MGIC Investment Corp (MTG) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your fourth-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this is being recorded. I would now like to turn the conference over to Mr. Mike Zimmerman. Please go ahead.

Thanks, Mary. 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 results for the fourth quarter of 2008 are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; and Executive Vice President of Risk Management, Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website which is located at [MTG.]MGIC.com under investor information, includes additional information about the Company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures.

As we have indicated in this morning's press release, we have posted on our website supplemental information containing characteristics of our primary risk in force and flow new insurance written, as well as other information which we think you will find valuable.

During the course of this call we may make comments about our expectations of the future, actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release.

If the Company makes any forward-looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the press release.

Now before I turn the call over to Curt I wanted to let all the participants know that we'll be trying to end this call a little bit before 11 o'clock Eastern Time, about five or 10 minutes before the hour, given the scheduled time of the inauguration ceremony. We'll try to get all participants that wish to ask a question; however, if your question has not been addressed during the Q&A, please feel free to call our Investor Relations department that can be reached at 414-347-6596. Thank you. And Curt?

Thanks, Mike, and good morning. For the fourth quarter we reported a net loss of $273 million and for the year a loss of $519 million. During the quarter we insured $5.5 billion down from $9.7 billion last quarter and $24 billion a year ago. The lower volume reflects the much more stringent underwriting guidelines and increased pricing that we have in place versus a year ago, as well as the increased pricing the GSEs have added to conventional loans.

Our market share remains strong approximating 23% to 24%, but our industry has lost significant business to the FHA. Persistency continued to improve in the quarter standing at 84.4% versus 82.1% last quarter and 76.4% a year ago. Our quarterly run rate was 88.2% versus 83.6% a year ago. Insurance in force of $227 billion was down slightly from last quarter but up 7% from last year's total of $212 billion. The average premium yield on the insurance portfolio was 62.4 basis points, up from 60.2 basis points last quarter, primarily reflecting $11 million less being ceded to captives during the quarter.

Underwriting expenses were $66 million in the fourth quarter versus $64.6 million last quarter and $74.6 million a year ago. We have made staff and expense adjustments throughout the year reflecting our lower volumes. So I think the fourth quarter is a good indicator of the run rate for expenses in 2009.

Losses incurred in the quarter were $903.4 million, up from $788 million last quarter, reflecting a 30,000 -- a 30,288 increase in the delinquency inventory in the quarter. Claims paid in the quarter totaled $310 million down from $330 million last quarter. For the year claims paid totaled $1.4 billion.

A year ago we thought paid claims would approximate $1.8 billion to $2 billion. The reason we didn't pay more in 2008 was a combination of reasons including foreclosure moratoriums, servicing delays, court delays, MGIC fraud investigations, borrower loan modification discussions with servicers, MGIC loan modifications and MGIC claim rescissions and denials for misrepresentation.

While it is difficult to assess the impact of the above factors, let me try to quantify those numbers where MGIC is involved. In the fourth quarter MGIC worked with servicers/investors to modify approximately $63 million of MGIC insured loans and for the year modified approximately $235 million worth of loans. By way of comparison in the fourth quarter a year ago that number was $28 million and for the year $82 million for all of 2007.

These figures reflect our traditional redefault rate of approximately 50% as loan mods historically did not always lower the borrower's payments. But with today's new modification programs centered on reducing the borrower's payments, we would expect a higher success rate going forward. Although we're not sure to what level.

As you are aware, there are a number of loan modification programs in the marketplace from those negotiated by the GSEs to those instituted by major lenders. Of our 182,000 delinquencies, approximately 60% of the delinquencies are GSE loans and 40% are private label securities or portfolio loans. Out of this universe the key will be how many will actually qualify and, given that we don't yet have updated income information and property values, it's difficult to assess the size of the benefit to us.

Additionally, if CRAM DOWN legislation is passed it will also benefit us. But again, it is too early to speculate if such legislation will indeed be passed and, if so, what the ultimate benefits will be.

Finally, claim rescissions and denials have been growing reflecting the significant amount of fraud and misrepresentation that occurred on the late '05 -- the entire '06 and '07 books of business. Rescission denials totaled $85 million in the fourth quarter and $171 million for the year, approximating 15% of claims resulting in the fourth quarter versus 8% last quarter. By way of comparison there, rescissions denials totaled $7 million in the fourth quarter a year ago and $28 million for the year. So it is a growing number for us.

So as you can see, the claims paid forecast for 2009 is difficult to assess. The one thing I can tell you with conviction is that it will be higher than the $1.4 billion we paid in 2008. How much higher is subject to so many moving parts that we think it best not to try and quantify at this time until we have more transparency.

Regarding the remainder of the outlook for 2009, originations should approximate $1.7 trillion to $2 trillion, and with an 8% MI penetration rate and 23% to 24% market share, our NIW should approximate $35 billion. Expenses should be as I discussed earlier with claims paid and delinquencies being difficult to assess accurately at this time.

While we think delinquencies will peak in the third quarter of this year, the key will be to what level will they grow, especially with the growth of unemployment we are experiencing, until they do finally peak. This has significant capital implications for us. As we talked about last quarter, we're not sure if our capital level in the second half of 2009 will be sufficient to meet new insurance written demands, especially if the economy continues to weaken.

As a result we initiated discussions with the US Treasury late in October of last year to determine our eligibility for TARP capital. And while available TARP funds were used for other purposes, given the new administration's focus on preventing avoidable foreclosures and the importance of supporting real estate values through new lending activity which will require continued access to affordable and sustainable low down payment mortgage alternatives for first-time homebuyers, I would hope our case, as well as that of our industry, will be looked at favorably. With that, Mary, let's take questions.

(Operator Instructions). Donna Halverstadt.

Good morning, gentlemen. I had a couple of questions; one I wanted to ask about was what level of tax and loss bonds you had left at year-end '08? And just more generally, as a follow on, if you could talk about the use of such as a source of opco liquidity? And if you could also talk about the quantum and timing of cash recovery from captives? And in turn I'm just trying to get a better feel for how much of your investment portfolio you may need to sell this year to cover claims payments?

There is a lot of stuff there. Donna, the tax and loss funds, we had about $400 million left at year end to redeem and I believe we redeemed those this last week so that we won't have any further redemptions. And I think last year we redeemed somewhere over -- almost close to $700 million. So that's part of the cash flow increase for the year. You see we warmed up about $8.2 billion in cash and investments.

A significant part of our portfolio has been shorter in duration, as you can tell from that lower yield, so we've already planned for that this year to have more than enough cash available to pay claims. And of course, we also have premiums and investment income, obviously. So I don't see any significant change in the portfolio during the year; we planned for that already. You had another question I think on captives?

Just the timing and amount of cash recoveries. But also on captives, your sup now points out when treaties can be terminated and it looks like some have been. I was curious if you can give us any color on the amount of reinsurance that you now won't get from those arrangements that you would have otherwise been entitled to for the ones that you've terminated?

Well, let me try to answer that question. The captives are required to maintain a minimum level of capital in order for us to include new business. If they drop below that level they're put into runoff, meaning past business continues ceding and is still funded by the trust account, but there would be no new business.

And then I guess there's another trigger which I think you're alluding to here as of late. To the degree the loss reserves, the ceded loss reserves equal or exceed the trust account assets, then typically the agreements call for a termination so there would be no new premiums being ceded. We would seize the trust account and pay the claims ourselves out of the funds in that trust account and that's what's been happening of late.

The ceded loss reserves in a few cases have consumed or totaled the trust accounts so the trust account assets pass through us so we got the cash and now we'll just be paying those. On an accounting basis going forward we won't conclude those paids for those agreements in the captive recovery lines because we have the cash -- they gave us the cash for those claims.

Let me just clarify something, Donna. In the fourth quarter we did have a number of treaties that were canceled. That's why you see the adjustment, we made a footnote -- I think its footnote number 6 relating to that paids -- you see a $260 million credit. So that's $260 million that we received in actual cash or securities increasing our cash, decreasing ceded premiums and there was a corresponding decrease in the reinsurance recoverable assets there.

Right. But the way I read the disclosure, and tell me if I'm wrong, when you terminate -- when the ceded loss reserves exceed the trust account balance, wouldn't that delta represent an amount of reinsurance that you had expected that you won't be getting?

Donna, this is Mike Zimmerman. We can go through it off-line, but I think the schedule you maybe want to look at as compared to the third quarter in the portfolio supplement to the fourth quarter as far as by book year what risk is in force and you can see the change. But the fact that -- your other statement sounded correct (inaudible) think of it that way.

Okay.

That's what triggered the events, not necessarily what the losses would be.

Okay. And then you also had some new disclosure on -- that if you're unsuccessful in selling Australia in 1Q '09 you may place that book into runoff. Are you able to give any color on the probability of such a sale happening? And alternatively, if you do end up placing it at runoff would you be able to bring back any of that capital to the US MI operations immediately? Or is that something that would happen over time as the book runs off?

We're in the midst of discussions relative to Australia, so we can't comment further on that process. And we'll be evaluating bids on that in the near future relative to the -- if we go in runoff we're not able to bring the cash back at that point in time.

All right, and then one last quick question and I'll get back in line. Can you update us on your conversations with the GSEs in terms of just ongoing eligibility and the role of MIs in the GSE food chain generally? I know there's a lot of uncertainty there, but if there's any new color there that would be helpful.

There really hasn't been relative to the GSEs on a company basis. There have been discussions on an industry basis, which I would say are positive. Both are supportive -- very supportive on our industry. And I'd also say that is also the case from the regulator of the FHFA has been in meetings that I've attended with Jim Lockhart. They're very supportive of our industry and the role we play relative to assisting the GSEs and making home ownership more affordable.

Okay, great. Thanks. I'll get back in line for a couple cleanups.

Dave Katz.

I had a couple of questions. First off, with regard to additional capital raises, which you said could be done through sales equity or debt securities and/or reinsurance, you guys have been saying that for a couple of quarters now. I was curious what progress you've made on that? And given that the market is not necessarily getting any easier for you to do that when the plan to come to market is?

Well, it would be a very difficult time which related more to my TARP comments than going to the private markets relative to a capital raise.

So does that mean pending the TARP decision the capital raise is off the books?

I think it would be very difficult to accomplish, it doesn't mean anything is off the books. I'm just reflecting on the current marketplace; as you well can see it would be very difficult to accomplish. Now we continue to do things in reinsurance, but raising of new capital in the private markets would be very difficult I think at this time.

Okay. And then you had mentioned before that you expect delinquencies to peak in the third quarter. I was hoping that you could explain why you thought that might happen in that quarter specifically?

Well, let me try to answer that. In the fourth quarter here the delinquency inventory was up 30,000 from September to December. $24,000 of that was on the flow side and about $12,000 of the $30,000 was the '07 flow book of business. So that's a newer book, it's a larger book and it's in some difficult economic times.

So a large part of the variance in the forecast and the timing is when actually does that flow '07 book peak in terms of new delinquencies? And most of the other books are flat, maybe up slightly, some of the older books are down. But it's really that flow '07 book that it's hard with all the moving parts in the economy, unemployment, to exactly call the peak and the height of the peak. Our current set of assumptions looking at the latest forecast for home prices and unemployment suggests third quarter of '09.

Okay. And with your view on the economy, does that rely on any particular forecast?

Well, we had -- as we said in the past, we typically use the Moody's economy.com forecast. Nationally I think they're calling for home prices would be an OFHEO home price which we think ties to our business better. Home price decline in '09 of 6.7 nationally and they're calling for employment -- or unemployment I think peeking around 9% sometime early 2010. So those are the numbers we're using.

Okay, and then finally, you had said that your view on potential losses for the books has increased since even the third quarter at the time when you prepared the 10-Q. During your prepared comments I didn't get a good feeling for exactly how much it's increased. Would you be able to quantify that?

Well, some of it's just mathematically -- you saw the increase in delinquencies in the fourth quarter. And then, as Larry said earlier, probably the impact on unemployment has affected some of the older books so what we would have expected -- an earlier decrease in the older books maybe now that line has straightened, if you will, for another quarter. So, we're looking at higher delinquency levels and that's putting the pressure on the incurred loss line.

Okay, well I guess in the absence of a specific number there, given that you've identified that you might violate the consolidated net worth covenant, but yet you have enough cash at the holding company to pay off the revolver --.

That's correct.

What would the decision be there? Would it just be if you were on the threshold of violating the covenant you would use the cash to pay down the revolver?

Yes, as we said earlier -- I mean, with respect to the revolver, it's got some covenants net worth covenants and risk to capital. And in the event that we were going to violate one of those covenants and then there would be cross defaults to other debt, we certainly wouldn't do that. The alternative would be to pay down the debt.

Okay. And I know the cash at the holding company as of October 31st was $391 million. What's the current balance?

It's very close to that $300 million -- it's around $389 million I think or $393 million, something like -- it's in the $390 million area.

Okay, thank you very much.

Jordan Hymowitz.

Hey, guys, a question for you. The actual severity of average claim payment went down for the first time in many quarters from 53.9 to 50.6. Can you state how much of that was related to -- there really haven't been any CRAM DOWNs modifications or other things. In other words, are you paying less on modifications or negotiations than normal? Is it because of state variances or help me understand the decline here?

Within a geography -- within each of the states the average claim paid that we've been paying quarter in and quarter out has been relatively stable. Through the past year or so the average claim has gone up overall because we started seeing more claim activity from the higher cost states -- California, Florida in particular. And a large part of those claims are on the vault side.

What's driving the average severity down here in the fourth quarter, once again within the states, each of the states, the average is very flat on similar to prior quarters. What's driving the decline is fewer paids from the high cost dollars -- California and Florida in particular. And a large part of that is being driven by the rescission activity, the rescission rate that Curt mentioned was about 15% in the quarter, higher on the bulk business and that in particular impacted California and Florida more so than other parts of the country.

So as a result of the increased rescission activity in California and Florida, California and Florida claims were down as a percent of the population driving the overall severity down.

And Jordan, again, you can see that these slides are -- looking at the flow average paid claim actually went up sequentially from 39.1 to 41.6 while bulk went down from 73.4 to just under 67. So highlight what Larry just indicated.

And am I understanding correctly that both California -- I think California, I'm not sure about Florida -- but I think they're about to be under a foreclosure memorandum at this point?

(inaudible) moratoriums?

Moratoriums, I'm sorry.

Well, the GSEs have moratoriums through the end of January and then there are various state and local moratoriums, even down to the county level.

But California has a statewide one now going on for three months, don't they?

I don't know that off the top of my head.

I know there are a number of large counties in California that do, I don't think the state has done so.

Okay. That's it, thank you.

[Mike Grondel].

Hey, guys, just a few questions. First off, the year-end cash investment balance of $8.1 billion was up from $7.7 billion. You guys had mentioned some captive reinsurance and some potential tax and loss bond sales. Could you just kind of I guess again reiterate what the increase was or what that balance would look like today?

Say it again. What it is today as of today?

Yes.

As I said, we received another $400 million from tax and loss bonds this week, so it's up give or take $400 million.

Okay.

Notwithstanding maybe some payments we made.

Mike, that comment on the captive is reflective already in the year-end numbers.

Yes, the $260 million that was recovered from captives at year end, that is in cash.

That is in there, okay it was just $400 million from the tax and loss funds? Okay.

That's correct.

Okay. And then secondly, you guys have a calculation risk to capital that I think is 16.1 now or 16 to 1, that was up from about 13.9 to 1 at the end of the third quarter.

Correct.

Did you use the same formula to calculate both of those numbers?

Yes.

Okay. Thank you, guys.

Mike Grasher.

Hi, good morning. Mike, I believe you mentioned the '07 book at 12,000 delinquencies. Can you give us some numbers around the '06 vintage? Were the numbers up or down or --?

Mike, this is Mike Zimmerman. In the supplemental information we give you, on the flow book anyway, those delinquencies by vintage.

Okay.

I can pull up the third-quarter comparison, but you can do that comparison quarter to quarter as far as total delinquencies and flow book.

The flow '06 book is about up 4,000 in the quarter; flow '06 up about 4,000, flow '07 up about 12,000.

Okay. And then on the accounting, Mike, with regard to the loan modifications, the delays and that, when you are -- I think the number was 63 million in 4Q '08 that Curt had mentioned. Are you releasing reserves with these or what's the accounting around that?

No, first of all with respect to that reserving, the reserve rates, claim rates we're using are experience rates and that projected some of the benefits that Curt is talking about. Therefore you see the build in the reserves. Because we've not seen that much experience benefit yet and that's the unknown relative to predicting claim rates and paids in '09. And so I think that's important to understand. Now the second part of your question dealt with what?

Just in terms of how much it would have been impacted by that?

I think to the extent that the things that Curt talked about, where we actually have a rescission, that is a denial of a claim and the notice has been eliminated from the reserve, that's correct, where there is an actual rescission. The extent to which those rescissions increase, and some of the items that Curt talked about that are possibilities, those items have not been built into the reserve factors.

Okay. All right, thank you.

[Scott Frost].

Could you -- you talked about the FHA taking share. Could you give us an estimate of what the increase in share and has been over the year or over the quarter for FHA versus the industry? And it seems like you're saying that they haven't taken much share from you, is that right? If it's not, could you tell us what the decline in premium that you've seen or in force that you've seen represents a share being taken by FHA versus just an overall decline in originations?

Yes, I said just the opposite; they've taken a great deal of share from our industry. And Mike, do you have the --? --

Yes --.

I meant you specifically. Are they taking it from you as well as the industry?

They're taking it from the industry. So, yes, we're giving up 24% of it because that's our market share. And Mike will give you the quantification of it. But it is business that, given the capital position of the industry is concentrated on much higher FICO scores. So where we're losing the business is on the 680s and below FICO scores to the FHA. But there's a lot of that business that's very profitable also. And relative to how much we've lost year over year, Mike?

Yes, taking it from the industry penetration rates were about 15% to 20% in the third and fourth quarter of last year and it's down now currently to about 8% or 9%.

Okay.

So (inaudible) of the industry shift and then you can see our market share from the published numbers there as well.

So it's not being lost to any individual company, it's being lost collectively by our industry. And then your proportion of that on a market share basis.

Okay, thank you.

Ron Bobman.

I've got two questions. And they might be a little bit off center. But I had a question about earthquake insurance and whether, particularly in California and the homes that the industry insures. My understanding is that earthquake coverage is not a requirement. Is that true? And is there any change?

Well, on our mortgage insurance policy, and this is an industry, we have special hazard protection such that if an earthquake or major fire or a hurricane, whatever the case may be, natural catastrophe, would happen the insurance -- you have to restore the home to its normal condition, wear and tear accepted for that point in time. You can't submit a claim if there's an earthquake unless you restore the home to what it was prior.

So that's not a condition that those catastrophes don't impact our industry per se. The point where they impact us, however, is if employers are wiped out through one of these natural catastrophes and the workers at those lose their jobs because of it and then can't pay on their mortgages. But the actual event itself doesn't have an impact on our insurance (multiple speakers).

I'm sorry, if the homeowner -- if the home is totaled and the homeowner walks away from it because they don't have the insurance to pay for repairs, what happens then?

Well then, the lending institution, if they haven't required insurance on that they would be stuck or the investor wouldn't have a total loss.

Okay, but they can't submit a claim -- the lender could not submit a claim to MGIC?

No, that's excluded from our coverage; they have to restore the property before we pay a claim on it.

I see. Okay, that was my first question, thanks. I had a question, if I remember correctly last year I think this call you had the call, then a day or two later you came out with the comp -- the compensation, I think it was bonuses and other comp levels that people were paid for I guess the preceding period. And so I was curious to know, given the rough year that we've all been through, what is the current plan for discretionary comp, discretionary bonuses for this prior fiscal year? Thanks.

Yes, there will be no bonuses or salary increases for the executive officers.

Okay.

To the entire organization there will be no salary increases either.

Okay. Thanks for the disclosure and best of luck.

Thank you.

(Operator Instructions). Donna Halverstadt.

Hi, Mike, I was wondering if you could just detail for us both the required and actual MPP as of year-end '08?

Donna, it's preliminary, but it's -- I think we're about 1.1 in excess of the MPP; we were about 1.5, 6 or 7 at the third quarter.

Okay. And then last question. Any industry chatter you're hearing on any potential new entrants?

Yes, we've heard that one company in particular is interested in writing reinsurance and then if also was thinking about the opportunity to be a direct writer. And I think they're still reviewing that process. But, yes.

And that's a company that's already active and in the business?

Not as a direct writer. I know they are soliciting companies relative to reinsurance.

Okay. All right, thank you.

You bet.

(Operator Instructions). [Mike Grondel].

Yes, just a couple follow-ups, guys. You talked about the rescissions driven by fraud being 15% of claims during the fourth quarter --.

Claims resolved, right.

Claims resolved. Could you break that out between bulk and flow and then let us know -- is it rising or has it peaked?

I can tell you it's arising.

Yes, in the -- the breakout between bulk and flow, so the overall was about 15%, bulk was about 24% and then flow was about 8%. In the prior quarter, Q3, the overall was about 8%, bulk was 13% and flow was 5%. So you can see the trend there. And we think it will continue to rise a bit more because the fraud generally is more prevalent on the newer books of business, '06, '07. And we expect more of the claims over the next year to be '06, '07, thus leading to potentially an increase in the rescission activity from Q3 and 4.

Okay. And then secondly, you've got -- obviously there have been some loan modification programs announced -- Bank of America, the GSEs, what they're doing, JPMorgan. Can you give us an update on how you are processing through those or trying to at least identify your delinquent inventory, how it would map up with some of those programs?

Sure, it's Mike Zimmerman. And that's exactly it. The GSE criteria for Freddie and Fannie, that just came out December 15th and it's really just being kicked off. The wildcard is the current market value of the property, what (inaudible) the current loan-to-value and the borrower's current income. So until you -- you really can't map that information because we don't have good data at the loan level there on current information.

The other programs, be it Citi or HSBC and all the others, there is varying criteria but it's along the same lines which is the LTV and housing ratios are the key elements. So that's what makes it difficult to try to quantify. We have tried to do that, but, because of that lack of information, we're not highly confident though of the eligible population.

Yes, I would say, Mike, we've got a dramatic increase in modifications year over year, but that really doesn't reflect any of the new programs that are in the market place. That was just the opportunities presented because of the increase in paid that we had or the increase in claims received. So all of these programs that are being talked about relative to loan modifications, you really have not seen the benefit within our company or our industry yet.

Do you think on the next call in April we'll begin to see some of that or you'll have more to report?

I would sure hope so. I mean there's been so much talk given to it between the FDIC programs and things of that sort. So I would certainly hope we'd have more clarity and start to see the benefits of getting some of this stuff done. But it is a process where it's done loan by loan by loan by loan, so it is also time consumptive. So clearly, I think each quarter you're going to see an increase relative to loan modification activity. I just don't know how to quantify it yet.

Okay.

I just know it will be positive for us.

Thank you.

(Operator Instructions). [Brian Long].

No question.

Okay, thanks, Brian.

Jordan Hymowitz.

One more follow-up. You have 182,000 delinquent loans as we sit here today. First of all, what percent of them today are eligible for some sort of modification program?

Jordan, this is Mike. This is what we're saying -- we can't estimate that. Out of the 180,000 we said 60% are Freddie/Fanny delinquencies, 40% are other investors, private label. But because of the variables of loan-to-value and HDI we don't know exactly how many are eligible.

So, would it be reasonable to guesstimate that whatever that percentage is, whether it be 60% or some higher number, and at max half goes into default and then you run that through with the rescission rate for claims and try and figure out what a loss number is? Is that a reasonable thought process?

That's the right algorithm, but the assumptions we'd have to leave to you, but that's the right algorithm.

Yes, okay, I just wanted to make sure we're thinking about it that way.

Yes.

Okay, thank you.

I am not showing any questions at this time.

Well, with that then, Mary, and investors, thank you for your interest in our company and have a great day. Thank you all.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. And have a wonderful day.