?

The book on the holding company is like 32%, but I don't have the stat. Kevin, I can give you call back. This is Mike. I can give you a call back.

Okay. Thank you. My second question was, when you look at the oil patch experience in the '90 to '92 downturn --

That was a mid-'80s.

Okay. Yes. But the two separate. Can you talk about the cure ratio experience for the lesser exposed states and the more greatly exposed states as they responded to interest rates, kind of what the timing was, and the differential between?

I'm not quite sure what you are asking. The cure rates in, if you will, Texas, Wyoming, Colorado, Alaska, Oklahoma, versus the rest of the country in the mid-'80s?

Yes.

I -- the reality there is that was driven by employment totally. And so I'm just speculating. I don't know the answer but having lived through it, frankly the rest of the country was doing quite nicely. So there weren't issues in the rest of the country it was those six or seven states. Most egregious would be Texas and Alaska, where we had probably claims of 30 per 100, in those five or six states. And the rest of the country is running at four per 100.

And because it was employment related, it probably took those markets a longer time to recover than I think the scenario that is going to unfold here because employment is still relatively good.

Yes. We look at the scenario as being relatively a quick -- well, it will be a very quick hitter, but a painful hitter, from the aspect I think the market is front-end loaded with if you will speculation, with fraud, and with very weak underwriting. And that plays out much quicker than an employment where those claims are driven by employment. So I -- we think this thing is pretty front-end loaded relative to and will blow itself out after next year.

Thank you.

Our next question comes from Mike Grasher of Piper Jaffray.

Good morning, gentlemen

Good morning.

Going back to the to the premium shortfall here, there is no impact on stat today.

That's correct.

But as future paid losses come through, that I'm assuming then does begin to impact statutory capital?

Well, it's a combination of things. It's very difficult to explain. We are releasing contingency reserves. Alright. We continue to do that on a stat basis. Do you follow?

Right.

We set up contingency reserves and they get reversed in these periods of time. So on a stat basis you got income.

Okay. I guess my question is as you go through '08 and even through the end of '09., how does this factor alone impact the statutory capital?

Well, I think it depends how long the duration is. But as I said in '07, we were still generating income on a stat basis and probably in '09 because we were releasing contingency reserves. I think that's the way the stat statements are set up. You set up $0.50 on a $1 for a 10-year reserve and use it if you need it in extreme conditions and we are in that right now. So, it -- if the duration were longer, I guess I'm saying if you get out to 10 or 11 there are issues and that might be something. But it isn't -- on a short-term basis as in '08 and '09.

Okay, and then an additional question here. If you look at vintage curves and historically it's been the peak delinquency have been 18, 36 months. That being said, are we pretty much complete with 2005 vintage? Has there been an acceleration in the curves that you can I guess give us some more idea about how '06 is coming along, updated comment around that?

The '05 curve, the first few years kind of normal and then it reached its peak. But because of what's happening in the housing market over last year, instead of starting to decline it kind of held or plateaued. So to this point here, the inventory curve and I want to stress that the inventory curve of '05 is flat plateaued. The new notice curve has started to come down. But because of the cure rate, the inventory level has not come down yet. Do you follow?

Yes. Absolutely.

Okay. And the '06 is at a higher trajectory than the '05. The default inventory has not yet plateaued. That should be happening here some time this year. Once again, that is the '06 default inventory trajectory higher '05 -- higher than '05 because the '06 book is seeing this lower cure rate environment at an earlier stage in its life than '05, contributing to the reason why that '06 default inventory trajectory is higher in '05. '07 is akin at this point to '06, maybe a little worse once again driven by the lower cure rate environment seeing at an early stage in its life. And the older books they aren't increasing. They just aren't declining as rapidly as normal.

Okay. In terms of new notice on the '06 book, has that -- I guess it's still growing, I'm assuming. But has the rate of change -- has there been any noticeable difference in the rate of change?

Let me come back to that. I have to look that up.

Okay, fair enough.

Our next question comes from Kabir Caprihan of JPMorgan.

Hey, guys. I wanted to get back to a point that Si brought up. And I'm a little confused about this. If I remember correctly your net worth debts on the bank line is like $2.25 billion. And you ended the quarter at $2.5 billion in net worth. Given your outlook for '08, you could come very close to that debt. So I'm a little confused as to why you don't think it's an issue, or if it does become an issue what your -- what the potential outcomes could be?

Because we had discussions with the lenders. I said it's a small group. They understand where we are, and if it was a matter of us renegotiating that it wouldn't be a major issue.

So are you talking about -- are you going back into --

No we aren't doing that but ask me a theoretical question and I said if it got and we had to meet with them we had conversations it wouldn't be an issue.

Okay. And on the rates you are talking about, the capital rates, I just wanted to make one thing is clear I want to make sure this is driven by your thought process and what the business prospects are, or do you have indications from the rating agencies as well?

No. We haven't gotten any indications from the rating agencies. As Curt and I talked about earlier, it's about our expectations of the future opportunities and we like to be prepared for that.

And on the last question on S&P putting on you on review for downgrade and Fitch going through, reviewing its criteria on the MIs, how important do you think it is for you to work with them to make sure you -- at least with S&P, to make sure that they confirm the rating of the --

We meet with them regularly and discuss where we are regularly. And they are cognizant of what we are doing, and we had conversations as recently as yesterday. So we do that on a normal basis.

Okay. Thanks.

Our next question comes from Amanda Hindlian of Goldman Sachs.

It's Donna again. I just had one quick follow-up to Si's dividend question. Would you quantify for us what amount of OpCo dividends you like to upstream in '08, if any?

A lower amount because we aren't a stock repurchase mode, obviously. So somewhere around $50 million, $60 million I think.

For the whole year?

Right, just to cover the common interest.

Great. Thank you.

Denise, we just have time for one more.

Okay, our next question comes from Ron Bobman of Capital Returns.

Yes, I'm surprised that you would limit the call to an hour. You lost $1.4 billion on revenues of $300 million -- or $400 million. I would think to be respectful to your share holders that you would spend as much time necessary to field and answer reasonable questions. So --

Go ahead with your question. Just go ahead with your question.

Thanks. I can tell you are interested in answering it. I had a couple of questions. Are you connecting any claims audit of the originators -- or not claims audits, but audits with respect to underwriting procedures and whether they complied with the standards that you expect them to which presumably are obligated to do so?

It's in a normal course of business we always do service our evaluation and review claim submissions. We have been doing that for decades.

So no increase in that regard it sounds like?

We are doing a lot more in loss mitigation and part of that is looking at how the servicers are working to assist in that process. And that's -- a big part of what we do is also sold to Fannie and Freddie and Fannie, and Freddie are at the forefront also of making services are doing a good job within that area. So we are paying increased attention to servicing loans in -- insured by MGIC to the point that we are adding some of our own people in lenders offices to make sure that they are indeed serviced properly and efficiently and quickly.

My next question was on the -- call it the discontinued bulk business that was going into Wall Street. What is the gross loss number that you were -- that comprising this sort of net booking on that segment of your business? And what is it sort of on an ultimate basis to characterize with respect to a claims ratio?

Let me try answer it this way. I think Mike Lauer mentioned earlier on his Wall Street business we've got risk enforce of about $7.6 billion. And between reserves and the losses going forward, that's -- I think that's about $3.6 billion or $3.7 billion, so basically we are writing off a little more than half of the outstanding risk from that channel.

Okay.

Does that help you?

Yes. I think so. I was trying to -- and --

So rather than I guess answer your question as a percent of the original, I tried to answer it as 50% or little more than 50% of the remaining risk we are writing off.

Got you. And the fact that some of those -- some of that business is already sort of run off or paid down, refinanced out, so that sort of the original -- I don't know, in aggregation of all of the issued mortgages being added up, the 50% or greatly more than 50% would be a meaningfully lower number or not really if you look at the all risk issue that related to that line of business?

Well, I think one of the things that Curt said before is that if you think about the '06 book -- bulk book, he said that we estimated that on lifetime, that's your question, on a lifetime basis we would estimate that book will go on about 150 to 175 loss ratio. I would say all of the pre-'05 books were low expense ratio books. Loss ratios in the 50%, 60%, and maybe 70%. The '05 book might be break even to 125. So the answer your question on the bulk business the '06 book which is the largest book we estimate lifetime loss ratio of 150 to 175.

Okay. And what's your willingness or at least sort of thought about providing us more fundamental data with respect to different vintages? I'll -- showing us sort of delinquency by vintage and how it's changing over time foreclosure rates, cure rates by vintage over time, and how those curves are developing and changing? Obviously there is -- we are at a huge information void. And I know there are a lot of moving parts and it sort of --

-- added some things to the website disclosure. Did you look that the this morning?

That has a lot of what you are asking for, Ron.

It doesn't have a curve per se, but it has vintage analysis with delinquencies and characteristics as well.

Okay. And my last question, you mentioned the lender initiated two of them, 86 in a captive program and a third one considering it. What's your thoughts about you initiating -- can you find cheaper reinsurance so as to capture more of the economics and you initiating canceling some of the captive deals?

Again, you may not have a long term history of our company or our industry, we fought this practice basically in the early 2000s because we didn't feel the economics -- we liked insuring all of the risk. And -- but our customers and our competitors more importantly actively promoted these programs to our detriment, and we lost a lot of business because of our positioning. Thankfully, much of that business has come back to us, but it's a practice that for many of our customers is something that works out quite nicely for them. So it's not as easy as saying, no. We'd lose a lot of business because of that. So we think what's going on in the industry of people looking at a couple having done so and others looking at possibly canceling those treaties going forward, that's very positive. As I said, we would love to have them go away. We like the business. We don't need that reinsurance.

Thank you.

Thank you.

It looks like there is one more?

Yes. There is another one in the loop we can take another question.

Our next question comes from James Gilligan of Equity Group Investments.

Hi, guys. I was wondering if you could give a little bit of detail on the break down of the Wall Street risk enforce you mentioned as $7.6 billion? Could you break down between the prime, sub prime?

We do -- I don't know if we sent that out. I don't know if we have those broken out. Within that supplement that is now out there on the website, it shows you the bulk profile and I guess I would tell you that 75% of the bulk enforce is associated with this Wall Street deals that we're discontinuing. So I think it's largely reflected. I don't have specifics for that at hand. But to give you a quick general idea, I would refer you to this website. But, by and large, it would be in line with the overall because it's 75%.

We will add another page later today just to break that out because there are a number of questions on this, and break it out by year, and we will add another page to that website data today.

Okay. Yes. And that would be great. And then I think you might have addressed this, I may have missed it before. But you've got -- with respect to the Wall Street you have $7.6 billion risk enforced today. How much risk -- how much Wall Street risk has already lapsed, let's say --

A lot.

Quite a bit.

We were writing -- The books -- let me say that, remember, we were writing almost $20 billion a year at 2001, '02 and '03. The 2003 and prior book is only $1.5 billion of that $7.6 billion risk. So all of those books have almost run off.

And that it was virtually all of the executions.

The '04 book has only got $800 million of risk. And '05 about $2 billion. '06 about $2.6 billion and '07 $830 million. So the bulk of it is '06 and '05, obviously.

Yes. Through the years in the bulk channel we have insured about $150 billion. $37 billion or something is remaining. So you can see from that we wrote $150 billion and $30 billion something is remaining. There is quite a bit that's run off. Most of that was Wall Street related.

Yes. The vast majority of the early business was Wall Street. So we had billions that we dealt with.

Okay. And then I think you guys addressed this before, but you -- in your disclosure here talked about the PV of the total Wall Street losses to be $3.5 billion. The part you already reserved, part you are taking in the fourth quarter and then some offsets due to the premiums. And I think you mentioned, my question is, if you weren't to PV that would that be completely different from the $3.5 billion, or given the sort of life --

Yes. No, $3.7 billion was the gross.

Okay. Great.

That's not a big number. We used four-seven discount rate.

Alright. Thanks, guys.

Thank you. Operator, we have time, until 10:15. So if there's any other questions in the loop.

Our next question comes from [Mya] Black of Principle Global.

Good morning. I read a few weeks ago that MGIC was heading back on writing with their business in the 18 market. But I was wondering if you are seeing great opportunities what's the reason for that might be. Is it because of diversification or those markets could deteriorate further or you don't have the capital right now to support that new business growth?

No, the underwriting guideline changes you may have missed the earlier comments. We made underwriting changes that we announced that were effective November 1st. We made changes effective January 14th. And then last week we had an 8K of further changes and also pricing increases which take effect in March. And the brunt of that was really that we were in the November and January changes it was reflective of loans that we saw multiple high risk factors, if you will. Low FICOs, high debt to income ratios, high LTVs. We changed pricing virtually all those type loans and limited what we'd insure within that space.

The most recent one, the 8K that you saw last week, was more where we looked at the decline and real estate values in California, Florida, Arizona and Nevada, Detroit, and we said, you know what? We need more equity in those markets and we need higher FICO scores or better credit from those borrowers in those markets to make sure the 2008 book of business that we were booking was an asset and not a liability. So we think there is tremendous opportunity within the business we were going to write, and as I said, the business we would lose from doing that is business that is better lost than insured by our company.

And then I would add on to that those segments that we are carving out with this new round of guideline changes in these restricted markets, those are segments given the price declines in our pricing we were losing money on. And aside from that, I would say picture view, we are still doing business in those even restricted declining markets, but it's full doc A with five to 10 down and decent credit. It's basically backed a solid full doc kind of business in those markets, given the market conditions.

Sure. Thank you.

And I could add to that. Our competitors have matched virtually all in November and January changes. And one of our major competitors virtually matched our 8K filing of last week in the underwriting changes. So it's the whole industry recognizes as need to be done. There are cases where people need to be renters rather than buyers through this market. And these changes will encourage that.

Our next question comes from Robert [Nap] of Ironsides.

Hi, gentlemen. Thanks. Slightly more thematic question, you sort of addressed my question with the last caller. You talked about wanting to raise capital and then you've also talked about being happy with your risk to -- risk to capital ratios. And your market cap is below $1 billion. So it's not clear to me how a convertible bond is really much of an option unless you are contemplating a dramatic delusion to your equity. There is some kind of a disconnect in the conversation because you are sounding very confident, on the other hand you are considering financial options which are emergency measures, really.

Well, you have to understand the -- what we are talking about is the opportunity to write more business and in the event that there is some significant growth elements, we think capital will be needed. So there is an opportunity for that, and obviously we wouldn't be doing it if we didn't think it was a good strategy.

That's why we were looking at a variety of measures.

Okay. Okay. But you realize that the tension between the desire --

Oh, obviously. If it wasn't a good decision for the shareholders we wouldn't be thinking about it. But the long-term opportunities here clearly outweigh that.

Trust me, we are all large shareholders sitting at this table.

Right. Because the share price is acting these days as the market has serious concerns whether you will be able to continue to write business, period. That's the only explanation for it. You still have nearly $5 billion in cash on your balance sheet whether or not you've had to take cap reserves. An account looks at your balance sheet and you look incredibly credit worthy, and yet the market turns around and it has market cap under $1 billion. So you must be frustrated by this.

Modestly. Yes. That's an understatement. Thank you very much. But the market moves in inefficient ways in the short run and we're going through one of those, I think.

All right. Thanks.

Our next question comes from Phil Marriott of ASB Advisory.

Thanks, good morning. I'm just curious, you commented that when somebody asked about oil patch, you noted that unemployment was a big driver in that situation. And I'm just curious about your thoughts on what's baked into your claims numbers, your page for '08, in terms of unemployment, and what sensitivity to unemployment might be on paid claims? Thanks.

Well, our '08, $1.8 billion to $2 billion forecast for paids, one is, a lot of those delinquencies that will become paids are in inventory, so we have a good handle on that. In conjunction with that, we are looking at actual trends with regard to cure rate notice activity by book and by geography. And in conjunction with that, if you want to talk economics, we are assuming home price appreciation at the national level declining 5% to 6%, although within that number we have got some markets are declining more or less than that overlay that against our portfolio. So you put that all together and -- but I guess to answer your employment question within that, we were seeing a slower growth, but not a material unemployment change.

And do you -- how would we think about sensitivity to unemployment change to paid claims? Is there -- have you thought about that, or --

Yes, that's our business. It's hard to quantify. I seen where some our competitors or one of our competitors tried to capture a 1% change means this. I wish it was that easy. The realities are, where does that flow through? Does it impact teachers and policeman, or does it impact Wall Street? Because it has a totally different impact on our company. We were first time home buyer market. And our loans are 90% on our $350,000 or less and so the unemployment is just not a simple answer. Suffice it to say, if it goes up, it will negatively impact us somewhat, and if it improves it will probably help us somewhat. We think we were in a continued slow growth market, where it will move up marginally, and that is the numbers that -- the impact that you see in our claim forecast that we are utilizing.

Okay. I will work with the assumption that you would prefer it to be Wall Street unemployment. Thanks, guys.

Yes. We do have some other discussions that we need to take, and so, operator, I don't think we have time for any more questions. Again, this has been a very difficult quarter, been a very difficult year. And so it's hard for me to say, look at the brightness that we have going forward. But we really do have tremendous opportunities relative to the fundamentals of the business as I outlined on the front end of my call and as one of the more recent questions was, are you frustrated? Yes. We're frustrate to the reaction of what's happened. But it is what it is and our company is committed to taking advantage of every opportunity that we see in the marketplace and there are many. Thank you all for your patience.

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