MGIC Investment Corp (MTG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MGIC Investment corporation second 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 call is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Mr. Zimmerman, 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 second quarter of '08 results are Chairman and CEO, Curt Culver, Executive Vice President and CFO, Mike Lauer, and Executive Vice President of Risk Management, Larry Pierzchalski. I'd like to remind all participants that our earnings release of this morning, which may be accessed on MGIC's web site which is located at http -- 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 mornings press release, we have posted on our website, supplemental information containing characteristics of our primary risk and force, [flow] and new insurance written, as well as other information 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 can could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release. If the company makes any forward-looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no investors should rely on that 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. And now I would like to introduce Curt.

Thanks, Mike and good morning. For the quarter we reported a net loss of $97.9 million with a diluted loss per share of $0.79. During the quarter we insured $14 billion of new business, down 27% from last quarter. $13.4 billion of the business was flow with $600 million of bulk and, like last quarter, the bulk business was a large transaction of GSE eligible business that was insured on a back end basis by a large lender. For the first half of the year, flow business is up 14% versus last year while bulk is down 60% from last year. Persistency improved during the quarter to 79.7% with flow at 80.7% and bulk at -- 75.9% versus 74% and 72.5% respectively last quarter. The quarterly persistency run rate for the combined portfolio was 83.8% which was up from 82% last quarter and 75% a year ago. Of that flow was 84% and bulk was 81.8%. As a result of the strength of the persistency growth and our flow business, insurance in force grew to $226.4 billion which is up 22% from a year ago. Our flow insurance in force is up 30% from last year while bulk insurance in force is down 10%. The average premium yield on the insurance portfolio fell slightly to 62.6 basis points as compared to 63.8 basis points last quarter. The decline reflects the continued movement of our portfolio to loans with lower LTVs, improved FICOs and full documentation. The details of this business mix improvement are contained within the supplement to the earnings release. Losses incurred in the quarter were $688 million down slightly and up from $235 million a year ago. Claims paid in the quarter were $385 million up slightly from $371 million last quarter and through the first half of the year totaled $756 million. While we will stick to our year-end claims paid guidance of $1.8 to $2 billion, it now looks like we will be at the lower end of the range. The reality is that the pace of paids has been slow due to various state and lender foreclosure moratoriums, servicing delays, fraud investigations, mitigation opportunities and a lack of capacity of our court system. The delinquency inventory increased in the quarter by 14,641 cases to 128,231. The quarterly increase is somewhat overstated however as 4,400 new cases, or 30% in the quarter, were due to a reporting change by one large servicer who changed their reporting methodology and were already reflected in our reserves.

During the quarter we made further changes to improve our operating flexibility and underwriting profitability including amending the revolving credit facility, making additional underwriting changes, increasing premiums on all of our products and entering a reinsurance contract with HCC which provides us with loss protection on new books of business as well as 150 to 200 million annually of credit agency stress capital. Our discussions with the GSC's relative to our remediation plans have been positive with Freddie Mac announcing their approval of our plan, while Fannie Mae has not yet completed their review. Competitively we continue to be in a strong market share position with a share of 23.6% in May and as an industry, while we are losing share to the FHA, I would add that I believe a large majority of the business we are losing, reflects the significant changes we have made in our underwriting guidelines to return to profitability.

Finally, with the influx of delinquencies and claims we continue to be very active in our loss mitigation efforts. Our efforts from loan workouts including loan modifications and presales resulted in mitigation of $69 million which is up 39% from last quarter. Our mitigation from recisions and denials for misrepresentation, ineligibility and policy exclusions, was $24.4 million compared to $17.8 million in the first quarter. So, in closing there's no question there's been a very difficult quarter for our company and our shareholders. However, I do believe our company is well positioned once we see stabilization of the real estate markets. With that, operator, let's take questions.

Thank You. (OPERATOR INSTRUCTIONS) Our first question comes from Dave Kats of JP Morgan.

Hi. We were curious what trends you guys expect for losses incurred going forward given that as a percentage of delinquent loans it looks like it's (inaudible) down to about 2.15% from I guess around 2.45% in 1Q '08 and around 5% in 4Q '08.

I think as we talked over the last several quarters, we've indicated that the incurred number is going to be directly related to what happens with delinquencies. Historically, we'd see an increase in delinquencies in the third and fourth quarter. So, I think the trend would be if that continues, we would anticipate seeing higher incurreds in the third and fourth quarter relative to changes in delinquencies and of course rate severity. We haven't seen much change in claim rates this quarter except for a couple markets, maybe California and Florida, and even that with saying the fact that overall severity is up, I think you can see that California and Florida would drive that. For example, in the month -- I mean in the quarter, we paid $92 million in California versus -- $92 million in claims in California versus $8.5 million a year ago. Florida we paid $36 million versus $5 million a year ago. So, California, Florida, Arizona, $12.5 million versus $1 million a year ago. Those states are driving some of the average changes but we haven't seen a lot of change in some of the other major markets especially in the Midwest. So, -- but I think more importantly, incurreds will be greater than the paids and a lot of it will depend upon the level of delinquencies in the third and fourth quarter.

Okay. And specifically with regard to those delinquencies, do you have any sort of view on when you expect to see them -- the delinquency rates peak?

We would think -- historically what we've been say is we thought they would peak this year. Now, whether or not that happens a quarter later or not but -- we think technically they'll peak this year. It may be a quarter later, but relative to the size of the books and some of the books running down, we would anticipate the delinquencies to peak possibly this year or maybe into the first quarter of next year.

So, no change from where your view was a quarter ago on that?

That's correct.

Okay, and then with regard to severity, do you have an outlook on that going forward?

Well, as I mentioned a lot of it's being driven right now by some of those larger markets that have deteriorated so much this past year. If that starts to flatten out we wouldn't anticipate much more change, but I think we need to see another quarter of development to make a better call on that.

Okay. And then you had mentioned some, I guess clogging of the court system. Do you have any sort of view as to when that might work its way through?

No. That's hard to say, I mean we went through this in Ohio last year. It's just a matter of adding staff and whether they do that. Probably the more relevant. That's probably the least relevant of all of those points. The moratoriums, but I think the servicing delays and as we work on mitigation opportunities, those were the most relevant.

Okay. And then finally, would you be able to clarify what cash was at the hold-co level?

Cash at the holding company at the end of the quarter was $482 million.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Donna Halverstadt of Goldman Sachs.

Good morning, gentlemen. I have a couple of questions for you. You had mentioned recessions and denials. I was wondering if you could give some sort of order of magnitude as to what you think the amount of rescissions might ultimately aggregate up to and secondly if you could also tell us, to the extent that it becomes a very large number, how you would think about the trade off between the financial benefit of such versus potentially alienating long-term customers?

Yes. I can't give you where it is going. It's -- I mean MGIC -- what we're doing is not out of line with what we've always done. We're always enforced the policy, and -- so to give you a perspective on that, last year in the -- if we looked at the second quarter on rescissions and denials, we had 123 for $7.1 million. This year we had 294 for $23 million. So, it is up, if you, whatever that percentage would work out to be, but it's not as though we are looking for these in more detail than we always have. The reality is we had a number of loans that were done with reduced documentation that have just opened themselves up for more investigation. So, where that ultimately leads, I don't know, but, you know, we are going to enforce our policy as we've always done and work with lenders, you know, to provide a fair solution.

Okay. And then when you think about the potential profitability of business underwritten in '08, '09, how do you think that will compare with the profitability of business written earlier in this decade? Do you think it will be similar, a little bit less, noticeably less -- how do you think about that?

I think th --, if you looked at our business in '08, the first quarter will be the least profitable the business will do in '08, because you still had an overhang of the '07 guidelines that we committed on -- I mean as a company and as an industry. I think you will see this in every company in our business. With the last half of '08, probably running at about 4.5 per 100 or so, we think as far as looking at claim rates in the first quarter being around 6 per 100. So, it will be a profitable book of business. The '09, I think will be an outstanding vintage for the industry in that we will have all of the changes implemented. We will have at least 20% price increases on all of that business, some higher than that. And we will have a borrower mind set in which -- if values were still falling, they realize that but in most cases I think they're going to be stable to increasing. So, I think the '08 will be marginally profitable but the '09 will be extremely profitable and '10 even more so.

The other aspect of the profitability of the '09 book versus the early 2000's would be the revenue. The early 2000 books had low claim incidents but the persistency -- it ran off quite quickly. And what's happening now is, with the guideline changes, the '09 incidents will come down quite appreciably from '06, '07, I don't know if it gets to the low levels, '01, '02, but the revenue will be substantially more. So, I think ultimately the absolute dollars of profitability on the '09 would be better than some of the early books 2000 because of the revenue side of the equation.

And the other thing Donna, on that, is that we won't have captives at the 40% layer, they'll be at a maximum of 25% on which was half of our flow business. Well, 27% was actually the 40's, but -- so, you've got that also adding to the bottom line of all of the companies in the industry.

Okay. And I also had a question on the average claim payment which, if you look at that sequential, it increased only by about $2,100 versus if you look at Q1 over Q4, it was about $7,400. Was there anything interesting to note in terms of that rate of increase declining and where do you expect the average claim payment -- do you expect that to stabilize soon, do you expect it to keep growing -- how should we think about that?

That's what I mentioned before. The waiting changed a little bit because of California, Florida, Arizona et cetera. So, California was a significant contributor to the average this quarter again. And obviously, there's a higher loan sizes -- California, more coverage. I think we continue to see that, the delinquency development, the newer delinquencies obviously are carrying higher loan amounts especially in some of those markets that are changing rapidly. So, I would anticipate to see a continued increase in that for at least another quarter or two until it kind of equals out, if you will, quarter to quarter.

Okay and one other thing is on the paid claims guidance. Are you willing to break out the contribution to the aggregate number by vintage bucket?

You mean --

Are you asking for what the --

Like the he $2 billion. What portion of the $2 billion comes from '05 product versus '06 product, you know, versus if any '07 product?

I think the answer is no.

No? Okay.

Yes, we can certainly take it under consideration.

Yes.

Okay. When do you expect to start giving paid claims guidance for '09?

Late in the year.

Yes.

I think we'll -- as I mentioned earlier, a key development, obviously on loss forecasting is what happens in the third and fourth quarter. When we get a good fix on notices at year end, we'll have a better idea on paid loss forecast. Clearly paids are higher next year than this year. We said that all year. The question is to what level.

Okay. And I have just one last question. I think in the past you said that the assumption you've used in your loss forecasting is unemployment between 5, 5.5. And given that we're already at 5.5 and a lot of people expect we are going a lot higher, have you incorporated or are you thinking about incorporating higher unemployment assumptions in your loss forecast?

I believe the unemployment we -- in the past was close to 6, 5.5 to 6, not the 5 to 5.5.

Okay.

But I guess aside from exactly the number, we see a little bit of deterioration in employment but not a significant employment event here.

Okay. Great.

Okay. Thanks, Donna.

Thanks.

Thank you. Our next question comes from, excuse me if I pronounce this wrong, David Hochstim of Buckingham Research.

Hello, David.

Hello. Just wondering if you could provide some more color on the change in delinquencies? You said that 30%, I think of the increase in number, was attributable to a service of reclassifying, a routine in reporting. And then if you look at, you know, in the supplemental disclosure, the sequential increase in the percentage delinquent by vintage, pretty sharp increases, including in '08 and yet, you know, the rate of change doesn't seem so bad. And you suggested there are some slowing in other, in other numbers. I wonder if you can try and make sense of -- ?

David, this is Mike Zimmerman. Putting aside the 30% increase which was from a one servicer, you if you think about from a geography perspective. California and Florida counted for 38% of the increase, 26% Florida, 12% California, and Michigan, Illinois and Ohio accounted for another 10%. Half of the increase is coming from those five states, which -- in the forefront of the housing issues

And on claims paid, what's the break down there?

I don't have the same percentages but again, as I mentioned, David, the increase -- are you talking increase quarter to quarter or year to year?

Well, the same thing you were just addressing before, the sequential increase has slowed, and you indicated there's some mix change. And yet even with the bigger increase in California, the average hasn't gone up as fast.

Yes, well, California, quarter to quarter sequentially was up $10 million, so a 92 over 82. Some of the other changes that were significant quarter to quarter wouldn't have been that much. I mean, they're, for the most part, just on a gradual basis but California would with the biggest change, Florida is up $6 million, 36 over 30. And this would be disclosed in our Q.

Okay.

But those are the big changes again for the sequential.

Okay. I guess what everybody wonders about is at what point can we actually see some deceleration in the rate of deterioration? I mean, Curt, you were talking about some slowing, but I guess what I'm wondering is it just a slowing this year and it's just shifting more --

Into next year?

Into next year or is it actually slowing?

Well, I think the key will be, David, what happens of notice development in the third and fourth quarter. That will be an early indicator to you. I mean the paids are going to work their way through the system. And whether or not we have slowed the acceleration of delinquencies will be an event that we will see in the third and fourth quarter.

I mean, I guess the other, sort of another variance of the same question is, when you look at the increases in delinquencies for the various categories, the prime -- it seems like subprime is kind of more stable now than prime, although if you look at the number of delinquent loans, they're -- I mean is that just, again, more California or something?

That's California.

Okay.

Yes, that's California delinquencies, again as Mike said earlier, California delinquencies went up, I guess for the change, 1200 -- or 1700 for the quarter. Florida was up 3800.

Yes. Okay. And just in terms of average, did you say what the average claim has done in California the last couple of quarters?

Do you have that, Mike.

I'm looking at it right now, Dave.

Okay.

Well, in the -- technically, I mean, it was up marginally on the bulk from 118 to 123 average claim ban and the flow went from 88 to about 82. So, I mean put them together, kind of flattish if you will, there.

That's sequential from -- ?

Yes, Q1 '08 to Q2 '08.

Okay. And then other markets are they basically -- they are even more flat presumably, I mean, if you go to, kind of, states where you have bubbles, and not in the mid-west, so --

Well, David, I think state to state -- that quarter to quarter at a state level, at this point, we're kind of flat. Keep in mind we pay a certain percentage of the UPB. So, if prices fall, we're limited basically on how much our claim payment will be because if we insure a bunch of $200,000 homes and then we've 25 covered that's a $50,000 claim. And then once we hit that $50,000, we may get more California's at $50,000 than Michigan's at $30,000 and that's kind of causing the average to creep up each quarter and that will continue to happen a couple of more quarters although at a slowing rate. But within the state at this point we are pretty much paying our percent option coverage. The mitigation opportunities, pre-sales and that, are quite small. So, state to state at this point is pretty flat. The average creeps up because we are still getting a little more California and Florida than in prior quarters. But that should be slowing as well.

Okay. And then just finally, just looking again at the change in flow, delinquency by vintage, the number of units was up from 26 basis points in the March quarter to 111 on the 2008 book. Can you talk about that? Is that a sign, what you were talking about before, I guess Larry, that the 2008 book is marginally profitable because you are seeing high delinquencies?

Well, the '08 book if you look at it's delinquency path versus the '07 book, it's much lower. But it's still upward because a new book starts at zero delinquency activity and then the natural agent cycle is delinquencies will ramp up, peak, you know, three years out or whatever and start coming down and beyond that point. So, that's the upward leg of the '08 even though it's better, it's on the upward leg. Some of the older books, '06 we believe, is at that top or close to it and that gets back to Mike's point, if we can get some confirmation that in fact some of those older books are at their peaks, then we can get a better handle on exactly when the default inventory here peaks whether it be end of this year or early into next year.

And could you say yet, if you think that the '06 and '07 books look like they're going to peak a lot earlier than normal or are they just going to have higher peaks at kind of --

Well, definitely have higher peaks, but I guess we need another quarter or two to determine exactly if '06 has peaked and how far behind '07 is.

Okay. Thanks.

Thanks, Dave.

Thank you. Our next question comes from Howard Shapiro of Fox Pit.

Hello, just a couple of questions. Can you talk about what balances you have currently in the captives and what you would expect that to grow to by year end? And then can you just talk about some of the pricing increases you put through?

Yes. On the cap to balance, Mike. Is that -- ?

The caps and trust balance $731 million at the end of the quarter.

And Mike has included that captive reinsurance attachment, I think within the supplement that goes through, what's attaching and the various numbers that flow through that. What was the rest of it, Howard?

The pricing increases, I mean our major products are 90 LTVs and 95 LTVs and essentially on the vast majority of our products were up about a 20% premium rate increase on a go forward basis. It's effective early August, in most states.

Yes, August 4.

And that would include even your standard flow product?

That's what I am talking about, standard flow. A 90 LTV, we were at 52 basis points per annum. Now it's 62. So, 10 on 52 is 20% and we went from 78 to 94 on a 95. So, that's 20% there.

Okay. And just in terms of your discussions with Freddy and Fannie on the remediation plan. I know Fannie hasn't responded, but did Freddy Mac put any limitations in terms of your ability to underwrite business or anything like that? Or --

No.

Could you just talk about it?

Well, they came out with a release and you know we are continuing on as we always have. There are no conditions to Freddy Mac's approval of MGIC. We continue to meet with Fannie Mae and again they've been very positive meetings.

Okay. Thank you.

You bet.

Thank you. Our next question comes from Eric Wasserstrom of UBS.

Thanks. I just wanted to follow up on Howard's last question on the GSE plans. The first is, can you help me understand what it's actually meant to accomplish because it seems that the -- is it meant to -- is it strictly around capital levels, is it meant to address profitability -- what's the focus of the plan?

Well, relative to that, I think you're best off talking to them on what -- all in all, I mean I would summarize it as our ability to pay the claims relative to doing business with each one of them ultimately. That's the important part. That is what we do for them. So, everything that leads up to that is what they're interested in and for more details it's really their call rather than us.

Okay. And then it seems basically that there's, you know, there's kind of three, you know, three issues, right? There's, you know, there's the profitability of the go-forward books, there's the existing statutory capital, and there is the ability to generate capital. I mean is there more to it than that?

Again, I come back to what they're looking for is the ability to pay their claims on an on going basis. That's what the insurance is for and that's what they're really ultimately looking for. And the details of that are really their call.

Okay. And can we just maybe circle back to one other topic, which is, I am still confused about why you're kind of classifying the profitability of the '08 book as marginal. Is that more on the -- ?

I would say in the first quarter, because of -- it's an overhang of the '07 book of business, that that will probably be like a break even quarter, and every quarter is going to improve from that. So, I don't know where that ultimately -- maybe it's my conservative nature and what we've been through. I know it is good business. I mean I am looking at the business mix here in June of this year relative to June of last year. And this is on a commitment volume, our full doc aid business in this year, in June, is 99.3% of what we'd insured. A year ago it was 73.9%. Full doc, A-minus is 0.6%, last year in this month it was 16.9%. Reduced dock was 0.1%, last year it was 9.2%. 100's is 0.3% last year it was 38.9%. So, I -- the mix is very, very good. We're going to have a price increase on top of that kicking in, in August, we've got the captive limitations. So, I know the second half is going to be very good for us. I just don't know how to classify it. It will be profitable.

Thanks very much.

Thank you. Our next question comes from John Farrow of Deutsche bank.

Hello, guys. Thanks for taking the questions. First question, I guess, just following up on the unemployment question earlier, do you guys happen -- do you guys have a view on 2009 unemployment, when you're looking out towards that year coming up?

We're kind of keeping things stable to the 5.5 to 6 -- 5.5 to 6 as far as the end of this year is basically what we're carrying into '09.

Okay. And then Sherman update, do you guys have any update on Sherman? I know you said that in the last question on the last call you guys expected to get that done by the end of this quarter. Any update on that?

Well, we're --

End of last quarter I should say. End of 2Q.

We're close. We're in -- I would say the final stages of documentation between Sherman and MGIC, and we would expect the transaction to close early in the third quarter.

Okay. That's very helpful. And is that, from my understanding, that is the fourth remediation item on Freddie's list that you guys provided them, is that correct?

I don't think we classified items in that manner, that was part of what we talked about with both, that that was something that we were working to get done.

Okay. Then a couple of just quick housekeeping things, are you guys still targeting $50 billion of new insurance written this year? I know you'd mentioned that on the previous call.

Yes, I mean we are looking at that or marginally higher.

Okay. And then I would expect your premium yields to be higher going forward. I mean I know you guys had given guidance around 60 bips. I assume that's getting higher just given the pricing increases you are implementing in August?

Yes. Be cautious with that because of the mix change that I talked about relative to, you know, we were at 100's and now we are 95's and things of that sort. I don't even know if we have guidance on the basis points. We have the price increase on all of the business going in, but would tell you the mix is changing to much lower risk products. And lower LTVs. So, that will play -- and that will have an impact also.

Yes. And I guess, you know, I see the over 97's dropping pretty significantly on the '08 book 1Q to 2Q. I assume that that's going to continue going forward. I think it was, it dropped from I think 30% to 15%. I mean, do you guys --

Well, as I've just mentioned, in the -- in June, loans over 97% were 0.3% of our business versus 38%, it was 39% a year ago. So, yes they've dropped pretty rapidly.

Do you expect that to continue I would assume then?

Well, we don't insure loans of 100%, loans over 97% anymore. So, that -- that will be zero.

Okay. And just one follow up on the '06 books. So, you guys expect that book, I mean, I know we've heard comments that that book is starting to at least turn the corner on delinquencies, potentially plateauing, and I guess you guys said that it's going to be one to two -- maybe another quarter out until you really start to see that happening?

Yes.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from James Gilligan of Equity Group Investors.

Hello, good morning, guys.

Good morning.

I had a question on the Wall Street bulk. But, I thought just as a refresher can you just remind me the definition of Wall Street bulk?

Yes. Those are basically the private labeled mortgage-backed securities. Some (inaudible) them as home equity securitizations, first lien business, the private label RMBSs.

Okay. And then just going through the numbers in the release and correct me if I am wrong here. Risk in force $6.5 billion, you've got the premium deficiency reserve which has calmed down, now it's about $788 million then the loss reserve of about $1.65 billion.

Correct. Yes.

So, that kind of leaves a net, lets say, unreserve risk enforcement of about $4 billion? Is that kind of the way to think about it?

Yes.

Okay, and then the present value of that is what you mentioned as, I'm sorry I might be off here, the 3.2?

No, no, no. The 3.2 is the present value of the risk -- the Wall Street risk in force as of the end of June, we have a present value of the loss of expenses of $3.26 billion. We've got reserves already $1.6 of that in the losses (inaudible) known delinquencies, there's an additional $1.6 billion for expected but not yet reported delinquencies.

Okay.

And then there's the further offset then by the present value of the revenue, of around $800 million or so, to get to the $788.

Okay. All right, got you. That helps. Thanks for the clarification.

Thank you, our next question comes from the line of David Stadlin of Weintraub Capital.

Yes. That was my question. The one you just answered about.

Okay.

But the premium deficiency reserve, you are saying is an offset to -- is an offset?

David, we can barely hear you.

The premium deficiency reserve is an offset to the reserves? I wasn't clear.

It's in addition to the reserve.

Okay. It is in addition to the reserves. And then can you just clarify the $150 odd million that was --

Released?

Yes. Is, you know, what is the cause of that being released? Can you just talk to that?

Well, again, we go through the same calculation every quarter and estimate the net present value of the future premiums which was about 829. The net present value of the future losses which is about I guess $3.2 or $3.3 million the net difference of that is a negative $2.4 offset again by the already existing reserve on delinquencies of $1.6 billion, gets you to $788 net, versus $947, the previous quarter, or a reduction of $159. So, it should be running down.

Okay.

We estimated earlier in the year that we thought that reserve would reduce by $500 to $700 million. We're probably on -- around the $700 million number now as an estimate. So, we would think that in the third and fourth quarter the number would be slightly less than this quarter, but around $700 million for year.

And this is on a total risk enforce of $6.2 billion, is that correct?

That's correct.

Okay. And --

It's not a run off book of business. You understand that's a run off book?

Yes.

Okay.

And what was your market share earlier in the year? If you said it was 23% in May.

23.6% in May. In the first quarter we were at 25.6%. There's a lot of noise that goes on a monthly market share. So, I would give you as a caveat. The point was -- we continue to do quite nicely even with all of the pricing increases that we are implementing and have implemented in the underwriting changes that we have put in place.

Okay. And in terms of reinsurance recoverable, what happens if you have exposure to an IndyMac situation?

Well, IndyMac is about 1% of our risk in force. So, it's quite small, and it's being serviced according to Freddie and Fannie requirements. And we monitor the servicing as well.

But on the captive reinsurance, we have separate agreements with them that are separate from whatever happens to IndyMac. So, those dollars are not impacted at all by whatever happens to IndyMac. Those are separated in a separate trust fund.

Okay. Great. Thank you.

Thank you. Our next question comes from Nat Otis of KBW.

Good morning, gentlemen. Most questions have been answered just a one quick one and I don't know if you have already provided it, just a further break down of the $4,400 by segment. Do you happen to have that?

Are you talking about the $4,400, the loans? The increase in delinquencies.

Yes, exactly.

Large servicer.

No. That's just -- that's from -- the aggregate from the one servicer at the end of quarter.

Right. But you don't have it by actual product segment break down, is it -- are you just -- ?

Not at the table here, no. I mean it is in embedded within that, but it's a -- they're are a large national servicer. So, it's probably pretty representative of the mix of business over the last couple of years.

Okay, fair. That's it. Thank you.

Thank you. Our next question comes from Dan Johnson of Citadel.

Great. Thank you very much. A question pertaining to captives again. What sort of data can you point us to, to help us understand the risks of coming out the backside or the topside of the captives? Is that, you know, can we frame that in terms of what you think, you know, the flow business for 2006 or 2007, will look like on a loss rate per 100 where that would line up versus the topside of the captive programs? That would be helpful or any other way you can sort of help us get a visual of the risks there. Thank you.

The two major forms of captives, a 5-5, 25 captive, where we pay the first 5 per 100, the captive is responsible from 5 to 10 per hundred. So, incidents above 10 would come through. The other one is a 4,10. So, we cover the first 4, they cover from 4 to 14. The '04 and prior books given where they are and that, we do not believe many or any attaching. There might be some small (inaudible), but by in large '04 and prior are not attaching. '05 borderline, it's really '06, '07 books that the focus is on the captives, and so those, I think we've indicated in the past, that the '06 '07 we believe, you know, 7, 8, 9 per 100 thereabouts, subject to what happens to house prices in the economy going forward. So, at that level, 7, 8,9, none of the 5-5's or 4,10's would get breeched. However, you know, some lenders perform better than average, some perform a little worse. So, those marginally worse lenders you could see a 10, 11, 12, maybe and thus those would breech the 5-5. But, does that answer your question?

I think as we look at it though just our analysis of it, I think we have possibly one customer that we might breech and I mean, and that's possibly breech. As it looks now, I think, on the books of business we think we're comfortable with all other than possibly just going out of one layer marginally with one lender.

If we're just trying to put parameters around this. If we said, you know, just looking at the '06 and '07 years and just looking at the the 5-5, 25 captives, I mean for every point that went out the backside which I realize and appreciate as a relatively low probability, but what does that mean in terms of net income for every point we go through the topside of those programs?

Right now, Dan, in the supplement we gave, is we brought out, the current risk in force for example, for the '05 book that's covered by both 5-5 and 4, 10's, we don't break them up there, is $1.1 billion. So, you can, I guess -- there's revenue that's going to be associated with that, but if it's 1 point loss on $1.1 billion as of today, then net out the revenue that would become associated with that as well.

And that was for the '05 year?

Right. There's $3 billion for the '06 and $6 billion or the '07 as it stands as of the end of June. Current risk enforced covered by an excess of loss treaty.

Okay, got it. And obviously, the 5-5, 25's are a portion, subset of that.

Yes.

A minority subset of that?

I think they're about 11% or 12% of --

Yes, the '06.

Of the '06 and '07 books with a 4, 10, 40, is at about 26%, 27% and 50% quota is at about 8% of the flow business.

And the remainder has no captive?

Well, that's the --

Right, yes. About half of it doesn't have captives. The other half would be the 27, 11 or 12 and that 8, whatever. So, about 57 -- low 50's would not be in captives.

Got it. Great. Thank you very much.

You bet.

Thank you. Our next question comes from Mike Grasher of Piper Jaffray.

Thank you. Good morning, gentlemen.

Morning.

A question on the run rate of, Mike for operating expenses or other expenses I should say. Is this a fair run rate, what we saw this quarter? Can you talk about maybe what is happening in there?

Yes. I would say probably at about this level for the balance of the year. You know, obviously we have reduced some underwriting volume lower -- some other staff reductions. We've increased some staff in mitigation efforts obviously, but this is a reasonable run rate.

Okay. And most of my other questions have been addressed, but Curt, I did want to come back one more time on the Freddy, Fannie commentary, are you basically when Fannie finishes, I guess you're not expecting any change there in their opinion despite the scrutiny that they themselves are under right now?

I am not expecting any change. Again, the meetings have been very positive. It's just a matter of comparing numbers and we remain actively in discussions with them and you know, looking at forecasts and things of that sort. But again the meetings have been very positive and I don't expect anything relative to our operating performance changes from that.

Okay. Thank you very much

Thank you. Our next question comes from Jim Delisle of Cambridge Place Investments.

Hi, guys. I apologize if this question has been asked, I had to jump off for a moment. Earlier today on the JP Morgan call, Jamie was talking about prime losses going -- assumptions at their place going from 90 basis points to 270 and the effects it might have on their earnings and their balance sheet. Is that outside of the stress range you have for your prime mortgages?

I don't know what that relates to. I mean it's hard to, you know, it's hard to even relate that to us, so I --

Well, actually, if you maybe if you just take a listen to the conference call maybe a little bit later, we can -- I can touch base with Mike.

Sure.

Alright. Thank you.

Thank you. Our next question comes from Al Copersino of Madoff Investment Securities .

Hello. Thank you very much. You commented briefly on this in the opening comments, the FHA. Could you give a little bit more color on your views as to -- I guess on the one hand how much your heightened prices and stricter underwriting is the cause of some of the business going to FHA versus on the other hand, FHA just taking some business that you also would find attractive right now? Can you just give me a sense for how that's playing out those two factors?

Yes. I mean, if I had to classify it, I would probably say 90% is related to underwriting changes and 10% is on the margin that we would love to have -- that we would love to get and yet because of our prices are not able to. So, most of the changes have been related to the changes that we've made in our underwriting guidelines. I think that will be an issue longer term for the industry as we look at competing with FHA although I do expect FHA to raise pricing, given the significant losses that they're going to incur this year, I think, in excess of $5 billion. So, that story is yet to play out. Right now, what's happening is, you know, business that our industry can't insure is finding a home elsewhere whether it be FHA or somewhere else. And again it's business we can't insure.

That's helpful. Thank you.

Thank you. Our next question comes from Bruce Harding of Lehman Brothers.

Hello. Good morning. What's the status of captives today? I mean how many have pulled away -- you might have commented on that already, I just don't remember.

It's been a marginal number that have pulled away, Bruce. We haven't commented on it. We will have some capital calls here relative to them adding capital to their treaties going forward, and that may make others decide not to do so and pull their captives. We are hearing some discussions of that. So, right now it's has just been a marginal number although they've been significant players and going forward we will see how it plays out.

And the, you know, the competitive outlook in your page, well, it doesn't have a page number. But in your press release, you know when you about your competitors, I don't see Triad there anymore. So, have they -- they've completely stopped writing business?

Yes.

Okay. And what's your roll in Jumbos? Are you working with the GSE's on any specific programs? Are you seeing much flow there?

We'll insure the Jumbos up to their conforming loan limit, the higher loan limit now, but by and large that 90 LTVs with 700 plus FICOs and we really haven't seen much of that yet. We'll have to monitor to see how much of that volume actually happens.

Is that -- is that just because they haven't really rolled out their protocols and policies yet or -- ?

I think that's part of it. I don't know exactly the effective date, but it wasn't that long ago.

So --

And again, we're not a big player in the Jumbo market anyway, Bruce.

Okay.

Right now Bruce, it's about under 1.5% of our flow risk enforcement, it's pretty much unchanged from last quarter.

Okay. And then, you know, we're still, you know, most economists are still calling for $5 million home sales which is, you know not a bad number given all of the head lines, you'd think that number would be a lot lower. But in some states like California there's a higher percentage of foreclosure sales, do you treat those any -- when a home was a foreclosure, do you treat those any differently in your underwriting and in terms of how you view the collateral and appraisal? And then on the other hand for borrowers, this is sort of a separate question, who have been foreclosed on, do you have to follow the GSE rules, I think Fannie just said they won't take loans if somebody's had a foreclosure event within the last five years or do you have your own guidelines for that?

If he didn't pass DU & LP, we wouldn't insure it. So, in essence, the same foreclosure rules would apply to us. And if it came to us directly and we saw a recent foreclosure, our underwriters wouldn't approve it either.

And on a foreclosed property Bruce, I mean that's just the case of getting, whatever the appraisal is on the new property, I mean it isn't the property that generally caused the problem.

Okay. I mean I was just in the Ohio market last week, somebody was telling a story where somebody had a -- you know, was willing to pay $1 million for a house and the appraisal came in from the bank at $750,000 and the buyer was all upset with the appraisal and everybody was mad at each other and you know, but the buyer was ready to pay $1 million and because the appraisal was so low you know, the person walked away. I mean, that seems like a huge -- that was a true story from a broker. I assume it was a true story.

By --

Are you seeing much, are you seeing much of that kind of thing I mean these huge gaps.

That's an investment banker that's paying that much, but relative to the appraisal, you know, everything is back to underwriting 101, so there is more -- you know, everything, the appraisals is more serious, the underwriting is more serious, et cetera, so, that's why the environments so good to be insuring properties today.

And the LTV is set off of the lower of the purchase price or the appraisal.

Okay. And then, just in terms of California are you, I know you are underweight California relative to California as a percentage of all mortgages, but are you keeping it that way? Are you more underweight in terms of your NIW?

You know, prior to middle of '07, you know, 3%, 4% of our business was California. A lot of that business ended up in the Capital Markets, when the Capital Markets shut down, you know, in the middle of last year, some of that business started moving to the conventional Freddie, Fannie mortgage insurance side of things. So, it's crept up to 9% or 10%, but with some of these latest rounds of the guideline changes, California is max 90% effective August 4. So, I think that will reduce that 9%, 10% downward.

And again, California is 20% of the mortgage market. So, even with that, we were a much smaller part before these guideline changes.

Okay. Thank you.

Yes. Thanks, Bruce.

Thank you. Our next question comes from Howard Shapiro of Fox Pit.

Yes. Curt, just a question for you. We're another half year into this housing crisis, you have another half year of perspective. As you look out into the remainder of '08 and what you at least tentatively or preliminarily expect in 2009, are you still comfortable with your capital position, or are you thinking you may need to raise more capital?

No, we're comfortable with our capital position.

Okay. And just one other question. I guess you talked about what you expected claims rates to be on the '06, '07 flow business. Can you tell us right now what you would expect on the '06, '07 Wall Street bulk business, what you think those claim rates will be?

Well, on that point if you go back to 12/31/07, when we set up the premium deficiency reserve, in essence we wrote off half of the risk in force. So, think of it that way. I don't know as a percent of original, but the premium deficiency then and on a go forward basis, we're still in that 50% of the in force being written off due to loss.

Okay. Definitely not higher but you're not sure if it is lower yet?

I think that's fair to say, yes.

Okay. Thank you.

Thank you. Our next question comes from John Farrow of Deutsche bank.

Hello, I just wanted to follow up on the bank amendment quickly. You guys said -- I mean I know you gave the balance at the holding company and you guys had said with the bank amendment that you were going to pay down $100 million of that revolver up at the holding company. Has that changed?

We did that. Yes. We paid down $100 million in the, I guess a week ago.

Okay. And then have there been any other talks of paying down more of that revolver with the banks?

No, no. As we stated the capacity still remains at 300, we just reduced it by 100 -- the outstanding.

And, I guess why did you guys pursue, that amendment so soon? Obviously you still had a pretty significant cushion above the previous covenant.

Because of the language in the disclosures about an event that could happen and what it would do to the other debt. I mean it's a pretty significant disclosure event and it makes a lot of people uncomfortable. Do you follow? If we were to miss the covenant and all of the other debt would immediately come due across default. So, it's a pretty significant disclosure. We wanted to get past that, if you will.

So, you guys are just try to go be proactive in the -- ?

Exactly. Exactly.

Okay. Thank you.

Long-term, we'll want to do something else, but we needed some more time.

Okay. Thank you.

Thank you. Our next question comes from Amanda Lyman of Goldman Sachs.

Hello, thanks so much. You had previously stated that you plan to seek approval to upstream $60 million of dividends during 2008 from your operating company. And I was just hope to receive an update on that. If you've taken any thus far this year and how much you expect to take in the second half? Thanks.

Yes. We had a $15 million quarterly dividend in the first quarter, we had another $15 million in the second quarter, and we anticipate the same quarterly dividend in the third and fourth, upstreaming from the writing company to the holding company.

Great. Thank you.

Thank you. Our next question comes from Donna Halverstadt of Goldman Sachs.

Thanks. All of our questions have been answered.

Okay. Thank you.

We'll take one more.

Our final question comes from James Litinsky of JHL Capital Group. Mr. Litinsky, your line is now open. Please unmute your phone.

Let's take another one.

Alright. Your final question comes from Geoffrey Dunn of Dowling Partners.

Hello. Good morning.

Hello, Geoff.

I just wanted to clarify, in terms of how you submitted your remediation plan to the GSE's or how you think about your risk to capital from a state regular standpoint. Would you already have the capital down at the operating company to satisfy those plans and I am really just trying to figure out the $485 million at the holding company? Is that something we should expect by plan to be downstreams or part of it to be downstreamed over subsequent quarters or is it up at the holding company because you don't necessarily think you need it?

I think the plan would be to, to retain it at the holding company until, until we would need it if we do.

Does your current plan suspect that you will need it or your forecast?

No, no.

Okay. Thank you.

With that I would like to thank you all for your interest in our company again as I mentioned, it's been a difficult quarter but I think MGIC is positioned well to compete in the future. Thank you.

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