MGIC Investment Corp (MTG) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation third quarter 2008 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today, Mr. Mike Zimmerman, Senior Vice President, Investor Relations. Please begin, sir.

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 third quarter of 2008 results are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; 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 include certain non-GAAP financial measures. As we have indicated in this morning's press release, we have posted on our website supplemental information containing characteristics of risk in force and flow 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 could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release. If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party 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. Also I would like to ask with the number of callers on the line if we could limit it to one question and a follow-up and then return to the queue. We'll be able to get through as many questions as we can. With that, I'd like to turn the call over to Curt.

Thanks, Mike. Good morning. For the third quarter we reported a loss of $113.3 million, with a diluted loss per share of $0.91. During the quarter we insured $9.7 billion of new business, down 31% from last quarter and 54% from a year ago. All of the business was prime business. Persistency continued to improve in the quarter to 82.1% with flow at 82.8% and bulk at 79.3%. The quarterly persistency run rate for the combined portfolio was 86%, up from 83.8% last quarter and 77.4% a year ago. Insurance in force grew modestly in the quarter to $228 billion, up 1% from last quarter and 16% from a year ago. The average premium yield on the insurance portfolio was 60.2 basis points, compared to 62.6 basis points last quarter. The decline reflects the continued movement of our portfolio to loans with lower LTVs, improved FICO scores, and full documentation. And the details are contained within the supplement to our earnings release.

Underwriting expenses were $64.6 million in the third quarter, down from $70.8 million last quarter and $87.6 million a year ago. This decrease reflects our lower volumes of new insurance written as well as attention to expenses as we weather the difficult market conditions. Last year's expenses I would remind you included a one-time charge of $11.3 million of merger related expenses. Losses incurred in the quarter were $788.3 million, up from $688 million last quarter and $602 million a year ago. Claims paid in the quarter were $330 million, down from $385 million last quarter and now total $1.1 billion through nine months. While our guidance for the year was $1.8 billion to $2 billion, it now looks like paids will approximate $1.5 billion for 2008. While at first blush this looks like good news, let me remind everyone that the pace of paids has been slowed not due to improvements in market conditions but rather due to a multitude of reasons that have delayed payment, including servicing delays, foreclosure moratoriums, court delays, and MGIC fraud investigations.

Our loss mitigation efforts from loan workouts, including loan modifications and borrow and lender titled presales resulted in mitigation savings of $71.5 million in the quarter, which was up 3% from last quarter and 14% from a year ago. In addition, our mitigation from rescissions and denials for misrepresentation, ineligibility, and policy exclusions was $45.5 million in the third quarter, compared to $24.4 million in the second quarter and $8 million a year ago. Reflecting the deterioration in lending standards in 2006 and 2007, especially in the limited documentation product area, we are rescinding coverage for fraud or misrepresentation on approximately 8% of our claims. A year ago, that percentage was 1.5%.

Competitively, MGIC's market share continues to be strong within our industry with a third quarter share approximating 27%. Reflecting the significant underwriting and pricing changes our industry has made and continues to make, our industry's share of the lowdown payment market fell to 34% in August with FHA at 66%. In August of last year, our share was 86% versus 14% for FHA. Now, while we dislike losing any business, the loss business to the FHA is clearly reflective of the underwriting changes we have made. As we stated earlier in the year, we needed to make changes in underwriting and pricing such that the 2008 and later books of business are profitable even if real estate values are falling. That is indeed is what is happening as early delinquency performance on 2008 originations indicate an ultimate loss ratio of 50% or less. The improved loss performance coupled with our decision to eliminate excess of loss captive reinsurance in 2009 should lead to strong earnings contributions in these books going forward.

As we look forward, I must tell you that these are the most difficult market conditions I have witnessed in my 32 years in the business. What makes it particularly difficult is the extreme lack of transparency relative to outcomes. On the one side, we have real estate values continuing to fall, albeit at a slowing pace, coupled with growing unemployment. We also have a media frenzy relative to the problems in the marketplace that is making more weakness become in some sense self-fulfilling. On the other hand we have billions of dollars of government intervention being allocated throughout the system to provide liquidity, and more importantly to us, to assist current borrowers in refinancing into a safer loan instrument, and to assist delinquent borrowers to modifying their note into loan payments that they can afford and that forestalls foreclosure. These efforts are just being kicked off by the government and as a result, we are unsure of the magnitude of the benefit for our company and our industry.

In addition to the government efforts, private company efforts such as the Hope Now program as well as the recent Bank of America Countrywide settlement will have a positive impact on our loss performance. For instance, approximately 10% of the loans in our delinquency inventory will be impacted by the B of A Countrywide settlement, which should lead to a significant increase in the cure rate on these loans. Congress and Barney Frank sent letters to other large lenders, asking them to make available the B of A Countrywide loan modification template to their borrowers also. Each of these programs were to help improve our loss performance. However, again, the magnitude of the benefit is unknown. So in the interim, we continue to reserve as if there will be no benefit.

Finally, our own effort in conjunction with the GSEs to modify loans where it is feasible continues to gain traction. And while our company has never shirked its responsibility to pay claims, we likewise have always enforced our policy defenses where fraud or misrepresentation is clearly present, and there was a great deal of fraud and misrepresentation in the 2006 and 2007 books of business. So the bottom line is that the new business is performing nicely, but delinquencies continue to grow in the 2007 and prior books of business. Whether these delinquent loans ultimately cure or go to foreclosure is a $64,000 question. And given the magnitude of factors impacting the outcome, both positively and negatively, we cannot make a confident prediction at this time. However, as a matter of prudent planning, we continue to consider our options to obtain additional capital, which could occur through the sale of equity or debt securities and/or reinsurance. With that, operator, let's take questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first question. Our first question comes from Steve Stelmach with FBR Capital.

Hi, good morning.

Good morning.

Curt, you you mentioned the government's Herculean efforts on the asset purchase side and others. Can you give us any sense of where you think MGIC or the industry at large can participate in the Treasury's guarantee program, third leg of TARP?

I don't know if there's a real opportunity there, Steve. As we looked at it, and frankly I was somewhat involved with that program being designed. Paul Ryan, one of our Congressmen who is a good friend, was a leading advocate of that to get a number of the conservative Republicans to participate in this process. And as they went through it, I didn't see a significant opportunity. What it is is somewhat akin to insuring I think the Wall Street securitizations that we backed away from.

Okay.

So as a result, I don't see a real opportunity for our company or industry. And I will also tell you, I don't know if there's a real effort on the part of the Treasury to do more in that area. I think there's more interest in the purchase side of the equation.

Okay. And then real quickly as a follow-up, loss mitigation opportunities, do you suspect on balance those are increasing or is this the home price depreciation making a neutral type of impact? I can't get a flavor for where you stand on loss mitigation.

I would say they're definitely increasing because everyone at all levels is making such an effort to increase, both on the government side as well as the private, such as the B of A Countrywide. 14,000 delinquencies we've identified within that settlement are on our books and so we expect some good things to happen. And as I mentioned, Barney Frank has asked other large lenders to address this issue likewise. In fact, they're supposed to come back by today with their programs, and so there's a real effort being made now. I think over the last two weeks, the realization that the bottom line on the problems are being caused by real estate borrowers -- by real estate values falling, and the reason they're falling relates a lot to the delinquencies and impending foreclosures, and that that's where we have to solve this problem on a government basis. And so I think there is an extreme effort by all involved that this is vital to success is to keep people in the housing.

Great. Curt, thanks for the color. Appreciate it.

Our next question comes from Dave Katz with JPMorgan.

Hi. Bit of a follow-up in terms of the loan mitigation. If any of the mitigation actually ends up in principle reduction, how would that affect you guys? Who would bear the brunt of the change?

Right now that's a -- right now it's not part of our claimable event. Now, again, as we look at it, in participating in this process, if that is a mechanism that we can utilize that would be more beneficial to the company than paying a full percentage payment, then it obviously is something of extreme interest to us. And it also helps keep the borrower in the home which also helps support values in that neighborhood and that community. That's also an added benefit. So while it is not a direct claimable event for us, clearly it is something we are interested in working with the government as well as the private lenders, that is a better solution.

By saying it's not a direct claimable event, are you indicating that if it were something, that was put through by the government it would fall on the servicer?

I don't know if it would be the investor most likely that would ultimately be responsible for that, if you will, cram-down in principal value.

Okay.

Whoever owns that mortgage.

Okay. And then as a follow-up, you guys were talking about options to obtain additional capital including debtor equity sales. Given the state of the market, that seems near impossible. So what other options are you considering?

Well, we also mentioned reinsurance and we have active interest in our industry because of the bright outlook going forward and so reinsurance is also very important part of what we are looking at.

Okay. Thank you.

Yes.

Our next question comes from Mike Grasher.

Thank you, good morning, Curt.

Good morning.

Just to follow up one more time on the mitigation in a different way. Paid losses remain relatively low, with regard to the flow, at least my thinking is. Delinquency is rising. How much of the mitigation efforts or the government intervention maybe is holding up the delinquency count? In other words, perhaps they would have accelerated some cures or it -- the delinquencies would have gone off your books by paying out losses?

I mean, that is a huge question right there, Mike, that we don't know the answer to. Clearly, a number of the delinquencies and again, it's anyone's guess, are there because it attracts attention to those borrowers to get help relative to modifying their notes or to deal with the valuation issue or an instrument issue. And whereas if they were current, they weren't attracting attention. So I know there's a percentage of borrowers there that wouldn't be there if all these new efforts were being made. But we can't -- I can't categorize what that number might be.

So in some way you would suggest, then, that these delinquency numbers we're seeing are to some degree artificially inflated because of those efforts, though?

I would say they're overstated, but I have no idea to what degree.

Okay. Thanks very much. Just quick question, the run rate on the operating expenses, is this a good run rate?

Yes.

Okay. Thanks, Mike.

Thank you.

Our next question comes from Donna Halverstadt.

Good morning. Thank you. Had a question related to the GSC charter and you have new disclosure about how conservatorship could increase the likelihood that the charters are changed in ways that would have a material adverse effect. At the same time, in early September, Lockhart made a comment that the charter requirements for MI or other forms of credit enhancement would not change in conservatorship. Clearly no one has a crystal ball on how any of this is going to play out, but could you give us some color on how much of that risk factor language in your disclosure is really more lawyers doing their things versus how much of that is really new building concern you have or particular chatter you've heard and how are you thinking about that risk?

Donna, we have our General Counsel, we just all looked at and smiled. We have a conservative General Counsel and, I mean, there is no inkling that any of that would happen, other than just the -- this is something that could happen. And so we have no indication that anything at all -- every indication has been from Lockhart as well as from Fannie Mae and Freddie Mac that mortgage insurance is very, very important to them. Obviously, they have a huge amount of our protection as an industry in front of them and our continued success is very much in their interest, not only going forward but going -- looking backwards and so as a result, that was an excellent counsel doing this job.

Okay. I also had a follow-up on the capital needs questions that have been asked. In terms of potentially breaching requirements related to things like policyholder position and risk to cap, I mean, how soon in '09 do you think that could happen? How much capital would you like to raise? Have you talked with your largest shareholder about things beyond them being a passive investor? And last but not least, in terms of policyholder position, the last update we had on what both the requirement and the actual was was for year-end '07. So I was wondering if you could update on those numbers?

We'll count those as four follow-ups.

Sorry.

The excess position at the end of September was $1.6 billion. Individual company consolidated about $1.8 billion and I believe the comparative number in June was $2.1 billion and $2.3 billion with respect to the MPP. Your question about the risk to capital requirement, how soon that can change in '09, it really is going to be a function of what Curt talked about earlier -- and that is what are the trends going to be in this environment vis-a-vis the delinquencies and losses. Really, it's difficult to forecast. Clearly that's an important measure, and that's why we mentioned that all things being equal, we're looking at ways to support new writings and some of that would be capital and/or reinsurance or a combination thereof.

It's just good planning on our company's part as Mike mentioned. There is such extreme volatility here and delinquencies on the one hand and then these massive efforts to mitigate by all parties. And so, if things continue at very high levels relative delinquencies, it's sooner than later and if it doesn't it's not necessary. But as prudent planning for the company, we have to explore all angles, given how we think things might turn out and when we get more transparency it allows us to move forward. So it's just part of trying us get ready for an uncertain future.

And largest shareholder?

We wouldn't be commenting on any conversations that we would have.

One last quick thing and I'll get back in line. I was curious to see the duration of your fixed income portfolio go from 4.1 to 4.6 years, especially given that mark-to-market is not excluded from consolidated net worth for purposes of financial covenants. Curious what the thought process was behind extending the duration.

I think the duration overall is about [4.6], but that's a net. We've got about $4 billion of it is managed outside with a much longer duration of 7 and that's really where we took the hit, the unrealized hit. The balance of the funds are managed very short term. That's why we get a blend of about [4.6]. We've got the portfolio mix obviously outside managed longer and internally very short relative to the paid forecast that we're looking at.

Okay. Great. Thanks, I'll get back in line.

Thank you.

Our next question comes from Howard Shapiro.

Hi. Thanks very much. Just, again, a question on the modification programs and the B of A Countrywide settlement. I know it's hard to predict the actual benefit, but I just want to make sure I'm understanding this correctly. You have 14,000 delinquencies that you think may be covered by this, and your average I think reserve per delinquency is $25,000. So potentially you could be talking about close to a $350 million reserve recovery. Am I looking at it directionally the right way? And then I had a question on accounting.

Directionally, yes. The impact might vary because of where those loans are and what the averages were. But you're correct directionally, yes.

Don't forget, as new notices of delinquency occur that are subject to the agreement, they would be included as well.

Actually, Howard, we have 50,000 15 loans within that that are covered by that settlement, 35,951 that are current and 14,064 that are delinquent. So those current loans are also being looked at because of pay option ARMs and other things of being refinanced into if you will safer instruments. It has a benefit. But you're thinking about it properly.

Okay. And then whatever other originators do subject to the Frank letter, that would be an additional benefit, just the same $25,000 per delinquency. Is that correct?

I mean, that's our reserving, so yes, it would be a benefit to the company, again. To what degree we can't make that call, but that's certainly directionally what's happening.

Okay. And then just from an accounting perspective, I just want to make sure I understand. At this point your accountants or from an accounting perspective do not allow you to change your reserve methodology even though you know or think a loan may be in modification, is that correct?

I think we need to verify it and it's got to come through if you will. Okay? As we experienced the benefits, then it will come through in the factors. Right now, it's theoretical. Correct?

Okay. So you can include it in the factors?

That's correct.

And then just maybe one final question. I'm looking at the actual B of A Countrywide I guess term sheet or settlement. It says here that Countrywide has to begin modifications on not less than 50,000 delinquent loans by the middle of 2009. So would you say 2009 and 2010 are the years where you would see the potential reversal in benefit from this or would it be longer than that?

Well, Howard, also the, goes delinquent through June of 2012. On the loans that are currently delinquent, those would occur sooner in that timeframe. But exactly when -- they're starting it December 1st. That 50,000 is a minimum requirement by the end of the first quarter, I believe.

As you can tell, we're in discussions with them already.

Okay. Thanks very much.

You bet.

Our next question comes from Jordan [Haywood].

It's actually Jordan Hymowitz with Philadelphia Financial. Couple quick questions. First of all your bulk delinquencies were actually a fair amount less than what I thought this quarter. Are you seeing a significant slowdown in both delinquency rates at this point?

Well, the rates are going higher because the book is running down, Howard. But the numbers are not going up as much, obviously, because that book's in runoff. There was a slight increase this quarter, but for the most part, that book is running down pretty much as we expected. The delinquencies were up slightly. I think there were 42,900 versus 41,300, previous quarter. So clearly the book is in runoff and the delinquencies are not going up obviously as much as the flow book which is the better part of the increase in delinquencies.

But given that the claims are much higher on the book, as that starts to run off, the dollar amount of losses should be less all out. In other words, a disproportionate amount of your claims are coming from that 20% of your book that's bulk.

Well, yes, it's also weighted as we told you -- California and Florida, which again were the big increases in delinquencies for the quarter. So California, Florida, obviously much more impacting on a dollar average than some of the other states, correct.

And then second question is right now you're reserving as if this 10% from Countrywide B of A, is going to default. But reasonably speaking, they reached a settlement with the largest issuer of -- or about the same of mortgage in the country. It would be reasonable that similar agreements would be reached with other people. So I guess my question is at what point do you say you know what, we're not going to actually have these losses and maybe some of this $375 million that's been reserved, some portion of it could get reserved back, maybe the second half.

As we tried to state earlier, the reserving has to be as the current policy is. We look at delinquencies and reserve for them according to what the experience has been. As the experience changes, you're correct, we realize it. The cure rates will go up, the claim rates will go down. But we can't factor that in, forecast that in on the proposition it's going to happen. It has to be realized in the model.

Final question is, the capital question that several people have brought up, your risk to cap is under 14 to 1 at this point. And it just seems very difficult to see that getting to below -- above 20 to 1 where some capital infusion would be needed. Could you hypothecate a scenario where that even would occur?

Well, remember, it's a statutory term, first of all, and you're currently looking at GAAP statements. And the difference between GAAP and stat, there's a couple things, but the primary difference for today's conversation would be the premium deficiency reserve. So in our P&L this quarter we had a $200 million credit. You wouldn't have that on the statutory statement, all right? So that's a $200 million swing, as is non tax deferred items, make it another $100 million possibly. So as delinquencies go up in the statutory statements and we book higher incurreds, then you have higher losses versus GAAP, notwithstanding the PDR release. If in fact the losses continue at these current trends, then you would continue to decrease surplus and depending on what risk levels would go, you could get higher than 25 to 1. But it's a function of the statutory statements and they're different than the GAAP, number one, especially with respect to the PDR this year. And then ongoing, the increases in delinquencies, all of that as Curt said earlier is subject to various happenings and some of the things we just talked about. But clearly, mathematically, that could happen. Whether or not its does is going to be a function of the economy and some of these other factors that we talked about earlier.

Okay. Thank you.

Thanks.

Our next question comes from Bruce Harting.

Where do rates need to go to get some refinance activity back up? And you talked a little bit about the bigger picture thing changes you need to see happen, but -- and what are the impediments to ARMs if the Fed does push on the short end a little more downward, what are the impediments to an ARM market coming back to give people with decent down payments a viable alternative in that product?

On the interest rate relative to refinances, Bruce, I don't think the interest rate is the key component. It's the underlying value of the collateral. And can they refinance because of the deterioration in the value of the property? So if values held and rates drop at all, then you're going to bring back a lot of borrowers and refinances. But the issue has been the collateral, not the interest rate. On the ARMs right now, Bruce, they're -- fear is probably the right word in the marketplace on the side of borrowers and consumers, again, because of the media coverage of what's happening that I don't know if -- it's going to be a while before there's an active ARM market, I think, that will be attractive to consumers in that I think virtually everyone wants to lock into a fixed rate mortgage. So until the hype goes away, I think that market's lost.

And are appraisals -- can you just talk about the nature of the appraisal business right now and your faith in those or lack of? And do they tend to be pro cyclical so sort of at the peak of the market they were not conservative enough and at point in the market are they trying to lead the market, getting out ahead of price declines? And the last point was is there any good news out of any states right now? Are you seeing any of your markets showing any stability, beyond what we see in the Case-Shiller numbers thing?

On the appraisal, they look at recent comparable sales. So whether you're an up market or down market, they tend to lag because they're looking back X many days at the sales. So to the degree some markets are starting to recover, they would be lagging the current values. And I think in the past, one of the areas in particular, '06 to '07 books, we're finding a lot of issues with past appraisals, that's one the key areas of misrepresentation.

I think on the markets, California actually -- I'll let Larry comment on it. At least from my analysis, both on a supply basis as well as some of our indications, it looks like it's getting closer to bottoming.

On the California, the interesting statistics there is the month's supply has steadily come down now. People say well, that's because maybe some people who had their homes on the market pulled them off because they couldn't sell them at the price they wanted. But the sales activity in California has increased, so all in all I think there's -- California is showing some signs of life much different than Florida. Florida is still problematic. We're not seeing much change, improvement there. I think aside from the home values on a go forward basis, I think the thing to watch in that is the impact of the jobs. We've had nine months now of job declines, and the impact of that I think is probably on a go forward basis is probably more of a question or concern than the home values at this point.

Okay. Thanks.

Thanks, Bruce.

Our next question comes from Nat Otis.

Good morning, gentlemen.

Good morning.

Just on the premium yield, seems to be a little lower than might have expected, given some of the new pricing, just wanted to see if there was any color there.

The pricing took effect for us October 1st. So that's just starting to take place. I think as pointed out earlier in the notes, we're not doing any more A minus reduced doc and higher LTVs. [Hunters] are pretty much gone. So the business we're doing is the prime 90% to 95%. On top of that, remember end of '06, beginning of '07, we halted bulk and bulk had a much higher premium rate, so the bulk has got a higher premium rate. That's declining. These newer products, it's not the high premium products, and the rate increase just took effect October 1.

Fair enough. Thank you. Just follow-up question, actually not a follow-up question but one quick question, any thoughts on the prospect for maybe increasing the tax deductibility above the $100,000? Dealing with Washington right now it seems could be a logical method to help spur things, just any commentary on there?

No, we really haven't had -- we're thrilled with what they've done, so at this point, given everything else, that has not been a priority.

Okay. Thank you.

Our next question comes from David Hochstim.

Good morning.

Hi, David.

Wonder if you could talk a little bit more about what you're finding in the way of fraud? You noted that you're rescinding claims at a much faster pace. Seems like it's doubling every quarter. Do you think that trend continues?

Well, I don't know how -- I think as Larry and I talked on that, 8% that I referenced, I think 13% or 14% was related to bulk business and 4% to the flow business. So I don't know how much higher it goes. I will tell you, on the Alt-A loans, there's a very, very high proportion of that that's fraudulent or misrepresentation of some sort. So I don't know if that will grow significantly higher than it is now but it's been quite an increase.

And then the two major I guess areas of the rescissions would be the appraisals, which we talked about earlier, and the income, which is tied to these Alt-A type of loans. And that was more prevalent in '06 to '07 valuation issues getting pushed and some of these products that are no longer done Alt-A. So as we go forward, my guess is these rescission numbers go up, largely because as we go forward the '06 to '07 books are at the peak or in the case of the '07, still on their upward leg of their delinquencies, whereas the older books that didn't have some of these issues are waning. So more of the delinquencies and claims in the future will come from the '06 to '07 where there's more of an issue relative to income and appraisal. I see it going up. I don't know how much more. But I see it trending upward.

Are those things that you don't identify until loans are delinquent and then you go in and start to look? It wouldn't be looking for these problems before the delinquency problem?

Basically when they're delinquent, well delinquent, we start focusing in on them, always have, and especially those from the more recent book because you always wonder why a loan you just did a year ago is now delinquent and in foreclosure.

Early delinquents. You're right, we don't look at them until they go delinquent, David.

I'm not sure how classify the business. For example, if you were credit enhancing loans that were lower than 80% LTV that were originated for the GSE by lenders, and you were providing like pool coverage, would you be involved in investigating that fraud? Or you're the secondary coverage so it's really GSE's problem? On the Alt-A stuff, I'm thinking.

The bulk primary policy and the flow primary policy is similar. We have a little bit more rights in the way of the bulk policy, but whatever the type of policy is, all in all the rights are similar. So we -- every claim, especially those from newer books, we take a look at.

Including the pool policy, David. We investigate those just as thoroughly, maybe even more so because we have more coverage.

And then could you just give us a sense of the recent trends in California and Florida paid claims, the last I guess quarter or two? Flattening out a bit?

We're scrambling to get it right now.

California, dollar paids were $82 million versus $92 million in the second quarter. Florida was almost $32.6 million versus $36 million, so those are the two largest and then the next state would be Michigan at $21 million versus $27 million.

And if we looked at average paid claims, would it be flattening out at all or -- ?

Within the geographies, I would say the average claim is pretty stable. We anticipate a slow increase on the severity as we move into more of the '06 to '07 books that had a higher balance and California and Florida claim activity peaked. So we're getting close to that point but that's really the pressure on severity is coming not so much changes within a book within a geography, but moving the claims to the newer books and a bit more into California and Florida.

Okay, and at what point do you think you would be comfortable forecasting paid claims for 2009?

At the end of 2009.

I figured.

We said that in unison. We weren't even practicing.

Okay. All right, thanks.

Thanks, David.

Our next question comes from [Craig Carl].

My question's been answered. Thank you.

Thanks, Craig.

Our next question comes from Mike Grasher.

Couple follow-ups. Just the discussion around the B of A Countrywide deal and Congressman Frank's letter. Possible that a settlement might be an option, much like you did at the end of '07 in terms of a premium deficiency reserve or a vehicle like that?

I don't know what --

Mike, the settlement is -- it's not ours.

We're not involved. It's just that the settlement that they reached with the attorney generals to modify loans and refinance loans, et cetera, et cetera, and they've got a whole litany of different mechanisms that they use by instrument. We have out of that settlement amount of I think it was $8.5 billion that they settled with the attorney generals. It so happens that 50,000 loans that we insured are part of that settlement and 14,000 of them are delinquent. So we should get the benefit relative to whatever modification or refinancing that happens at MGIC.

And I understand that. I guess to move this -- to get this issue passed, and to move forward and I would presume it would clear up some of the capital questions that maybe are there in terms of funding the growth, just to take those delinquencies and the potential for further delinquencies on those that are current off of the table and just move forward.

Well, Mike, again, we're not -- this is Mike Zimmerman. We're not in control of the process. So Countrywide has a staff in their loss mitigation and they're still working through these details and these are all estimates. They've identified borrowers -- they're going to stop foreclosure initiations and completions until they can confirm whether or not a borrower qualifies for either this program and/or another program outside of the AG settlement. But that's entirely within their operational area. We're working with them on our loans so that if some loans, as Curt mentioned earlier, wouldn't qualify under these programs, that with a little more assistance from us possibly could. But there's no way to make a match and just change them all and block and say we expect all of these not to -- to not result in claim payments. Now, down the road, if that -- as Mike Lauer mentioned earlier, if we see cure rates changing as a result of that, then factors could change. But it's too -- a PDR type thing or a block of removal of delinquencies and reserves I think wouldn't be the right way to be thinking about it.

Okay. Fair enough. And then Curt, in your guidance for the year, did you -- do you clarify or differentiate between bulk and flow?

No.

Okay.

Thanks, Mike.

Thanks, Mike.

Our next question comes from Ron Bobman.

Good morning.

Good morning.

Seems like some Midwestern favoritism letting Grasher go twice before me.

I had no control over that, just like the settlement.

My first question is pretty simple. The income verification and the appraiser -- appraisal actions or maybe inaction that is leading to the rescission activity -- what exactly is the deficient component to income verification and appraisals that are giving cause for you to rescind coverage? That was my first question. Thanks.

On the income part, the borrower's income isn't what it was as stated on the application. And so obviously that was a major decision on underwriting the loan. And so if it isn't -- and the follow-up on that, when you find out indeed the income wasn't as submitted, then the question is was that borrower generated or lender generated. So that's the aspect on the income. It just doesn't match what the borrower actually is making. On the appraisal, I mean, I don't know if it's faulty or if it's -- if there's a --

Well, typically, the typical scenario is the value of the home was supposed to be $200,000, and now we get a retro appraisal because of the current value -- instead of $200,000 12 months later it's $130,000 when the market only was down $10,000 -- you've got to say, well, is this just an oddball or was the original value overstated? So we get a retro appraisal. So we go back, actually have a third party go back to the comps available at the time the loan was originated and to see if it's the oddball case or if the original appraisal was overstated because appropriate comps weren't used. And once again in both cases where it's value or income, we only act when there's a material difference and we believe that as a result of that has cost us a claim.

Thank you. That answers my question. Why on a prospective basis wouldn't the company on a random basis conduct audits soon after the issuance, the time of coverage issuance, as a, whatever, a safeguard or hey we're looking over your shoulder which we haven't done in the past but we're going to start now?

We do QC audits and aside from let's call it fraud, we just sometimes much more of the issue is just too aggressive underwriting if you will. And we do that and identify those issues with customers and try to get them corrected so they don't get to that claim. We would rather correct an issue upfront rather than at the back end at the time of claim. By and large, we do QC, always have. We identified more in the way of underwriting issues than these fraud issues, but if we do come upon something, we would act on it then. But those are very few and far between.

I mean, you could think of it in terms of exception reporting. Where we see patterns that are out of line with either lenders' past performance or a geography or anything of that sort where we see patterns, then we will QC those more than just business coming in as usual. So we do a lot of QCing, but it's dependent on unusual patterns occurring.

Okay. And has it come to the point where there will be appraisers and broker originators who are going to be red lined, so-to-speak, given the frequency of rescissions that have been on their books? Come from their books, from their appraisals?

There always have been appraisers, brokers, I don't know red lined but disapproved. A lender who has active relations with various brokers, if the broker's business performs materially worse, at some point they would stop doing business with that broker.

We've been doing that for quite some time, tracking that. It's information that is difficult to share industry-wide because of legal reasons, but clearly on a company basis, we have that information and track it pretty closely.

Thanks. Another area of question I had was on your market share. I think you said --

Approximately 27%.

What was it the prior quarter?

25%.

And who are you gaining share from?

Don't know.

Don't know. And if you're not a guaranteed AIG entity, any change in their competitive position?

You'd have to ask them that. They're a good company.

So you don't see any change?

No, not really, not quarter-to-quarter, you don't see a change, no.

Okay. Thanks a lot and best of luck.

Thank you.

Our next question comes from Howard Shapiro.

My question -- follow-up was answered. Thank you.

Thanks, Howard.

Our next question comes from Joe [DeCarlo].

Hi, good morning, everyone.

Good morning.

Thanks for hosting the call. From what I got out of what you said earlier, the 12.3 risk to capital ratio is a GAAP number, is that correct?

No, that's a stat number.

I thought you said what we're looking at is from statutory accounting.

You're looking at GAAP financials. The risk of capital is a statutory term.

That answers that question. I was a little confused on that. Also some other questions have been raised, but where do you guys currently stand with respect to holding company liquidity?

There's $402 million at the holding company.

Okay. And do you see that changing by year-end?

Only modestly for the interest payments we're making.

Okay. All right. That's fair. Then that's all I wanted to ask.

Okay. Thanks, Joe.

Thanks.

Our next question comes from Larry [Zachariah].

Hi, my questions have been asked and answered. Thanks.

Okay, Larry, thanks.

Our next question comes from Donna Halverstadt.

Thanks for letting me back through. Just a couple details related to the whole co-liquidity. Do you have any operating company dividend capacity left for 4Q '08, and what are the expectations for '09? And with respect to the revolver, you paid it down to $200 million -- any plans to pay it down further in the near term?

Couple things. The holding company or the -- I guess you're talking about the writing company dividend [of] the holding company.

Yes.

We haven't made any -- we made a dividend this quarter of $15 million in the third quarter. And relative to '09, that will be a function of operations obviously. With respect to the debt, I'm not sure we would pay it down. It's due February or March 10, I believe.

Okay. And so if you paid -- if you upstreamed $15 million, I think that leaves $15 million more to hit the $60 million you initially talked about for the year.

We don't have a normal dividend. They're all special dividends. You follow?

Yes, absolutely. One last question, just because this came up with another company in your industry. Do you have any intermediate holding companies that might have cash or liquid investments in that that we might not have heard about that you have access to?

No.

Last question. Your unemployment assumption for your loss forecast I think last time I asked you were assuming 5.5% to 6% -- is that still your assumption and what are you going to be assuming going forward for unemployment?

We largely incorporate the Moody's Economy.com forecast both for home prices and employment, and I couldn't tell you offhand what their latest one is that we ran here in the third quarter. But my guess is it's higher than 5.5% to 6%.

It's significantly higher. I think it's closer to 8% ultimately. But I don't know that offhand, Donna.

Do you know offhand what the impact of 1 percentage point increase on unemployment rate does to your forecast for losses?

There are so many other factors relative to values and funding availability and things that -- to give you a number on that it would be meaningless.

Super. Thank you so much.

Our next question comes from Jordan Hymowitz.

Hey, guys. One more question. When I look at the flow versus bulk numbers, I mean, the bulk losses are almost 80% higher than your flow losses. So if your bulk business starts to really stabilize here, the decline or the loss, the relative increase of number of claims declined this quarter, wouldn't it be reasonable to think that even if your prime business continued to accelerate in frequency that the dollars losses could stabilize more because there's such a lower payment on flow?

Just to be clear, you're talking about the average claim payment; correct?

Yes. The average claim with bulk is $73,000. Your average claim with bulk is $40,000. Bulk pays 35% of delinquencies, 21% year ago and a year from now it will probably be under 25% since you've written no new bulk business. So hence the dollar amount of losses could at least stay flat even if delinquencies continue to rise.

The bulk business, we think has plateaued or about so and is waning and so that's a very valid scenario.

Okay. Second, you said the average paid today is $82,000 in California versus $92,000 last quarter?

Those were the actual dollars paid, total dollars. Someone asked me what the dollars claims were, some of the high dollar claims were. In Florida -- I mean in California we paid total, flow and bulk $82 million for the quarter and $32 million or $33 million in Florida and $21 million in Michigan. We break that out I think in our --

The average pay for California in the flow in the second quarter was approximately $80,000. Approximately $83,000 in the third quarter and for bulk it was second quarter approximately $123,000 and approximately $122,000, so call it flat really quarter-to-quarter.

So for the average for California was $83,000 for flow and $102,000 for bulk?

$122,000.

Thank you.

Thanks, Jordan.

Thanks, Jordan.

Operator, any more calls?

I am not showing any other questions, sir.

All right. Thank you. If not, thank you all for participating. Have a good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.