MGIC Investment Corp (MTG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation first 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 be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Mike Zimmerman. Sir, you may begin.

Thank you. Good morning 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 first quarter of 2008 results are Chairman and CEO, Curt Culver; Executive Vice-President and CFO, Mike Lauer; and Executive Vice-President of Risk Management, Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website, which is located at mtg.mgic.com under Investor Information, includes additional information about the Company's quarterly results that we will refer to during the call, and includes certain non-GAAP financial measures. As we have indicated in this morning's press release, we have also posted on our website supplemental information pertaining to characteristics of our primary risk [in force], which we think you will find valuable. 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 in the call are contained in the quarterly earnings release, as well as prior SEC filings. If the Company makes any forward-looking statements, we are not undertaking an obligation to update those 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 the time of this call or the issuance of the press release.

With that, I would like to turn the call over to Curt.

Thanks, Mike, and good morning.

For the quarter, we reported a net loss of $34 million with a diluted loss per share of $0.41. Claims paid in the quarter totaled $371 million, and losses incurred were $692 million, reflecting the increase of 6,500 loans in the delinquency inventory, as well as the increase in loss severity. In addition, during the quarter the premium deficiency reserve declined by $264 million, from $1.2 billion to $947 million. We wrote $19.1 billion of new insurance in the quarter, up 50% from last year, of which $18 billion was flow and $1.1 billion was bulk. The bulk moniker is a misnomer, however, as approximately 85% of the $1.1 billion was one lender-paid M.I. transaction of high-quality prime business, and the remaining 15% was GFC-related business, again of high quality. The loan characteristics of the bulk transactions as well as the flow business loan characteristics are shown in our portfolio supplement, and indicates a high quality of loans insured in the bulk sector as well as a significant improvement in made in the mix of our flow business. Please note that most of the flow underwriting guideline changes were just implemented in March, and as a result you will see even more dramatic improvement in mix characteristics of the flow business as the year progresses.

Market penetration of our mortgage insurance products continue at high levels, although on a [committed] volume basis as our loan quality improves, anecdotally we are hearing of the growth of FHAs. Persistency continues at elevated levels totaling 82.2% on a quarterly run basis, and 83% for the flow quarterly run rates. On an annual basis, persistency grew to 77.5%. The average premium yield in the quarter fell to 63.8 basis points from 65.8 basis points last quarter, reflecting the elimination of new Wall Street bulk business and the fact that we were insuring fewer loans above 95% LTV, ALT-A loans and loans classified as A-minus. Our expense performance in the quarter was positive, with underwriting expenses totaling $79 million, with $3.3 million of that resulting from one-time fees associated with our capital raise. By way of comparison, we spent $76 million a year ago to underwrite 50% less volume of new insurance written.

Relative to the remainder of the year, with the significant changes made in underwriting guidelines we expect NIW to slow with a total -- with the total for the year to approximately $50 billion. While the S&P action taken recently has not reduced our writings of GSE business, it will reduce our new insurance written with various state housing finance authorities by approximately $1 billion. It will also impact our ability to do business in Australia and get licensed in Canada, and we are actively looking at our business alternatives in both countries.

Relative to the GSE business, we have been in constant communication with both Fannie Mae and Freddie Mac, and we will meet with the GSEs in the near future to discuss our capital adequacy to meet their needs going forward. We feel good about these discussions given our strong existing capital base, coupled with the addition of $840 million from our capital raise; our underwriting and pricing changes; our discontinuance of insuring Wall Street bulk business; our negotiations to sell our remaining interest in Sherman back to them; as well as our discussions to possibly reinsure a portion of our new writings going forward. The changes in captive reinsurance that has been announced by the GSEs premium [sessions] to 25% will also be positive for our company as an added benefit in growing our revenues, as approximately 29% of our flow business is in an excess of 40% premium [seats], and 10% is in 50% quota share transactions.

Finally, let me reiterate our claim paying guidance for the year remains at 1.8 to $2 billion. Our quarterly performance would total to a lower annualized number, but our expectations for continued weakness in high-dollar states and the resulting growth in loss severities is what should drive drive the quarterly numbers higher for the remainder of the year.

With that, operator let's take questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Steve Stelmach.

Hi, good morning.

Good morning, Steve.

Can you walk us through the assumptions that you guys use for change in the premium deficiency reserve for the quarter? And then also talk a little bit about what we can expect in terms of sort a go-forward run rate in that number? Is first quarter a good run rate or is there going to be some pretty strong volatility around that?

Well, this is Mike Lauer. Let me go through -- again, at the beginning of the year, we estimated that the runoff for that liability account would be somewhere in the range of 500 to 700. Based on the first quarter, I think now I would say it is closer to the 700 range. Relative to the run rate going forward, I would think in the second quarter it may be somewhat less than this amount and then -- and then probably going down in the - somewhat in the third and fourth to get somewhere around the 700. With respect to the calculation, we again did the same calculation we did at year end, and on a net present value basis, the premiums and losses were down approximately $137 million, and then also offset by an increase in the reserve by 127 to get to the net 264. So the premiums are running down pretty much on schedule, as are the losses and the reserve change also. So it is pretty much on track, given it is only the first quarter, but I think as I mentioned relative to the total year forecast earlier -- our earlier estimate was 500 to 700, and I think now it's closer to the 700.

Got it. Thanks. Just real quick, Curt. You mentioned FHA.

Yes. Can you give us a little color what you see on the political side of things? If FHA will be more aggressive, if that's going to really impair your ability to grow the book at any meaningful degree? Well, two things. One, it is being aggressive relative to proposals from Senator Dodd and from Congressman Frank, as well as the Administration, as well as recent proposals from Senator McCain, relative to being a takeout vehicle relative to the foreclosure process that many loans are looking at, or instrument risk involved in preventing those foreclosures from happening. So it -- I would say that on that basis it is being used or looked at as an aggressive tool to be used at very high loan dollar -- high loan amounts, which frankly would help our entire industry if that is indeed the case. On a new business basis, it is more a reflection, Steve, that our industry as well as Fannie Mae and Freddie Mac has backed away from certain loan risks relative to very high LTVs and lower FICO scores in combination, and as a result FHA will grow from that basis. So I - that is why I meant that it is more a reflection of, I think, of the improvement in loan quality that our industry and hence Fannie and Freddie are looking at, than an aggressive stance in looking at new business at the higher FICO scores.

Okay. So on a net basis, would you say the M.I. industry is going to be better off given what you are hearing on Capitol Hill and the FHA?

That will be positive for our industry. You know, as we went through the capitol raise, I got asked that question a lot. I don't know how to quantify that. I just know it will be positive for us as we look at the FHA and their secure program and -- and there are a number of people that have instrument risks that it will be a good tool to get them out, and then also others that are looking at the possibility of foreclosure at their current loan payments, whereby FHA could be a take-off vehicle on a fixed rate basis. That will be helpful. On the other -- you know, relative to new business that our industry doesn't desire, again, I always have mixed emotions relative to people insuring business whereby, you know, longer term they may not be in their home. So I -- I struggles with that as a taxpayer.

Okay. Thank you very much.

You bet.

Our next question comes from Donna Halverstadt.

Good morning.

Good morning.

I have a question for you. It is related to the downgrades. You mentioned -- you made some comments about housing authority business in Australia and Canada.

Yes.

But within the U.S., what has the reaction of lenders been? Have you seen any shift in market share related to downgrades or any difference in terms of trades that are being offered by lenders to companies that have a single A versus those that still have double As across the board?

Well, I can only speak to our company. Our market share remains very strong at levels that we were last quarter. You know, the deal is relative to acceptance with Fannie Mae and Freddie Mac, and that -- I think they have given the signal there relative to how they feel about this matter and our strong capital structure that we have at MGIC. So as a result, we have not seen any change other than those I noted with the housing finance authorities, as well as some in Australia, but even that has been frankly more positive than I thought it would be. But we have not gotten any indications from any, if you will, customers of our flow business, traditional business, that they have any misgivings about doing business with MGIC, and relative to the other companies that have gone through that process, you know, again, our share is holding up at a very high number.

Okay. Great. I also wanted to ask with respect to your pay loss guidance of the $1.8 to $2 billion, what kind of unemployment rate are you assuming when you give that guidance?

5.5 to 5.8 -- I think it is 5.1 now. So I would say a modest deterioration in the unemployment rate, Donna.

Okay. And then I had one other question and then I will get back in line. I wanted to ask relative to the capital raising, are any of those proceeds going to be retained longer term at the hold co, or are they all going to go downstream? And what was the level of cash and short-term investments at the hold co at the end of the quarter?

At the holding company we've got the -- 448. We -- we expect we will probably have -- of the total proceeds, we will regain 100 at the holding company net at the end -- end of next week when we get done allocating funds to some of the MGIC subsidiaries. MGIC has - in addition to the writing company has two or three sister re-insurance companies whereby it reinsures some excess cover over 25% regarding certain states. It is still MGIC business, but it's - they are reinsurance subs, and we will reallocate some capital to them and we haven't finished all that yet. At the end of the day of all the proceeds, there will be $100 million left at the holding company for interest rate coverage, which we have talked about really on the -- on the road show.

Right, right. And you still plan to seek upstreaming of $60 million in dividends this year?

Yes, that is the normal dividend we will have from the writing company, from the holding company to cover the previous debt.

Okay, great. I will get back in line.

Operator, next question. Hello?

Our next question comes from Ken Posner.

Good morning. I had a couple of questions, if I could. One, just a quick question on the yield. The premiums relative to the -- to the balance of insurance in force seemed to dip down a little bit from fourth quarter to first quarter. I am trying to remember if there are seasonal or other factors or -- the question, how should we be thinking of the yield going forward as your new book of business evolves?

Ken, it is probably driven -- two main causes. One, the bulk as a percent of the force is declining and the bulk has a higher premium yield, and, two, this will be more of an issue -- or a factor going forward now that guidelines are in place, and that is with regard to the flow, the hundreds and some of the other A-minus all-day product lines which carry higher premium rates, the volume from that should be little to none. As a result, between the bulk and the product mix going forward, that should continue to climb. Now that will be offset somewhat by what happens on the captive front.

The captives, you will get more revenues back from them.

Right.

So you should see it declining throughout the year, Ken. I think in the neighborhood - maybe average 60 basis points for the year.

Okay. Great, thank you. My second question is on the line of credit, which is something us equity types have to sometimes struggle to get straight. If I am correct, you have the covenant -- the net worth covenant waived temporarily and it [reset] back to $2.25 billion. If I read the press release properly, your net worth is at $2.9 billion, so that would seem to put you in fine shape for now. I guess the question is, what would be the biggest risk to the line of credit as we stand right now?

Well, obviously if there were significant launch development over the next two years, that would reduce that equity. So I think as I stated last month when we were on the road, we - that became such a critical issue that we elected to work our lenders and get the waiver extended out to July to take that issue off the table. Our plan is to meet with them shortly and discuss that facility and then relative -- if we need to make any changes we will look at it, but right now it is not an issue obviously.

Okay, great. My last question is more strategic. I know this -- the whole M.I. industry has struggled, given the shock to the system, the growth initiatives, whether they were in guarantor space or international, all these growth initiatives have turned out to be frustrating, and I know that Magic and the other companies are eager to look at growth opportunities where possible, but I wonder if a different strategy would be appropriate now given the stock price relative to book value. Is there strategy that says, look, growth is not appropriate for this industry. What is appropriate to fulfill the mission of the GSEs and operate efficiently and protect that book value, and therefore potentially create shareholder value by narrowing the gap over time between the stock price and the book value amounts? It is a different mindset and perhaps it involves pulling back from international and other possible growth ventures. What do you think about that?

Well, I think you are right on, Ken. Basically I think what you are seeing, certainly from our company, and I would say the industry, is that we are hunkering down, and we are going to grow but on a profitable basis. It is back to underwriting 101, back where we are in charge of underwriting our own product, that we don't delegate that out, and I think you have seen that throughout our industry. Everyone has made that decision. And that -- to do business to do business doesn't make sense if we are not going to make money on the loans that we are insuring. We are seeing a real return to credit quality, lower LTVs, full documented loans, high FICO scores, the stuff that made this industry 50 -- or our company 51 years old.

I would say on the international basis, I think there are some opportunities to do some things differently there than what we were originally looking at, that we think it is still a basis to grow on a very profitable basis. Not quite as quickly, but that we do so, and even as we look at reinsurance, we -- you know, that is a case whereby we are going to disperse some of our risk relative to getting a partner and it gives us $200 million to $300 million more annual capital that we can utilize in the company. While we feel very, very good about the credit quality going forward and some would say well why reinsure that, we just think it is good to have a partner as we move forward. So we are looking at that. So I think your basic premise is right on, but I do think there's a little more opportunity in international, but I think in the coming months as you see how we lay that out, you would you that is a good way to do business.

Can you just explain little bit the reinsurance? I don't want to use the word "captive," but that would have the effect of reducing premiums and reducing losses, right? But it would have no effect on GAAP equity. Is that fair?

Right. Yes.

Thank you.

Our next question comes from Howard Shapiro.

Hi, thank you. I wanted to just ask a few questions on credit. When I look at your -- your statistical data here broken out by prime, A-minus, subprime and so forth, what I am seeing is that the number -- the number, not the percentage, but the number of delinquent subprime loans seems to have stabilized over the past three months. The number of delinquent A-minus loan seems to have stabilized but the number of prime loans delinquent continues to increase. Is it fair to say that maybe we have seen the peak or close to the peak in terms of delinquency development for subprime and A-minus but there is still more to go in prime? Or am I looking at this incorrectly? And then just as a secondary question, can you give us a sense of where we are in terms of severity migration and how much more it could increase, or are we kind of close to where that will be peaked out as well?

The subprime probably was impacted quicker, sooner, than the prime impacted by the slowing in the housing market. On top of that, the bulk business, which was a major component of that type of business, we stopped writing a lot of that toward the end of '06. So basically you don't have that bulk subprime component to the degree you did prior to '07. So you put those together, subprime being impacted quicker by the events and the bulk decline in writings. And then on the -- on the prime side, you know, '07 was a large book for us, and a lot of that was prime, and in this housing market those prime loans are being impacted, so it is size and timing, I guess. And your other question was regarding severity. You know, the high cost areas are the ones that are the weakest, and we see the -- the inventories in those states continue to build. And as a result, the mix of claims from those higher -- higher cost areas will grow. So that's why I think Mike said the severity is expected to grow through the year.

We are a percentage of the loan we are at probably 100%, are we not?

Right.

So there will be no growth in that aspect, Howard.

Right, okay --

Howard, with respect to the severity. You know we -- of this -- of the total claims paid in the quarter, $82 million was paid in California versus 4 a year ago. In Florida, 30 in the quarter versus 2 year ago. So you see the impact of -- of California and Florida, and the severity very high. In addition to that, California and -- and Florida were the highest contributors to the delinquency. Florida was up 3,100 for the quarter and California 1,600. That is of the total 65 or 6,700 change in delinquency. So California and Florida are still driving a lot of delinquencies and severity.

Okay, great, thank you very much.

Our next question comes from [Scott Frost].

Hi, in SNP's recent rating action they said they expect median home depreciation to be 30% versus the previous estimate of about 11. I want to ask you if you agree we this estimate and, if not, what do you expect median home price estimation to be?

I think the 20% you are talking about is peak to trough.

Right, '06.

No we don't agree with that. That number I think largely is in line with some of the [Kay Schiller Wise] indices and whatnot. But we think for our business the OFHEO home price index is more appropriate, and it reflects the Freddie/Fannie portfolio, conforming loans, conforming underwriting guidelines, if you will, and weeds out the upper end and other types of transactions, and the OFHEO price index peak to trough I think is around 9%, so we think that is more in line. The other thing is - that came across, there was a chart out of MoodysEconomy.com, and it showed the nation, and it showed peak-to-trough throughout the country, and a lot of the major price declines, the peak to troughs in excess of negative 10% were Florida, California, Arizona, and parts of the northeast. But by and large, a lot of the rest of the country was flat to slightly down. So you may want to pull that out. It is a chart that shows peak to trough, house price declines across the nation, and it was put out by MoodysEconomy.com.

Even within that, Scott, whether it's 10 or 20% ultimately, that doesn't - we are reserving at 100% of our severity, which is where it will really impact us. It does not cause, if you will, more people to walk away from their homes that have an ability to repay their mortgages. It just - it doesn't happen in our space nearly as much as the media portrays it. As a result - I mean again, it is an academic debate if you want to use the [Kay Schiller] index or the OFHEO, but I would submit OFHEO is much - that is the business we insure, but I don't think either number has nearly the impact that people give it, because we are reserving at 100% of our loss severity.

I was just trying to get a picture of what you think kind of the mortgage market generally holds, since you are pretty close to it.

Yes, I think nationally we have more deterioration this year. You will see stabilization in '09, make a slight deterioration nationally but I think all in all pretty much flat, and then we start to move up slowly from there and a couple percent, 2, 3% which frankly is really our sweet spot as a company relative to our [persistency].

Just on that topic, too. How are you -- just generally speaking, not to you specifically, but how would sort of characterize the current market in the sense of whether or not we are getting a better line of sight with respect to how bad losses are going to be. Is it clearing up pretty much? Do you have a handle on how this stuff is actually playing out? Are we near the end of it? What is your sense of that?

We have a good sense, I think, of the [paids] that we see this year and what we are looking at next year. Clearly on the delinquency side that -- I mean, I wish we had more visibility relative to that. You know, I think we had a good quarter relative to delinquency performance. Hopefully that holds. But traditionally in the first quarter we get a good quarter relative to delinquencies. I don't know what the -- you know, the tax rebates that people will receive here shortly, what impact that will have, but it will be positive, I know that. So you know relative to paids, I think we have good visibility relative to to how the reserves may play out this year. We still think delinquencies will go up, and so reserves will be at the levels Mike has talked about. In '09 you have higher paids but you see - encouraged they are coming down.

Okay, Thank you.

Our next question comes from Hymowitz Jordan.

Hi, it's actually Jordan Hymowitz. Congratulations on an excellent quarter.

Thank you.

Second, a couple of question. First of all, you have bulk loans, which are a large part of your loss as you're reducing the balances dramatically. You're down to $35 million. How low will that go by the end of the year in terms of risk in force?

$35 million?

$35 billion. I wish we were at that $35 million.

It's not $35 billion for bulk.

The -- the insurance of course is 35-ish.

Sorry, the insurance in force.

The risk I think is 9 or $10 billion.

The insurance was at $35 billion, which is below where most models had it. How low do you think that trends by the end the year?

I don't know what we had on runoff --

You know, Jordan, the persistency on the bulk this last quarter was around 70% or so. So, you know, it is going to be more a function of that and seeing how these programs, you know, what - it could impact that. But...

Is 30% [wrong]?

I mean, it's worked out right now, it's about 30% prepayment rate now.

You are not really adding much to that business. Just 30%?

No, as we said the $1.1 billion we did was basically a large M.I. customer that does business on a lender paid basis after the fact, and that was 85% of what we did and other was a few GSE transactions, which was all prime business, too. So we don't -- we are not really adding, if you will, at all to the Wall Street area that is running off so quickly.

That number could be mid- to high-20s by the end of the year?

That seems aggressive, but --

If you use the 30% prepayment rate, then that is what you would get because that would be a function of what that prepayment rate would be.

Yes, that seems reasonable.

Second is, from your marketing deal in February, the number of defaults went down from February in March, which was kind of surprising. Any comment on that in any way? I mean just to see an improvement in the number of defaults surprised --

Again, March, because of tax refunds generally is a very good month for us. So you would -- you would -- you know, we were hopeful that that would indeed happen, given everything going on you didn't know what might happen but we expect March to be a good month relative to improvement. Again I -- what will be a swing factor for us will also be the tax rebates that are coming out here shortly, in May I believe.

And next question. It seems like there is an increasing number of regulatory agencies or as part of the solution any way. Only you guys in general seem to be real capitalized and there's no more seconds to get. So it would seem like increasingly your business is more and more profitable on the margin, you are getting more and more of it. Do the regulators increasingly realize your necessity to the market?

I think our partners at -- at both Fannie Mae and Freddie Mac realize that we are an important part of their future success, which is very important to our company. And I think regulators -- I mean -- our industry hasn't been the voice of reason relative to -- although I guess financially you wouldn't know that, but a lot of the input we gave OFHEO and the Fed and the others on the banking side relative to the performance of second mortgages and other things have indeed played out as our industry suggested they would, and that, you know, you should be looking at third-party credit enhancements instead of letting that risk pile up on the books of banks. So -- I would say our industry does have -- for a small industry does have tremendous credibility relative to the regulators.

Another thing is when I model you guys your marginal [best] is coming up at about a 15 ROE with 13 to 14-to-1 leverage. You know that -- when I look at just '09, it would seem to be that you guys should at least make some profit, at least with the high single digit ROE in '09 . Is that a reasonable - a lot of people have you guys at losses in '09 and I can't seem to get

Can't comment on that.

Again we are trying to avoid that conversation relative to predictions on earnings. We find it much better not to talk about that.

Can you predict where the book will trough at?

Where it will what? When losses stop, do you think?

Good try. Same thing.

You want to ask it a different way again? [Laughter]

All right, thanks, guys.

Thank you.

Our next question comes from [Michael Manizi].

Actually, it's [David Hoxton]. I wonder can you tell us where captive balances were at the end of the quarter?

$687 million were in the trust fund.

Okay. And on the bulk the lender-paid bulk that you wrote, are the premiums pretty similar to flow business? Or how different are the economics on those transactions?

The transaction was very high quality as Curt said, but the other major factor was the coverage was only 8% because they were just insuring for capital purposes, so our average coverage on flow is 25-ish. This is 8. So the premium on this deal was less than flow because of the coverage.

Okay. But it's -- I guess proportionate to the coverage? Not a -

Yes, it is proportionate to the coverage. We are not in the business of selling - and given everyone's capital capital, I don't think anyone is out there selling something for less than what it is worth.

And then I wondered just could Larry -- somebody talk a little more about the delinquency development and I guess the -- the trends in the prime business. Are they -- are those loans performing normally? Are you seeing accelerated deterioration as we have with Alt-A and subprime because of home price declines?

I think it is more of a market vintage. I guess looking at the first quarter numbers, first off, as Curt and others have mentioned, the first quarter is a seasonal quarter. You get a lot of seasonal impact both in terms of -- of slightly lower new notices, particularly in March, and a rebound slightly in the cure rate. We saw that -- that type of development, lower losses, higher cures on most of the vintages and most of the geographies. The two that we didn't see it would be the California, Florida '06, '07 vintages. So aside from those two geographies, those two vintages, things look pretty good. It is hard to sort out the seasonality versus the underlying trends in the declines in the new notices and the improvement of the cure rate. That's why we will know more here in the second quarter when it is less seasonal activity, and then we will get a better read on the true underlying fundamentals.

Is there any way to say that conditions are deteriorating at a slower rate than a year ago? Last year you didn't see the normal seasonal pattern in the first quarter. I mean, are we at the point where we're starting to see a real sustainable acceleration in deterioration or not?

The seasonal pattern has always been there but sometimes it gets masked by the overriding fundamental side of the books and performance of the books. As I said earlier, I think the subprime stuff was impacted soonest, and we are seeing signs maybe that stuff is peaking and at a downward trend. But I think, you know, the major comment would be if California, Florida, newer books seem to be -- I wouldn't say getting any worse, they are just not getting any better, and we saw some improvement from the other vintages, other geographies but we don't know at this point how much of that is seasonal versus true improvement.

Okay. I guess -- following up on Jordan's question but not asking the earnings question, but just the return question. He was suggesting that you may be pricing just for kind of a mid-teens return on equity. Is it really that low when you have much higher premium rates and you have tightened underwriting standards and just not writing as much risky business? Clearly you have to assume that home prices don't keep declining forever, but if they stabilize or as you suggest start to rise by a couple percent in two or three years, shouldn't the returns on capital be better?

Again as we were on the road a month ago, we talked about that the returns that we think on the '08 book are more in the neighborhood of 15% and may be higher given the captive cutbacks, but that '09, '10 are probably closer to 20%, which is reflection of the improving credit quality as well as us operating the Company at higher capital leverage ratios. So indeed I would say that ROEs are improving.

Okay. Then finally, can you just -- I guess Mike or Larry talk about the -- the severities in -- in Florida and California, and how much different they were in the first quarter than the fourth quarter? Probably the average claim, I guess?

Do you got that?

I don't have California. Well, California -- let's see. More on the bulk side because we don't do that -- didn't do that much [closed] site. But bulk and flow, California was up. We are probably - in the first-quarter California severity was about 118,000; up from 113,000 a quarter ago on the bulk business. Florida, 73,000 to 74,000 on the bulk. And Florida on the flow, 58 to 64, 65,000 on the flow.

Is that - is it reasonable to see that as a reflection of some, again, what you were talking about before, sort of a slower rate of deterioration? I mean, compared to what happened over the course of 2007, this is not that much worse.

no, but we are looking at these newer books, where the delinquencies are still growing and the cure rate is still quite low, and we will see more from California and Florida, newer books that will have a higher average balance than some of the Florida prior books. So that's going to feed the severity through the remainder of the year.

Okay.

The average balance on the 2006 flow NIW was $161,000 and 2007, the average balance for flow NIW was 178. So as those work their way through their normal seasonal pattern, too, you will see that be reflected in there.

Okay. Thanks.

Okay, Dave.

Our next question comes from [Nick Kalano].

Hi, guys, how are you?

Good.

I have a question I'm trying to sort through, and it has to do with severity. So if -- if I look at the coverage of the book, and I am talking about the total book, and just increase that by 10% for foreclosure costs and stuff - and such, I get to roughly 29%. But then when I look at average claim paid over average loan size, you know, we have seen that grow, but now it is sort of 34%. What is the disconnect there?

The claims are coming from the higher cost area.

As I mentioned for the quarter, the -- of the -- of the primary pays. Of the $370 million that we paid, we paid $82 million in California and $30 million in Florida. So that -- that weighs pretty heavy on those averages.

Your assumption on the coverage was proper, of the 29%, 26 coverage and then 3%, if you will, for add-ons. But as Mike said it is just --

Okay. So then -- so then when I think about kind of -- when I start thinking about paids, I mean, how do I -- I guess how I do model, you know, that 34 coming back to that 29?

Well, what we've done in the Q, we gave you the high state -- the 15 highest states, and we will -- we will have to further, I guess, break that out in the quarter. So you get some indication of where the delinquencies are, the higher percentage states, and where the severity is with respect to the dollar, so you can weight the model to some extent that way. In other words, you coul probably run, as I look at it sometimes -- I look at Florida, California, Michigan, Texas, et cetera ,and Ohio, and where is that relative to the rest? And it is heavily weighted to those top 15 states. We broke that out in the Q -- or the K rather, and that's -- if we continue to -- to break that out, that will give you some more information.

Okay. Again, just so I understand, it is not because the severity is higher, because we are running at roughly 100% severity. It is because the --

Loan size.

The loan size in California and Florida are larger than the average.

Yes, I think Mike just told me the average loan in California that we insured is $293,000.

293, and so combined total book, bulk, flow, vintages, 293 is the average balance in California, 180 is the average balance in Florida, and then that would compare to the average balance of the total portfolio is just under 150.

Got it. I see. A big difference. Okay. And then the other question I have - and guess this probably has to do with the same answer, was while delinquencies are ticking up, claim rates -- I am saying percent delinquent at default, really ticked up in the last quarter.

Can you say that again?

Delinquency rate on the whole book was 7.7%, right? So claim rate, percent delinquent that actually ultimately default, I calculate it as 38%.

Right. And Nick, you are doing that taking the average paid -- the total paid by the average claim payment?

I will tell you exactly what --

And then on back at a trailing basis. That would be -- he is taking the average and calculating a percentage of loans, number of claims that we paid divided back into an inventory number.

Once again, I mean, the California and Florida influence may screw up that calc, too.

I am basically looking at delinquent loans -- I am looking at average claim paid.

We can spend some time with you.

Okay. Why don't we talk about it later.

Good idea.

Thanks.

Our next question comes from [Joshua Smith].

Hi, thanks for taking the question. I wanted to get a little more detail on the premium deficiency reserves, as this is sort of a new thing that we are trying to work through it. Can you conceptually talk about the buckets? Meaning you have and expected present value of the future claim payments, and you have expected present value of future premiums, and you have a reserve, and the difference between the three is your deficiency reserve?

Correct.

So over the course of the quarter you pay some down, you take some premiums in - which I understand how that would reduce both the first two buckets.

Right.

Why did reserve goes up?

Delinquencies and the factors.

So the delinquencies went up, which caused you to increase reserves?

And the fact we raised severity, and we talked about California and Florida specifically, but there was some others, but that was the major.

So that wouldn't have been included in your original expected --

Sure.

But it just changed --

These -- I guess - if you remember from the earlier conversations, we will continue to record this business through our normal -- normal lines, premium and losses, et cetera, and then the only adjustment is obviously whatever happens to the -- to the ending reserve. And in this particular case, delinquencies went up -- even though the book is running down, delinquencies went up and we increased reserves for those new delinquencies, and maybe made some adjustments for existing.

Okay. So the underlying intricacy of mortgage insurance, where you can't actually reserve until you see the delinquency.

Right.

That is still going through this?

That is still going forward, right.

So when I'm looking at - you are taking down this premium deficiency reserve -

It goes down for two things. It goes down for reduction in future premiums, obviously, it goes down for our estimate of future losses because we paid some losses and we haven't -- we haven't reestimated higher losses, if you will, so that is a positive, and then plus the -- whatever the reserve adjustment is to back it up. The net of those two, 137 for the net premium - values of the premiums and losses, and the increase in the reserve of 127.

And the increases in reserves should track typical factors like delinquency --

Exactly, right.

And severity on the delinquency. That's helpful. Second question. Barney Frank's proposal -- a lot of these proposals talking about the lenders, you know, writing down the mortgages to 85% of appraised value, and then -- and then selling that to the government. Have the M.I.s - I haven't heard the M.I.s talked about at all in these discussions, and clearly you have a stake in the game, given that you could be making a full M.I. payment, or if it doesn't go to foreclosure, there's no M.I. payment. So can you talk about your involvement in those type of discussions?

We have been informed of what those proposals are, and obviously from the individuals involved, the Barney Frank and Senator Dodd, and the Administration has a similar proposal and I said today, Senator McCain has a similar proposal. We are a part of the discussions relative to what they want to do. But we haven't - from that, we will have to wait to see what plays out. As it stands now, again if they cram down the principle, which every one of these has, I mean that is the centerpiece of any one of these that the lender/investor would take that drop in value, you know, there is not an insurable event relative to that. But that doesn't mean that we wouldn't participate in some form or fashion as we get down the line now. To the extent -- and I would expect these would only be offered -- and this is really where the rubber runs in on all these, I think, it would be in cases where you take a loan that has a high probability of ultimately going to foreclosure. And so, our participation as an industry will be warranted, I think, on that basis, given that ultimately we will have a larger loss. But otherwise, I mean it's hard I think for anyone to stomach that just the borrower would be able to write down the value where they have the ability to pay the mortgage as that exist today. So if I am answering your question, Josh, there is a lot -- --

I guess the question -- the answer I am looking for is that ultimately you will have a seat at the table and this can't hurt you, it can only -- it can help you to to some degree or could be a non-event; is that fair?

Again, I think any of these proposals will help us relative to -- as we look at -- at every one of these proposals, they are borrowers that are clearly on the margin relative their ability to make their payments at the current level. And then some participation -- I mean we are doing it right now on loss mitigation, whereby if we can do a short sale with a borrower and we think we have a pending claim coming at a loss less than what we paid, that we will do that. So I -- you know, I think each one of these is positive for our industry. I don't know if anyone has a seat at a table. We give our input, but those political decisions seem to come out regardless of what anyone decides, on what is the most popular that day. So we do have a seat at the table, Josh, relative to giving our input. For what value that is taken, I don't know.

Thanks a lot.

Our next question comes from Eric Wasserstrom.

Thanks. Good morning.

Good morning.

Curt, I know you mentioned you will sit down with the GSEs and discuss with them, you know, what your capital position and your claims paying resource is, and all that kind of thing. I guess what I am wondering is, according to what Freddie has put out publicly is that the remediation flan is required from the M.I. industry and the event of a downgrade, which hs obviously has now occurred, revolved around the intent of the M.I. to return to its -- to its prior credit ratings. And yet when I try to look at that relative to what S&P is using as the basis of its downgrade, it -- it is basically looking -- SNP is basically looking at a forward-looking economic projection and relating that to the loss experience. But it is not necessarily relating it to the capital levels because the capital levels remain in excess of what is required for a AAA rating. So I guess the essence of my question is, in that context, what's the -- how does that get reconciled, you know, between what Freddie Mac wants in terms of a return to AA ratings over some timeframe, and what S&P is stating about future loss expense?

You know that is a good question to them, but from our perspective and our conversations, and we have - had been in contact with them for a couple of months relative to, you know, what we saw happening in the business, their real concern is the capital adequacy to pay their claims going on the existing book, and their ability to ensure loans going forward on a capital basis, and from that aspect, I think that's the disconnect, if you will, with what S&P did and why we feel very good relative to how the GSEs are looking at the situation. Clearly, it is our goal as a company to continue to push forward on a very profitable basis and regain a AA rating. That is the goal of our company. But I -- a long-term goal. As I think you heard from the S&P call, that will be a couple-year process, I think, relative to how they are looking at our industry.

But I -- I think the GSEs concern is their ability to meet their needs and that is relative to the capital and the claims-paying ability of the companies, which is indeed their capital adequacy and the risk to capital ratios, which seems to be a departure from S&P is looking at the business at the current time, where operating margin is more important today than capital. Again, we had a fundamental difference with S&P over that, given our capital strength that just - we disagreed strongly with what they did with our company and probably some of the other companies. But I think, again, back to the GSEs, that's a question to be answered better by them. I feel very good relative to our conversations. We have met with them in person, and will meet with them in person again, and as I say, we talk to them weekly relative to sharing information on the strength of our capital, and from that I feel very good relative to those conversations.

Okay, great. If I coul follow-up on one element of the prior question about, you know, the key element of the Frank plan and the other plans that -- that will resolve the issue of negative equity through a cramdown. In all the -- in the text of those Bills that I have read, it seems that in each case it is effectively the servicer or the - or the body that is responsible for determining the overall economic value, in other words who has the economic interest in the loan, to determine which loans will be eligible for this within the broader criteria. And it would seem then that if -- if, you know -- if a holder of a loan has M.I. on that loan, and it is facing the element of a cramdown versus just letting it go to foreclosure and then getting part of their loss mitigated by you, they will choose to do the latter. Doesn't that effectively compel the M.I industry to participate to some degree in order to avoid being adversely selected?

Again that was my -- I guess general comment was that while it is not a claimable event, it would be certainly part of something we discussed going forward, because paying 25% of 15,000 versus 50 makes great economic sense for our company relative to that cramdown. As it stands right now, again, we don't have a claimable event because there is not a titled property that they can present as a claim to us. But it would be short-sighted on our industry's part not to be part of that discussion, relative to doing what's in the best interest of all of us.

Right. So just so I understand, when you are saying that you think it will be a benefit, it's just because the loss that you would suffer, it would just be less than -

Yes. It would be smaller.

Okay. Great, thanks very much.

Our next question comes from Jason Ruggiero.

Jason, are you there?

Pardon me, sir. Your line is open. If you have your phone on mute, take if off please. If you have a question --

I have no question, thank you.

Our next question comes from Donna Halverstadt.

Hi. I wanted to get an update from you on captives. If you could update us of your view on how much benefit you expect to see in each of '08 and '09. At the end of the year the captive trust fund assets were about $630 million. I wondering if you could update that number for the end of the quarter?

The end of the quarter - the 687 we've got out on the schedule, so those have grown, and you know will continue to grow as those captive treaties continue on. And as far as the benefit, on a paid this this year, around $100 million or so.

On pays.

On pays. But on an incurred basis it would higher than that, but paids would be about 100, and you know it is a sensitive forecast in that there are no losses right up until it gets into their [layer] and then loss is at 100%. So by and large, about $100 million this year.

And next year?

A little higher --

Somewhat higher. You know we expect I think over the life of those loans that we would have over $1 billion in those trust funds that we could call upon, I think was the number we were utilizing, Donna, that that should grow, too, relative to those books. Again we don't expect to utilize those dollars given our outlook on the future, but they are there, and again, while you know I am not a fan of that product, through this cycle anyway, it is helpful relative to limiting our exposure, half our book to, you know, 4 or 5 per hundred.

Okay. The other thing I want to ask you about is prior to your capital raising, you had said given the expected increase in risk to cap, you wouldn't be able to fully participate in the opportunities you see without raising capital. The amount of capital that you raised, is that going to allow to you participate fully in opportunities in '08 or '09? Or would you have liked to have gotten more? Would you expect to possibly be back in the market again in the near term?

We don't expect to be back in the market. Again, the re - the sale of Sherman, which we are negotiating, as well as the addition of the reinsurance which we are talking about, and then also looking at our International opportunities, we -- we don't see a reason to be back in the market. As far as the opportunities -- I think we are really meeting the opportunities that presented by our market, given the size of it or the contraction within it, and then also relative to, if you will, the cut-back in the size of volumes based on our underwriting changes and pricing changes. So I - the only area that we will fully meet what I would like to be doing, or what our company will like to be doing more, is somewhat with the FHAs, because that has been a very profitable business for us, as well as the international. We would have liked to have grown that faster, but we're not going to do that. So that's the two opportunities. The FHAs is a billion dollars, not that we sneeze at that, but we would like to have done more there, and clearly international longer term I think is a very strong aspect of growth for our company, it just won't be as fast as we once planned.

Okay. The last thing I wanted to ask you about, just a quick detail question on the credit facility. As far as I could tell, it looks like there are three maintenance covenants, two of which there has been some good disclosure on, but there' s one that says your policyholders' position which described as including [stat] surplus and contingency reserve, must be not less than the amount required by the Wisconsin insurance rate --

25-to-1. Risk to capital 25 to 1.

I know what risk to cap is, I found that, but the amount - but the dollar amount of policyholders' position required by the Wisconsin regulations. What is that dollar amount?

We haven't done the calculation for the quarter.

No, I haven't done the calculation.

I mean, it is not an issue at all, Donna. That's why we have not done that -- it is not -- it is not something you need to worry about.

All right. I just --

I mean we can get it to you and you can call Mike Zimmerman and get that. I don't mean to sound --

No, that would be great. I would just love to mark that one off the list.

Sure.

Okay, thank you.

Mark it off the list.

I knew would you say that, but I like the number. (Laughter) Thanks.

Okay, Donna

Our next question comes from Michael Grasher.

Good morning. Just a couple of questions here. Can you give us, Mike, any details around what's left in the '06 and '07 vintages in terms of risk in force or insurance in force as a percent of the total?

Is that in our supplement?

Yes, Mike, this is Mike. On the last page, we have a supplement on the website, but let me tell you for flow, I mean, it is predominantly there. If we talk about the Wall Street bulk transaction, '06 is 65% of remaining risk, and we only -- we wrote up to a billion of risk in '07; Wall Street [falted] at 95%. 72% for the remaining bulk for '06, and nearly all of it for '07. But I will point you to the supplement. We will give you by vintage. 2004 and prior, '05, '06 '07 and '08 for the whole risk in force characteristics there.

Okay, great. Just -- then can you talk about what you are doing on the mitigation front, in terms of trying to limit the paid losses?

We are doing a number of things. One of which is to work with a servicer and borrower to potentially refinance the loan into some of the FHA programs. Two --

Which are available today. It doesn't take into effect whatever may happen with the Dodd, Frank, McCain or Administration programs.

And then another would be to modify the loan, buy down the rate and whatnot; just lower the payment to borrower to keep them in the hose, for those borrowers that it would for, and as Kurt was earlier, to a degree, the borrower is is a situation where even with - loan buys them down, they're not in a position to keep making payments than a loan along the foreclosure and presale - short sale front them in the house for those borrowers that will work for, and as Kirby was mentioning earlier, to the degree the borrowers in the situation where even down they are not in a position to continue to make the payments and then to try to move that along -- move that loan along the foreclosure and presale -- short-sale front to mitigate our loss.

Yes. There was a story in the Wall Street on about short sales, and I have got to tell that you that we are being more proactive than the borrower pursuing it. We are pursuing it as the mortgage insurer, and as the - with constant conversation with the borrower and the servicer in trying to make - arrange those short sales and happenings. So it happens a little more often when you are proactive at it, and we are trying to be very proactive in that area.

And then up to this point, we kind of thought about the programs, talked to the servers, there was - got things in place, laid the groundwork. So I wouldn't say -- I would say to this point some of that mitigation is not reflected in the numbers. Hopefully these programs further reduce losses going forward, now that we have them in place.

Okay. Thank you.

Yes.

Our next question comes from Nat Otis.

Good afternoon, gentlemen. All my questions have been answered. Thank you.

Thank you.

Our next question comes from Howard Shapiro.

I must have pressed it by accident. No questions, sorry.

I love it.

Our next question comes from Jordan Hymowitz.

Hey, guys. One more thing. Despite, you know, reserve - losses being lower than expected, you continue to build your reserves, and they are over two times paid claims at this point for one and a half times, if you use the 1.8 to $2 billion in paids for the year. At what point do you say that is enough reserve building? Do you have to see the fall start to come down? I know you don't look at it, you know, reserves to paid claims, but it is much higher than it has been in the past few years at this point and you are starting to look a little overreserved.

I think the key would be, Jordan, what happens with delinquencies. As Curt talked, we had a reasonable quarter and we would expect that in the first quarter, and in the event that delinquencies continue to rise, you will continue to see the reserve build over paids. And generally speaking, you would anticipate because of the size of especially the '07 book, that we should see an increase in delinquencies. That's why we said earlier on a macro basis that we thought we'd continue to see delinquencies increase this year - the level at which they increase, that may be a difference, but we continue to expect that -- that delinquencies would increase throughout the year and we'd have a normal build in the reserve overpaids subject to that.

Do you think subprime delinquency will increase or just overall?

Overall. I think primarily the flow book. The bulk book is running down, and I think the biggest part of that will be delinquencies out of '07 book, because it was such a large book.

Because your average claim payment is almost double on the flow - bulk than the flow. So to the extent that the subprime and the A-minus slow down a lot or get reduce d, it could make up for an increase in the prime, do you know what I'm saying?

That may be a mitigating factor, right, the mix could be a mitigating factor. It's really - as Larry said, it's a little too early in the year to call those. I think we need to see a couple more quarters develop.

If you had to guesstimate, do you think that subprime will bs relatively stable from here? It's actually come down this quarter.

When you say "stable," do you mean the paid level or the delinquency level?

The number of delinquent loan level. Well, certainly on the Wall Street book, we expect that to run down.

Because it really - I mean, as Larry mentioned, we we really stopped writing that at the fourth quarter of '06.

Thank you.

Operator, I just see two more questions in the queue, so let's take those two questions and call it a day.

Our next question comes from Peter Horan.

All my questions are answered. Thank you.

Okay, Peter. Last question.

Our next question comes from Ron Bobman.

Hi, thanks a lot for taking my question. I appreciate it. I had a question about Sherman. Your investment agreement, or whatever, sort of evidence is the relationship and the original deal. Does it have, in effect, tag-along rights so that if you reach an agreement with Sherman management, that sort of Radian comes along presumably at the same terms or vice versa? I know both you and Radian have discussed, you know, the prospect of selling it and now the specific mention of negotiation. So I had a question along those lines. Hello?

A yes, it does have tag-along rights.

Okay. And then -

But you probably need to talk more directly about how those apply.

Okay. Then I - would you give us any sort of conservative timeline? You are optimistic that -- that if you reached an agreement, you're two weeks away, two months away, or if It is way too early to determine at this point? Any sort of statement about the timeline?

Quarter 2.

Q2. Okay. Best of luck and thanks a lot.

Yes, thanks Ron. Operator, that's it as we show as far as questions. And, again, I would thank all of you for your interest in our company and your investment within our company. Thank you all.

Ladies and gentlemen, thank you for participating in today's conference. This includes our program for today. You may all disconnect and have a wonderful day.