MGIC Investment Corp (MTG) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter earnings call. Later, we will conduct a question and answer session. (Operator Instructions)

I would now like to turn the conference over to your host today, Mike Zimmerman, Investor Relations. Please begin.

Thanks, Shawn. 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 first quarter of 2009 are Chairman and CEO, Curt Culver, Executive Vice President and CFO, Mike Lauer, and Executive Vice President of Risk, 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 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 new insurance written, as well as other information we think you'll 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 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 issuance of the press release.

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

Thanks, Mike. Good morning.

For the first quarter, we reported a net loss of $184.6 million with a diluted loss per share of $1.49. New insurance written in the quarter as $6.4 billion compared to $5.5 billion last quarter, and $19.1 billion a year ago. MGIC's market share remains very strong, totaling 25.2% in the first quarter and was 27.6% in march. However, our industry's market penetration has fallen significantly to approximately 5%, reflecting the significant underwriting and pricing changes our Company and our industry have made, as well as the increased loan level pricing from the GSE's, particularly on loans with FICO scores below 720. The good news regarding these changes is that our quality has materially improved on business insured, which we would expect to generate a loss ratio of 50% or less on loans insured after the first quarter of 2008.

Insurance in force ended the quarter at $224 billion, which was down 1.6% from $227.6 billion last quarter, even though our persistency improved during the quarter to 85.1%, versus 84.4% last quarter, and 82.2% a year ago. The average earned premium yield totaled 63.1 basis points as compared to 62.4 basis points last quarter, and 63.8 a year ago. The yield is up marginally from last quarter, reflecting lower premiums being seeded to captives. Cash flow for the quarter was a positive $419 million, and cash investments totaled $8.6 billion as of March 31.

As our underwriting volumes have fallen we have adjusted our work force and expenses in the quarter. Underwriting expenses totaled $62.5 million. Losses incurred in the quarter totaled $757.9 million, up from $691.6 million a year ago, reflecting the $13,530 increase in the delinquency inventory in the quarter. Claims paid totaled $356 million, which compares to $310 million last quarter, and $371 million paid in the first quarter of last year. The paid number, which was below what we would have expected to pay in the quarter, was influenced by three factors. The first, foreclosure moratoriums. The second, a rescission and denial activity. And third, loan modifications.

Regarding the first, the foreclosure moratoriums, the GSE's and many of our major customers had implemented such moratoriums in late November to allow them to put in place refinance and loan modification programs. The moratoriums came off on March 6th, so we should now see an increase in paids.

The second factor was our rescission denials for fraud and misrepresentation. The level of this activity continues to grow with 20.4% of our claims rescinded or denied in the first quarter, compared to 14.6% in the fourth quarter, and 3.8% in the first quarter a year ago. Putting that into dollars, $163 million of claims resolved during the quarter were rescinded or denied this quarter, versus $100 million in the fourth quarter, and $20.8 million a year ago. Despite this increased level of rescission, however, we continue to grow reserves, reflecting the increased severity and higher number of delinquent loans that I mentioned.

The third factor is loan modifications, and while the efforts of the GSEs and major customers are just getting started, in the quarter we modified approximately $72 million of loans versus $62 million last quarter, and $35 million a year ago. We should expect to see this number grow in 2009, now that all the rules have been published regarding the refinance and modification efforts of the GSEs.

As we discussed last quarter, unless recent loss trends mitigate, our Company may need additional capital to write new business. As a result, we have been pursuing capital strategies on three fronts. Those being the first, internal excess resources, the second, regulatory relief, and the third, the US Treasury. Regarding the first, the internal capacity strategy, while it's premature to share a great deal of detail, it is our belief that we have excess resources that exceed our claim obligations. As such, we are in discussions with the Wisconsin OCI on forming a subsidiary beneath MGIC, and that will remain beneath MGIC, with a certain level of those excess resources. While we have had positive discussions with the OCI on the structure, it is a strategy that will take some time to implement as it is subject to regulatory approvals, GSE approval and our Board's approval.

The second strategy is to work with the various state insurance departments to obtain relief from certain regulatory requirements, including risk to capital or minimum policyholder positions. Again, our discussions have been positive, but it is our feeling that this strategy will take a longer time to implement, and ultimately, is not the best long-term solution.

Finally, we have had discussions dating back to October of last year with the US Treasury, regarding the potential of making available, funds for our Company and our industry. These discussions continue today on an industry basis, and while we are getting a great deal of support from the FHFA on our need, we have no idea if funds will be made available for our industry, and if so, at what cost. With that operator, let's take questions.

Thank you. (Operator Instructions) Our first question comes from Mike Grasher with Piper Jaffray.

Good morning, everyone.

Good morning.

The first question I have is just your commentary around the regulatory relief, the risk to capital ratios. Can you explain a little bit more about why that would take longer to implement? I guess I understand the longer term, maybe it isn't the most satisfactory outcome, but just in terms of why it might take longer to implement?

Yes. In the domiciled states of the four, Pennsylvania, Arizona, North Carolina, Wisconsin, I think that process can proceed much quicker. But there are 17 states in total, Mike, that have risk to capital or MPP requirements that would need to be changed, and those are significant states, California, Texas, Florida, and it's a lengthy process to get all those approvals taken care of. So again, while that is a positive, discussions we are having regarding it, I just think it's lengthy. And I also think, if they do put them if place, they may be temporary in nature to help us deal with the situations in front of us, so I don't think it's the best long-term solution, although in the short-term, it can offer some relief.

Yes. I would think it would be better than some other form of relief that maybe would damage shareholders. But in terms of the length of time, would you foresee that it's longer? Are we talking about six months?

I don't know.

Okay. Fair enough. Just in terms of the trends on the insurance in force, it was down 1.6%, I'm just curious what drives that drop in IIF? Is it, more or less, just the cancellations resulting out of foreclosure?

No, it's just we are writing less business, Mike. In fact, the persistency is running, in relative history, at all time highs. It's just that we are writing less business on the front end due to our quality requirements, and as a result, while the cancellation level is quite low, we are not replacing it with new business because of the underwriting requirements.

Okay. So it's nothing more than the run off is occurring faster than you are putting the new on?

Right.

Okay. Thanks very much.

Thanks.

Our next question comes from Steve Stelmach with FBR.

Good morning. You mentioned a debt repurchase in the quarter. Is any more capacity for that, Curt, going forward, or are you pretty much through?

Well that would depend on what the market availability was. We do have $360 million at the holding company, so there is some capacity there. We do have a revolver due, $200 million. So there is some capacity, yes.

Do you have the appetite to?

Well, obviously. Yes, we have.

Okay, and then, on the excess internal capacity you mentioned, would there be any risk that capital gets trapped down at that sub? Or I guess, you only contributed enough capital to seed that business. Could you give me a little more color on how that may or may not work?

Well the idea would be that we would put capital in that sub to continue writing business, so there would be no interruption to the flow of business. You recall, Curt was saying with respect to the risk to capital issues in the industry, one of the ways for us to solve that would be to write business in a new subsidiary with some excess capital from MGIC. So we continue to write business in that subsidiary, but we would be a wholly owned subsidiary of MGIC.

Okay, and presumably, there would be no restrictions between the earnings of that sub and the parent?

It would be owned by the parent.

Alright. Thank you.

You bet.

Our next question comes from the Steven Eisman with FrontPoint.

Yes. I have two questions. The first question is with respect to rescissions. Could you clarify how exactly you are factoring in your rescissions into your provisioning policy? So in other words, you are at 20% rescissions this quarter, for every 100 delinquent loans, how are you factoring in rescissions at this point in terms of provisioning?

They would come in with respect to when we were establishing the reserve we look at a number of factors. First of all, the level of delinquencies on a month to month basis, and then obviously, where those are, and then, the severity, and finally, the claim rate. The claim rate would be the factor where you would see the adjustment for rescissions. What we have seen this quarter, is again another increase. Obviously, the increase in delinquencies, about almost 14,000, came in the markets that you would think, Florida, California, Arizona and Nevada, and average severities were higher, but the mitigating factor was some rescissions. We have been able to maintain a relative flat claims rate the last couple of quarters, so it has been positive in that respect. But the negative has been the increase in delinquencies as well as severity coming from the higher markets.

Are you assuming 20% rescission rates in your provisioning currently, or lower than that at this point?

It's not a function of rates. It's a matter of mathematically how it affects the claim rates in each of the markets, okay? So effectively, there has been an improvement in claim rate, albeit modest. We would have had an increase in rates. The rescission factors have, in fact, mitigated some of that increase.

By 20%?

I don't think you can get a number on it that way. Think about it this way. In your case, I think you mentioned a couple thousand or something. The delinquencies themselves went up 13,000 or 14,000, so there is a mathematical effect of it. You wouldn't get the full 20% effect. And, there is a time delay on some of that, also. You can't just arbitrarily assume, because a delinquency came in this month, that automatically, we are not going to pay 20% of them. There is quite a bit of time delay that takes place with respect to the investigations before we actually get to the rescission. There is quite a bit of time delay.

Can you elaborate? How much time delay are we talking about, because your rescissions have really only started to go up very recently?

This is Larry. The time line, we get a delinquent loan reported to us at the 60 day mark. It progresses to a 90, 120, and goes through the foreclosure process. And then that claim is submitted to us, and we look at it to see if we identify any red flags with regard to the loan file. If so, we initiate an investigation, which could take a few months to get it done and back to us. We look at that investigation. If it supports the red flags, then we issue a findings letter, and give the servicer a couple of months to come back to us with any differing views, and then after that couple of months of studying the finding letter, wait for the reply. If none has come back, then we rescind.

Let me just ask to clarify it a different way. On the roll rate to claim rate, how much have you factored in the rescissions in the reserves?

As I said, I don't think you can get to it mathematically as easy as that, other than to say that in establishing the reserve on a monthly basis, the claim rate has been mitigated for rescissions by a certain percentage, but it varies by market, obviously.

Steve I think maybe to get to your point, when we have a longer history, if you will, at 20%, it will have more of an impact. This has grown from 3.8% a year ago, to 20%. So you cannot factor that all in, and say this is the way it is. But clearly, it's a growing part of the reserving discussion.

It could be a bigger part?

Yes.

Okay. Let me ask the second question with respect to capital because in the press release, there is mention of, you say that you have excess claims paying ability, there's mention of a possible capital raise, then it also says we have no current plans to sell any securities under this registration statement. So, I just want to make sure that we are all on the same page here, that there is a terminal value to this Company that's well in excess of the current stock price, and anything you are going to do in terms of capital is going to be accretive to shareholders, otherwise you won't raise capital.

Well, this is Mike Lauer. I guess what we are seeing is theoretically, there is a number of opportunities we have, and we believe the best alternative is to use internal capital, if we are allowed to do that. Remember, Kurt did go through what the examples were and the fact that we would have to get through regulatory approval, et cetera, so that's our core strategy. There is also some alternatives with some outside capital, obviously, and then a third possibility would be raising capital in the market. But obviously, at these rates, that wouldn't be an attractive alternative. Hasn't been for a long time.

Okay. Thank you.

Our next question comes from Brian Montell with Barclays.

Hi. What was statutory capital at MGIC at the end of the quarter?

This is Mike Zimmerman. At MGIC, the risk to capital, I'll get you the exact dollar figure here. But, the risk to capital at MGIC, the writing Company, was 14.2 to 1. Up from 12.9 last quarter on a combined insurance company basis at 16.1.

Does that answer your question?

I have to go back into the risk to get the dollar. We'll see if we can get that number and get it to you as we are talking here.

Do we have that number?

Policyholder surplus of MGIC combined was $1.4 billion, contingency reserves were 1.8, for a 2.9 total. Does that help you?

We lost him from the queue.

Okay, sorry. Next question then.

I have Brian's line back open.

Yes, so that was 1.4 and 1.8, for 3.2 total?

No it was combined. It was 1.4, surplus contingency reserve of 1.8, for 2.9.

Okay. The crest of the question I'm trying to get at is as of year-end, you reported 14.1 times risk to capital for MGIC, and 16 times for the overall organization. This quarter looks like you restated year-end risk to capital from 14.1 down to 12.9?

No Brian this is Mike. What we did at the fourth quarter results, we had a preliminary number as we were working with the state in getting clarification on the calculation. You'll see in our 10-K, we had stated the numbers that you see in today's press release for the fourth quarter. So effectively, what we were able to do when we established loss reserves, which charge as capital, but it was left in the risk in force. So we had clarification from the state that we were able to take credit, not have that double accounting or double penalty, if you will.

Okay. You are back in loss reserves out of the total risk in force?

Effectively, yes.

Real quick, how much cash did you spend to buy back debt during the quarter?

Approximately 19, I believe. Yes, 19.

Okay. Then just one last question. On the rescissions, do you have some kind of a number around the amount of rescissions, where the banks or the GSEs are pushing back on? Do you have some kind of percentage for that?

No. There has been, I would say, minimal push back to date. Everyone's so busy on other things and the reality is the loans which we have rescinded or denied, we have pretty strong cases regarding those. And as Larry explained, we send a findings letter to the servicer and give them 60 days to respond to that, and to date, we haven't had significant push back on that. That done mean it won't happen in the future, but to date, we haven't.

Thanks.

Our next question comes from Richard Wagner with Citadel.

Morning, everyone.

Good morning.

Had a couple of questions on the captive reinsurers. The first is, on page 16 of your supplement, you define them as active excessive loss and active quota share. What does active mean in that disclosure?

Pretty much it's just that. I mean, that it's one that is in force and current. For example, in the fourth quarter of 2008, we terminated a captive and then, seized back trust accounts of $260 million, so that gets reflected out. So it is just more of a clarification that these are ones in force at this point in time.

Got you. So for the 2006 and 2007, roughly three quarters of each of those vintages have attached. Where do you stand within the attached layer of both of those years? How much of a risk is there to piercing the top of the captive?

Well, you can see the breakout where they are within. I guess your question is do they consume the layer?

Yes.

I'd say that's a possibility. Some lenders books of business are better, worse than others, and some will consume. How many, I guess depends on the economics forecast and what not. Aside from the money in the trust accounts now, remember we are continuing to seed premiums on that existing business to further supplement the trust account funds, but we do not take credit for anything in our financials from captives to degree we feel either the layers consumed or that there's insufficient funds in the trusts to cover seeded losses.

On the issue about the trust funding, have you had any discussions with the banks, or gone back to them about having to put additional funding into the trusts?

Well, they have a minimum, roughly 10% of the rest. To the degree they fall below that, they have to fund up above that to continue, or they are into run off. Now, what's changed here as of January 1 is we have limited the types of new captives, going forward, to quota shares, so a lot of those older, existing, excessive lots are, by and large, all in run off now.

Yes.

So I would guess, over time, many will fall below the 10 to 1 just because there is no new business flowing in.

Excellent. Thanks a lot.

You bet.

Our next question comes from Pat Dowd with King Street Capital.

Hello. You have gone through some of this already, but just on your reserving more generally, and correct me if I'm thinking about something wrong here. But, if I take the number of delinquencies and just as a simplifying assumption, assume they all become claims and multiply that by the average claim size, you get losses of $10.5 billion, and then, your reserve is whatever it is, 5.3. Could you just help me bridge the gap there in terms of what the major assumptions are? Obviously, it sounds like precision is a big part of that, but kind of what the components to the differences are there?

Go through the front part of that again. I missed a step.

100%.

Oh, 100% claims rate?

We pay out $10 billion and we get $5 billion. What that would say is we have a claim rate of 50%.

I mean, theoretically, that's the difference. Obviously, not every delinquency goes to claim. Some cure, some are rescinded. So that would be the difference.

Right. So I'm trying to understand what goes into that claim rate. What is the advantage of that?

Well, the actual experience. You take a given delinquency in a given market, and the underlying loan and the exposure, and then, the rate at which those delinquencies are going to claim, and that gets adjusted monthly.

Each delinquency category, 60, 90, 120 has a different probability, so the farther it gets, the closer it gets to a foreclosure, the closer it gets to 100% probability.

That help you?

Yes. I'll follow-up with you all afterward, if that's all right?

Okay. Yes.

Our next question comes from Shawn Burrow from Deutsche Bank.

Just following-up on that last question. I think we have gotten it from you before in the past, the total amount of delinquent inventory? Obviously, with the severity assumption in there. Do you have a number for that or a ballpark of where you think that is right now?

Shawn, this is Mike. You want to know what the total delinquent inventory is?

Yes.

$195,718.

There is a schedule on the back of the press release that gives you the breakdown by bulk, flow, various credit rates.

No, no, total amount.

Oh, dollar amount?

Yes, dollar amount.

I don't believe we have had that in the past. You basically would have to take the average loan's size for each vintage year.

I didn't know if you had an estimate of where you thought that was?

No, we don't.

Okay.

You could use that schedule in the supplemental information to estimate that though.

Okay. Anything new as far as dividends up to the holding company? Has there been any discussion with the regulators about that?

No. We have been talking about just the opposite, capitals to provide for new writings.

That would be down, not up.

That would be below MGIC though?

That's correct.

And, they seem relatively receptive to that at this point?

It's been a positive discussion. Still early.

Okay. And then, as far as claim rates, away from rescissions, understanding kind of cures and looking at what MICA data looks like, clearly we have seen kind of a seasonal uptick, at least in the February data. Are you seeing that same seasonality in actual cure rates away from rescissions? Understanding the claim rates seem to be flat, if not improving for you, do you think that is driven by just the rescissions or actual cure rates are increasing as well?

In the first quarter here, the level of new notices coming in the door, the new reports of 60 days, is down pretty much across the board, and the cures are stronger as well. That's a typical first quarter phenomenon, we think tied to, probably, tax related items, and we'll see if it carries over into the second quarter here.

Have you thought any more about pay claims for 2009, where you think that may come out?

Well, we have thought a lot about it.

Up from 08?

Certainly had a lot of internal debates on that subject matter with numbers. We came in much lower last year, than what we expected to pay. We are off to a good start this year, but as we said, the moratoriums have been in place and we don't know what the impact of that is. On the other side of that, rescissions are increasing. Modifications are really just kicking off. Everything we did within the quarter was pretty much programs that didn't take, yet, advantage of the GSE efforts, and those are going to be significant, both on re-fis and modifications. We have so many things running through the numbers, many of which are positive, it is hard to say what is the end game. But I tell you, I think given where we were three months ago, the number we think we'll pay will be less than what we thought three months ago.

That is just basically due to, obviously part of that's delays, which will come in 2010, and part of that is just from the rescission as well, which is helping you on that front.

Well, and also the modifications and the refinances that are being put in place. The administration has put in place a program to try and deal with 9 million mortgages. So those are all helpful to us. Again, it's just hard to quantify right now, the impact of any of these factors, but many of them will be very positive to our Company and our industry,.

Anything new as far as new insurance written? I know you gave a top down estimate of $35 billion before, just based on where your market share was and the market share, or penetration, of the total market for the MIs. Anything new on that front? Obviously, with this quarter you are tracking well below 35.

Yes, I think it will be closer to 30, unless some things change within our industry. As I mentioned, between our underwriting guidelines and pricing, but also a very, very important factor is the GSEs, which have pricing of anywhere from 25 to 300 basis points added on in loan level fees, relative to LTV and FICO scores. They have made our product less can competitive against FHA, and as a result, we are losing some of that business. Now at some point in time, the huge losses FHA is going to experience, I think, run through, and that will be another matter that will be a positive for our industry, longer term, when we start dealing with that issue, but that is yet to play out. But in the meantime, I think we are taking it n the shorts to FHA.

Just one last clarification on the prior questions. You said surplus and contingency were 1.4 and 1.8, and then you had a 2.9 total?

Yes, there is an adjustment for MPP. There are three numbers there. Surplus is 1.4, contingency reserve 1.8, less 300 gets you to 2.9. Less MPP from subsidiaries, okay? That is the technical calculation of it.

Okay, and then, just one other clarification on the risk to capital. You had a netting of $4.5 billion for the established loss reserves and the re-insurance that you guys put in place between the earnings release and the 10-K you mentioned. Has that number changed significantly? Should I just track reserves going up to around $5 billion now?

You can just track it in line with reserves, that is correct.

Okay. Thank you very much.

Thank you.

Our next question comes from Scott Frost, HSBC.

Okay. You have said that to improve capital positions, you got the GSE modification efforts, and you don't know how much that's going to be, but you think it's going to be positive. You also think, if I'm not mistaken, you're being sort of conservative on what your loss reserves are, given the current macro estimates. The other plans are private capital, the stacked new insurance subsidiary to keep writing business, and potential federal aid. Is that right?

Well the three were, as you described, the stack scenario. Then also, discussions with the regulators relative to regulatory relief on risk to capital, minimum policyholder position. And the third being the efforts with the federals, if you will.

Again, I'm confused. At the federal level, what exactly is that?

Well, we bring our case to the Treasury.

Okay.

That our industry is a significant part of helping improve the mortgage related area and that it would be important to offer the funds to our industry in some form or fashion, and those discussions, as I said, have been ongoing since October of last year.

Okay.

We continue those today.

Okay. What I'm getting at is, you said the chances of raising private capital here are pretty slim and none, I guess, not to put words in your mouth. And the stacked, I'm guessing the chances of getting regulatory relief with Wisconsin, with the stacked insurance company and reserve relief, would you characterize those as good or decent or moderate?

I would characterize them as positive discussions.

The chance of getting any kind of federal aid, where would you put that at?

I don't have a probability there.

Okay. Just as a follow-up, could you give us what the actual, versus minimum, policyholders's position is at the end of Q1?

Yes, I think at the end of December it was $1.5 billion, and at the end of Q1 it is $1.2 billion. So $1.5 billion at year-end, and $1.2 billion at March.

That is minimum policyholders's position?

That is the excess of minimum policyholders.

Alright, thank you.

You bet.

Our next question comes from Matthew Howlett with Fox-Pitt.

My question, just on the $5.2 billion of reserves, could you split out how much is dedicated to bulk and how much is dedicated to flow?

Matt, this is Mike Zimmerman. No, but I'd point you to the premium deficiency reserve. You can get some level of what's been already established for the Wall Street bulk transactions, but then the rest all goes to the balance of bulk and flow.

Okay, great, thanks. Is it fair to say the bulk, when you look at the delinquencies on the AB X and your delinquencies, do you feel comfortable with the 2007 bulk, which is your last big venture, your 2006 is sort of nearing its peak default period?

I would say relative to the delinquency inventory for bulk, we think that may peak here in Q3, and the full book would peak later, such that the overall inventory may be around year end. But obviously, that's impacted by future economics as well as some of these moratoriums and loss mid efforts, because those efforts, although positive, the items hang in inventory while they are going through the moratorium/mitigation. So, it could throw timing off. It slows things down and could push those peaks further out.

Okay, fair enough. One thing on the loss modification plan. Is there a way to tell what book will benefit more? Will the sub primes see a bigger benefit from modifications relative to the flow, or is it too early to tell?

I would think it will be on the other, the flow business, because of the efforts by Fannie Mae and Freddie Mac.

Okay, good. Fair enough. Then, on the average paid claims size on the bulk side, I think it was 170. Can you just walk me through how you get there? I think the average loan size is around, I'm sorry, I'm calculating around 175, the average loan amount, and then the average coverage would take it down to $143,000. I guess the question is how much of your average paid claim size is due to foreclosure costs, interests you share in the interest advancing? It sounds like it's a lot more than 15% or 20%.

Well our coverage is generally around 25%, 26%, 27%, and that's true both for flow and bulk. So really, our claim is the UPB plus some accrued interest, and you take that total and you multiply it by the coverage percent because in this environment here we are not mitigating, we are pretty much paying the percent option. So if the underlying interest rates on the mortgage is around 6% and it takes something less than a year to go through that process, the accrued interest component is 5%, 6%. So, it's UPB plus about 5%, 6%, times that 25, 26 average cover.

Remember on the bulk side, the claims are coming in slower at California, so much higher UPB.

Great. Thank you.

Our next question comes from Brad Berning with FrontPoint.

Brad, you there?

Can you hear me?

Yes. Now we can.

Okay. Sorry. What is the holding company cash level at the end of the March quarter?

$359 million.

Okay. And then, my second question, I think this is going to be more of a follow-up for you . I understand the mechanics a little bit better on how the rescission rate analysis works into the reserve discussion and how you lag that from historical trends. But I think if you could summarize that, either in the queue or in the going forward, next round of press release to come out for next quarter, to take a look at what your claim rate would be and your expectation, and then what your rescission rate is to get to your net claim rate, so you can tell us how much of the rescissions have been factored into your reserve at a summarized basis. I understand if you mathematically don't have that number available now.

I think helping people understand whether you are using the 3% factor from a year ago or using the 20% factor from the current quarter, and where we are at in that trend, helps people understand how much of that you factored it into reserves. I think we should get some help on trying to make sure we understand that number. Does that make sense, what I'm

Yes. We'll take a look at it.

What is the timing of the lag of assuming rescission rates? Is it a three quarter lag, four quarter lag, two quarter lag?

It is about six months between the time we investigate the rescissions.

Investigate the rescissions. Okay. So, in the current reserving practices, you would have more of what you have actually sent out for notices of rescission taken into consideration in your reserves, not necessarily delinquent loans where you have a roll rate?

I think you are looking for too immediately. I think it would be longer than that because of what Mike talked about first, the aging process, okay?

Yes.

You first have the aging process, and then you have the foreclosure and the process Larry talked about. So, on a reserve standpoint, it's probably about 12 months, at least 12.

Yes, okay.

That is why there is a lag factor here because we are still on the upslope, if you will, of these rescissions. That's why I said, there has been some mitigation in the claims rate, but not the amount you would have anticipated, not in this quarter.

I understand. We should think about it on a year lagged basis, impact in the reserves?

Exactly.

Okay, so we'll see what you are doing on the rescission efforts here in the first quarter, we'll see the impact on reserving, much more so, in fourth quarter this year.

I would say that would be a good estimate, third and fourth quarter. If these things continue to be material, and we'll see that in the actual claim results, too.

Brad, just looking at the last five quarters, and last year in the first quarter was 3.8% rescission rate, then it went to 4.1%, then the 8.4%, then the 14.6% in the fourth quarter, and then 20.4%. That's why it's hard to quantify, other than to say it's going to be an increasing part of that.

Yes, understood. I just want to make sure I understand the roll forward to the impact to the reserve timing, and it sounds like that is still lagged until the second half of this year before we truly see the impact.

Sounds accurate.

Thank you for the update on that. I appreciate it.

You bet.

(Operator Instructions) I am not showing any other questions at this time.

Okay. Thank you very much, everyone, for your interest in MGIC, and 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.