MGIC Investment Corp (MTG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the MGIC second quarter earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin, sir.

Thanks, Howard. 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 second quarter of 2009 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 for 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 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 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, with that, I'll turn the call over to Curt.

Thanks, Mike, and good morning. For the second quarter, we reported a net loss of $339.8 million with a diluted loss per share of $2.74. During the quarter, we insured $5.9 billion of new business, down 8% from the first quarter. Market share for the first two months of the second quarter was up slightly at 26.2% versus 25.3% in the first quarter. Persistency was flat during the quarter at 85.1%. Insurance in force was down 1.7% from last quarter and now totals $220 billion. The average earned premium yield was also flat with the first quarter at 63.1 basis points. Underwriting expenses totaled $61.7 million, which was down slightly from last quarter and through the first six months of the year is now down 14%. Cash and investments at quarter end totaled $8.5 billion.

Paid claims in the quarter were $380 million, up 7% from last quarter's $356 million and down 2% from a year ago where we were at $388 million. Year to date we paid $736 million versus $761 million a year ago. Losses incurred were $669.6 million compared to $757.9 million last quarter, and our loss reserve now totals $5.7 billion. The increase in losses incurred was primarily driven by 16,519 increase in our delinquency inventory, although the number of new delinquent notices received in the quarter actually declined from Q1 by 8.5%, or 5,845 loans. The primary driver behind the net increase is the fact that the cure rate, which has been stable since year end, is still quite low, which reflects the impact of higher unemployment than the significant decline in property values.

Loss mitigation was again active in the quarter as we modified loans with exposure totaling $109 million in the quarter versus $82 million last quarter. And let me remind you as I did last quarter -- when I give the number $109 million, the number actually modified is $218 million, but we expect 50% to redefault. So we give you the net number. But of that total, there was 3,829 loans that were modified and I've had a question already today given the Wall Street Journal story on the HAMP program, how many were that, and out of that 3,829 loans, 40 were done under the HAMP program. So there's a lot to ramp up in that program yet, which we'll -- which has significant potential for us.

Our investigation of submitted claims continues to find a great deal of fraud and misrepresentation, and as a result during the quarter, we rescinded or denied $286 million of claim obligations that would have otherwise been paid or charged to a deductible. This compares to $163 million last quarter and $31 million a year ago. On previous calls, I reported rescissions of the percentage of claims resolved in a given quarter. This calculation can be volatile, depending upon the number of investigations completed and the number of claims processed in a given quarter. This quarter we have added to the supplemental information a schedule that shows you the cumulative rescission rate by the quarter that the claim was received from the servicer. For example, 20% of the claims received in the third quarter of 2008 were rescinded. It is presented on a trailing six-month basis to allow the claim to reach its final resolution -- that is, it was either paid, denied or rescinded. We believe that this measure provides you a better perspective as to the level of rescission activity that has taken place and we'll update this each quarter so you can see the quarterly progression.

As we discussed last quarter, we have been pursuing capital strategies on three fronts -- those being internal excess resources, regulatory relief, or through the US treasury. We're delighted that regarding our preferred alternative, that being internal excess resources, the Wisconsin OCI recently issued an order allowing MGIC to contribute up to $1 billion to a mortgage insurance subsidiary of MGIC to begin writing new mortgage insurance as of January 1, 2010. Before this subsidiary called MGIC Indemnity Corporation or MIC can begin to write business, the OCI must authorize MIC to do so, and MIC must obtain licenses in the states it will transact business. We are also in discussions with the GSEs to gain mix approval as an eligible mortgage insurer.

In addition to our internal excess capital plan, we continue to work with our industry and the other two capital strategies to strengthen the capital adequacy of the entire industry. We also are aware of the capital raises from two new entrants, which would further add to our industry's capacity and further strengthen our industry's ability to meet the needs of the GSEs and first time home buyers nationally.

Finally, the underwriting results in the 2008 book of business and the credit mix on the 2009 remain positive. Even in the face of the current economy, we expect the business written since the first quarter of 2008 to perform at loss ratios of 50% or less. With that, operator, let's take questions.

(Operator Instructions). Our first question or comment comes from the line of Mr. Steve Stelmach from FBR Capital Markets. Your line is open.

Hi, good morning.

Good morning.

You mentioned the rate rescission. Last quarter you said something around 20%. What was it this quarter?

Well, we just went through why we changed, so that comparison has no relevance and there's a supplemental --

Page 15 of the supplement.

Page 15, which has those rescission rates on it. We can --

That's fine. I can refer to that.

Okay.

And then, Mike, when it comes to potentially violating the risk to capital at MGIC, has this become -- what's the practical implication of that? Is that simply MGIC will no longer be able to write new business, and that essentially a moot point with the establishment of MIC, or are there other implications there that we should be thinking about?

I think a couple of things. First of all, in the event that MGIC would exceed 25 to 1, it could be limited to writing. So the idea would be that we would cease writing business in the original MGIC and begin writing business the first of the year in the new company. Now, with respect to the capital, since it is a wholly owned subsidiary of MGIC, MGIC in its risk to capital doesn't lose any credit, if you will, for that capital. So its risk to capital does not change.

Right. So I guess the point being that the establishment of MIC sort of takes the operational risk off the table if you violate the risk to capital.

Exactly. It provides us with a means by which not to have uninterrupted flow of business.

Got it. So there's nothing else we need to really worry about in terms of that risk to capital issue?

Exactly. What would happen is you would effectively put MGIC, the previous company, in runoff. The risk to capital effectively would rise over a period of time and then decline, but the new company would start off fresh with new capital and have very low risk to capital levels.

Okay, and then what's -- I know you're nowhere close to it, but what's the rationale for the lower risk to capital requirement at MIC versus MGIC?

I think that's an issue with the insurance commissioner just to put added flexibility, if you will, with respect to controlling capital and looking at the runoff of the old company, as well as having some excess capital available. So it's just added protection from his standpoint.

Okay. And then last one on this subject, MIC is a sub of MGIC, which is sub of the holdco?

That's correct.

Okay. So it's a stacked structure?

Correct.

And then just lastly, going back to rescissions, you mentioned that at some point the rescission issue may be resolved through arbitration or some sort of judicial proceedings. Just to be clear, who will be giving the pushback technically? Is it the servicer? Is it the bank? Is it the GSE? Who's going -- any, all of the above?

Well, it could come from any of the above. I mean ultimately if a loan is rescinded or denied and the GSEs own it, they go back to the servicer and ask for reimbursement on that, because that loan no longer had mortgage insurance on it. And so they track very closely. However, the GSEs do -- whether they agree with the decisions by the mortgage insurer.

But I mean if there was pushback, it would come through the servicer or ultimate owner of the loan in either case, but generally the servicer. And that process itself is one whereby when we go through an investigation, we provide those investigation results to the servicer and then give them 60 days to respond to that information to say here is the information we have and the decision from that information that we're going to make. Do you agree with that -- you have 60 days to respond. So it's a process whereby if there are disagreements, it happens during that period of time.

Okay. Then --

Steve, can we get back in the queue?

Sure.

Our next question or comment comes from the line of Mr. Mike Grasher from Piper Jaffray. Your line is open.

Thanks. Couple questions. To follow up on the MIC, is it my understanding -- is it correct to understand that the -- you're basically pulling $1 billion out as of January 1, 2010? And at that time, Mike, is it fair to assume that the risk to capital at the current -- at that time would be no worse than 25 to 1?

Let me just correct you there. First of all, the funding would be $500 million now, this month.

Correct.

And then a balance about 1.5 years later.

Oh, 1.5 years later, okay.

But the risk to capital to MGIC does not change because the capital is still in the company. It's an admitted asset. It transferred from its own portfolio to a portfolio of a wholly owned subsidiary.

Understood, but then the sub, MGIC, the current sub, would incur some change in its risk to capital ratio by pulling some of that out --

No.

Would that not have impact?

That's not correct. If you think about it this way. Right now, if you had $1 billion in the investment portfolio and you transferred it down to an investment portfolio of a wholly owned subsidiary, there's no change in MGIC. It still has that $1 billion as an asset of an admitted asset of a wholly owned subsidiary.

Okay, got it.

So there's no change in the MGIC risk to capital calculation.

Okay, got it. Paid losses, how much of that is due to the moratoriums expiring here? Any sense of that?

Well, I would say the claims in the first half of the year are being held down by the moratoriums that are in place and I would think they would be up significantly in the second half of the year because of those. But I can't quantify -- we can't quantify and say, well, if that certain dollar amount that's being, that's been held back by the moratoriums.

And I guess similarly, the modifications that you have performed, have you seen redefaults occurring yet, or is it too early?

It's still too early on those, especially the 3,700 we did this last quarter. They just performed with it and that number's up. So it's a little too early to tell on that.

And again, remember, our expectations and the numbers we are giving you expect a 50% redefault rate, so you're hearing the net numbers.

Sure. Okay. Thanks. I'll get back in the queue.

Our next question or comment comes from the line of Nat Otis from KBW. Your line is open.

Actually it's Jordan Hymowitz from Philadelphia Financial. Hello?

Hi, Jordan.

Hi, Jordan.

I have two questions. One is on the captive reinsurance on Page 17 of the supplement, it shows $16 million in the quarter. Would that $16 million have been in effect paid claims without this captive reinsurance? In other words, is there a way to think about it that about 15% of your losses in the quarter were paid by captives?

Jordan, those are the losses incurred, so those would be the reserves.

Yes, those are incurred losses that were ceded to the captive. If you -- remember, if you look at the balance sheet, we have loss reserve of about $5.7 billion and then we have a receivable in the asset category of about $300 million some and that's that ceded reserve, the recoverables from reinsurance.

And, Jordan, in the additional information in the press release, you'll see when we detail out the paid claims, $10 million of claims were charged back to those captives. The other -- the $60 million is the incurred number.

$10 million is the claims number?

$10 million is the paid number.

Okay. Then second question, then, right now, you have about -- the industry has about a 50% cure to default ratio, correct?

On the metric of -- that's disclosed by MICA yes, new delinquencies versus cures, correct.

My question is, does that cure to default include rescissions and modifications? In other words, is that a prenumber there? In other words, with the net number to you be less than that that you would actually have to pay on?

The cures would certainly include modifications. And I guess I'll have to check back in with MICA on that relative to the rescissions.

I don't know how that's treated by the industry.

The comment Kurt made that our cure rate, MGIC cure rate has been stable since the beginning of the year -- that does not include the additional curing benefit of rescissions. That's without with regard to rescissions, so that's a pure true cure that Curt reported on.

So the other way to look at it, if approximately 20% of stuff is being rescinded and you have 50% cure rate, then really only about 30% of the losses, of the foreclosures if you keep a 20% recision number, would go to paid claims. Is that a way to think about it?

Well, be careful with that cured to, the cure ratio out of MICA because those cures are coming from various time periods. It's cures in the month, but those cures are from notices in any prior month including something 12 to 18 months ago versus new notices in the current period. So that's -- can be misleading, I guess, because of the different timeframes that the components could be coming from.

But directionally, you would have to deduct -- before you get the pay, you would have to deduct the revisions, right?

You would what?

Before you get the paid -- yes.

Thank you. I'll get back in queue.

Thank you, Jordan.

Our next question or comment comes from the line of Alex Lieblong from Key Colony. Your line is open.

Hey, guys.

Good morning, Alex.

Congratulations on starting on the rescissions, but if I'm doing the numbers right, we went from $31 million to $163 million to $286 million. Is there any way to go back, because I mean we know this much fraud was going on for quite some time. Is there any way to go get some of that other money back that maybe we should have had some rescissions going earlier?

Well, again, we've always taken the tack where we investigate our claims submitted pretty thoroughly so that we've always been consistent on enforcement of a policy. And while I think there is and we've looked at mechanisms to look at certain servicers in going back, I don't think there's much there given how consistently we've enforced our policy for years.

How about the bulk business? Wall Street bulk business that we set up? I mean it is my understanding that you've protected yourself, gotten in the claims on the Lehman.

I guess some of the rescissions that are being reported now are actually -- most of them are from claims received over 1.5 years ago that finally have gone through the investigation process and the 60-day period that Curt mentioned where we give the servicers a chance for rebuttal. If you look at the new page in the supplemental information, you'll see that relative to the bulk business in claims received 1.5 years ago, we rescinded roughly 20% of them. So as Curt said, we've been kind of at this for a long time. The rescissions being reported today really are from claims received 1.5 years ago.

Okay. One more quick question, please.

Okay.

On the '09 book, let's say versus the '07 book, if I thought of it like on a static pool analysis, is the delinquency down 50%, 10%, or what versus '07 or '08 book?

Well, let me try to answer your question. We're looking at the new notices from flow and bulk and for each of the policy years within flow and bulk. And for the last two quarters, the new notices being reported to us have declined pretty much across bulk and flow and all policy years and particularly from the higher risk segments and the softer markets, California and Florida. We know that Q1 was more of a seasonal turn, but now seeing another data point here for Q2, we feel better that these books of business in terms of new notices have peaked and are on their downward trend. The point Curt made is -- so that's good news. New notices coming into the delinquency inventory seem to be going down across the board. But the inventory's still going up because the cure rate is low. And the notices in the pipeline aren't curing because of the low cure rate there -- they are on their path to foreclosure and that's why they are kind of stuck in there. But the new volume of notices going into that delinquency inventory is tapering off, so that will take some pressure off the growth. We still think we're in for a couple more quarters of inventory growth because of the cure rate. But once that cure rate starts improving, we should some hopefully good development on the inventory.

But I think, Alex, if I know where you're going with that, you're asking what's the quality of the '09 versus the '07. And I think the '07 book will probably go out at around 15 claims per 100 loans insured where we would expect the '09 to be more in the neighborhood of 4 per 100.

Okay. Thanks very much. Guys, keep slugging it out.

Thanks, Alex.

Our next question or comment comes from the line of Ms. Amanda Lynam from Goldman Sachs. Your line is open. Please go ahead.

Thanks so much for taking the question. I was hoping you could just update us on what the expectation for the risk to capital of MGIC will be. I know you had previously said that you may reach regulatory requirements before the end of 2009. And I'm just wondering, do you still feel like that is a possibility? And then secondly, are you considering putting any expense sharing arrangements in place to move cash from the operating company to the holding company? And I'm specifically referring to what was disclosed in the risk factors this morning about the September 2011 debt maturity. You had given the numbers about the cash at the holdco and the upcoming debt maturity and said there was a potential that you might not be able to make that payment.

Couple things. First, on the risk to capital, the risk to capital calculation has been clarified further by regulatory review this quarter whereby we're getting full credit for the loss reserves, so the risk to capital this quarter is at MGIC is at [13.8]. Relative to your question about when will it exceed 25 to 1, I don't think it will get there this year because of where we are.

But clearly what we're concerned about and have continued to talk about was the fact that because of the increase in delinquencies and the amount of time that delinquencies stayed on and we've reserved for and the pressure that put on surplus, that in fact we could breach that 25 to 1 -- it could have happened this year. Mathematically it probably can happen next year. So that was the concern for establishing the new company. I can't give you a date at which it would happen. It's probably less likely now than it was earlier this year because we've written less business, but it mathematically could happen and will happen in '10, if not later this year.

With respect to the holding company cashflow, no, we don't anticipate at this time of dividending any up -- upstream any capital this current year from MGIC to the holding company, and we will deal with the 2011 issue in 2011. Hopefully markets are different, performance is different, and either, A, we can reestablish a line at some more reasonable rates or look to some other facility or in fact have a dividend from the writing company. So all of those things are possible, but I wouldn't say we include that in this year or next year, but rather '11.

Great. Thank you so much.

Our next question or comment comes from the line of Mr. Mike Grondahl from Northland Securities. Just a second.

Thank you for taking the question, guys. Curt, if you had any advice for the government and what they are trying to do with all of these modification plans, what could they do to improve these plans and to get more people into modification?

Lower our taxes. No, there's a lot of money being thrown around or at least discussed, but it's still too complicated, Mike. And I -- not that [they call], but for one thing on the modifications, it's a lot of work to modify loans and I know they have put $1,000 out there and then a continuing fee of that amount of money. But I will tell you, I still think most of the servicers lose money when that is indeed the case. So I think the incentive needs to be moreso for the lenders to dedicate more staff to that area than they have today, and I don't think it's adequate right now.

Okay, and then another question, the $1 billion that the insurance commissioner is letting you downstream into this new subsidiary, how is that number arrived at? Obviously they must feel you have more excess capital than just $1 billion, but did you split the difference, or did you take one third of what they thought your excess capital was? Could you shed a little light on how $1 billion was arrived at?

Well, the state went through an intense process after we had relative to looking at various scenarios and hired a firm to look at our financials and the forecast of those relative to various models that they looked at on losses and revenues going forward and from that determined the amount of money that is excess our obligations in the years ahead. And from that, we've presented a business plan to them of what we thought new insurance written would be in the years ahead, and from that combination of those two factors, that amount was arrived at.

Okay.

In other words, the $1 billion supports the forecasted NIW volume over the next five years, given the 18 to 1 risk to capital. Another way to look at it.

Okay. So it should be enough to write all the business you want over the next five years?

Yes, I think relative -- within that scenario, if four years from now things are as good as we think they will be, I think you'll have a lot of capital available if you need more anyway.

Sure, sure.

But, yes, that was the plan. As Mike said, in a very simplistic way, that's exactly what happened.

And then lastly on fraud rescission, that number seems to be accelerating. We had $163 million in the first quarter. It didn't double, but it came close to doubling to $286 million. Is that number continuing at that type of trajectory?

I think you'll see that for a couple of quarters more because you're getting more of the '06 and '07 claims coming in. And then you're going to start seeing it peter out. I mean the '08 and subsequent books, I mean that will be -- it will be like the old days, but I think we're seeing more and more of the '06 and '07 claims. And also you had the bulk getting in where there's been a higher level also. And so the combination of those two factors are what are making the number large right now, Mike. But I think it's pretty much through the end of this year, and then I think you'll start seeing it turn around and maybe even dramatically in 2010, later in the year in particular.

Got you. So at least two more quarters of heightened levels, but then you just got -- it will depend. Okay. Thank you.

I really do, because that's the way the originations came in and the claims are following accordingly.

Okay. Thank you.

Our next question or comment comes from the line of Mr. Craig Carlozzi from Mast Capital. Your line is open.

Yes, hi. Thank you for the time. If I understood you correctly, did you expect that the 2008 policy year would have 50% loss ratios, business that was done in 2008?

No, business written after the first quarter. And the reason I say that -- that is when we've had our new underwriting guidelines and pricing in place. They came effective at the end of the first quarter.

Okay.

So it was for the last three quarters of the year.

Okay, and because of the natural lag in the development of your business, presumably there's some expectations with what environment we're going to be in in six to twelve months from now when we start to see those losses rolling through. What are you looking at for housing, levels of housing versus unemployment? What's the general macroeconomic environment that you would need to get a 50% loss ratio?

Well, in coming up with that 50%, we're looking at development of loans that meet our '08 guidelines there, and the actual performance of not only the '08 book, but loans from '07 that had similar characteristics. So to try to answer your question, it's looking at the actual performance of that business in this environment, where home prices over the last year have fallen by whatever measure you want to look to and employment has dropped by whatever. So in the environment over the past year to 18 months, that's the context for that 50%.

Okay.

If I could maybe put it in a little different way, if you looked at our '07 book of business that met the underwriting guidelines that we have in place and the new pricing that we have in place, those loans from '07 that meet that category of '08 guidelines and pricing will run out at a 50% loss ratio. And frankly, I can't thank of a worse environment than what the '07 book has gone through to run out at that level, so that's what gives us comfort on the '08.

Okay. Okay. That's helpful. Thank you.

Our next question or comment comes from the line of Mr. Matthew Howlett from Fox-Pitt Kelton. Your line is open, sir.

Good. Thanks for taking my question. Just drilling down on the reserve methodology this quarter, delinquencies accelerated 28% this quarter, quarter over quarter, yet it looks like the loss adjustment expense was flattish. Now, I know you said new notices went down, but there was higher roll rates with the [30 day] delinquencies. Is there anything going out with your expectations with more mods or rescissions on that number?

Not really. I guess what I would say is we're up 16,000 delinquencies for the quarter. 1,000 of that is in bulk. So the bulk business obviously is flattening out delinquencies and running down. The full part of the book was the biggest increase, 15,000. 10,000 of that's from the '07 book, the book we were just talking about. So we have seen acceleration in some books in some areas and not so in others, and on an average basis, I think the reserve pretty much is where it was last quarter. So we haven't seen a significant change in claim rates or severity from a reserving standpoint other than the impact of rescissions, again, quarter to quarter.

So while we did have an increase, it's somewhat -- you have to I think cut it down into some of the segments. As I said, the driver of it primarily was the '07 flow book and some geographies to that. Florida, I think increased a couple thousand, 2,200, and California, about 1,000. So it's particular markets and categories. So overall, I think the reserve is up for those changes, but not at an accelerated rate with respect to factors.

Got you.

And you said 28% quarter over quarter and the increase was actually 8.5%.

Okay, okay. Got you. And then on Obama's HAMP program, you said only 60 loans were done --

40.

40.

40 out of 3,800 we did in the quarter.

Their official target is $3 million to $4 million universally across the mortgage world. What type of -- if they achieve that rate, is your way to quantify what that does to your current reserving methodology, what it does overall in terms of delinquencies, how many -- what percent of your book is eligible under the three government programs, or HAMP or H4H, the two -- is there any way to quantify that? Presumably you haven't really seen the impact yet of it.

We haven't seen the impact and I don't think there's a mechanism to quantify it, other than it would be helpful.

The big hurdle is that we don't have current income on the borrowers, so we don't know what their current housing ratios are and how many will qualify and if they are still employed or not employed. So it's a matrix type approach you would have to take as a percentagewise, but it's very difficult to quantify precisely.

Okay, great. And then just one last question, on the average claim paid, the size on the bulk went down. What should be the run rate going forward? Is there any way to estimate that?

Well, I think that, again, Larry can talk further about this, but again, you have to remember the mix is changing monthly relative to the delinquencies that are being paid relative to what markets they are coming from. So as I said, the -- and we break I think the delinquency numbers out in our Q, so you'll see it again. So the change in notices by some of the key markets in Florida, California, et cetera, are big drivers of that and the average severity accordingly. Larry?

I would say that we're pretty much expecting severity to remain in this area of 50,000 some odd, maybe 53,000 to 54,000 to 55,000. You know, we're looking at the severity within geographies and they are pretty much constant. So if they are constant within the geography over the last few quarters, the only way this would move is if we got a different geographic mix. And, yes, although California and Florida is kind of still growing in the inventory, the bulk is tapering off. So all in all, I would expect severity to remain in the mid 50,000 range.

Okay, and then one last question -- any idea where your market share could go, increase this quarter with the new sub next year?

No. I mean that sub is going to -- that won't change relative -- it won't have any impact on market share, I don't think, unless someone else isn't in business.

Right, just given your competitors are more capital constrained and so forth, it presumably could increase the share.

We'll see if that happens.

Great. Thank you.

Thank you.

Our next question or comment comes from the line of Connor Ryan from Deutsche Bank. Your line is open.

Hi. It's actually Shawn on for Connor. Had a question -- do you guys know what the change has been -- I see the table you guys put on Page 15, which is helpful on the rescissions. Do you know what the change was quarter over quarter from I guess first quarter to second quarter on that table? I mean just order of magnitude on those numbers?

Well, we quantified the dollar amount for you. I'm not sure what you're asking then.

I'm just trying to get -- I guess I'm just trying to get a sense of the Q4 '08 -- let's just say the claims received in that quarter. What's been the rescission rate increase between 1Q and 2Q at that I guess 11.8% total between bulk and flow?

Let me take a shot at that. Just use bulk Q1 and Q2. They are roughly 18.5% and 19.1%. And 99% plus of the claims received from those quarters have been resolved. So basically those numbers are going to remain stable because all the claims from that time period have been resolved now. But to go to Q4, '08 Q4, it's -- for bulk is 12.4%, but only 77% of the claims have been resolved. So there's more to play out there. So I would expect that 12% over time to get to that 20% area, give or take.

Okay. So you guys are expecting that. And I guess as time goes by, we've heard from various people that as time goes by and you start going back to '06 to '07, which it sounds like that's clearly where the bulk of these rescissions are coming from, does it get more difficult to actually be successful on those rescissions, or -- ?

No, those are the ones that are being presented to us today.

And it's not an issue that there's been potentially -- people have been paying on those over a certain period of time and then they become a delinquency and default?

It can take 12 to 18 months for us to get a delinquency to a claim. So, again, that's why you're seeing the '06 and '07. Those are what the claims are today.

So they are still coming, taking that long for them to come through. So it's not really an issue of the borrower paying for a certain period of time?

No, no, not at all.

Once again, to reiterate the point, you get a delinquency, it takes about 10 to 11 months to get to a claim, so there is a year there. And it takes us couple of three quarters, if not another year, to do the investigation and rescission. So really some of the rescissions now are from delinquencies almost two years ago.

Got you. Okay. Thanks, guys. That's helpful.

Our next question or comment comes from the line of Anand Krishna from [Four] Research. Your line is open.

Hi, good morning. Just one more question on the rescission side. You touched up on the timing as to how long it takes. Given that you've been working on this for the last year, 1.5 years or so, I'm trying to understand -- has there been any improvement in the amount of time it takes and also the cost involved in working through the rescissions and how soon are you getting paid on these?

Well, we're rescinding, so we're not the ones getting paid. As far as the process -- I mean this is something I explained earlier -- we've always made sure the claims we pay are legitimate claims since any of us have worked at this company. It's just now that the volume of claims being presented to us is so large that we -- there are just more opportunities that were fraudulent. And so we've added to the staff pretty significantly relative to investigating those, but the process has always stayed the same relative to our investigation of those. It's just that the universe is so much larger.

And I had one question regarding the '08 vintage side. You mentioned the first quarter '08 was the not good book and the next three quarters are based on the new [dividing]. Can you give us sense on the overall delinquency rates that is disclosed in the supplement, the split between how the first quarter versus the next three quarters look, just to get a sense of the performance?

We don't have that here. I don't think we're going to break it out, but once again, the guidelines were announced late '07, early '08. They were effective in the first quarter. So view Q1 of '08 as a transition quarter, somewhere between the '07 book. Curt mentioned maybe claims rate in the mid to upper teens versus claim rates on business after Q1 around 4% or 5%. So that Q1 '08 should be somewhere in between, given it's a transitional, between the old guidelines and the new guidelines.

And finally, the 2009 vintage, what kind of loss rates would you eventually see and the profitability of the '09 vintage? I know it's still early, but --

It's early, but '09, early development is better than the '08 second half.

It should be good.

Thanks. Good luck.

Our next question or comment comes from the line of Justin Doyle from [Tri Capital]. Your line is open.

Hi. Yes, my question has been answered. Thank you.

Okay, thank you.

Our next question or comment comes from the line of Mr. Mahmood Reza from Brahman Capital. Your line is open.

Hi, guys. How are you?

Good.

Just a follow-up on the Slide 15, the cumulative rescission rates. I just want to make sure I understood the question you answered from Deutsche Bank. So understandably we've changed the methodology from last quarter to this quarter in terms of reporting rescissions. I guess what I'm trying to get at is for the total, the Q1 to Q4 of '08, the 12.6%, the 15.5%, et cetera, is it reasonable to say like what were those numbers last quarter so I can get kind of a quarter over quarter comparison?

We don't have that at the table here, but those look the same -- those numbers in sense of the older quarters, well over 90% have already succeeded and 77% of the Q4. So trying to give you a range of Q4 for dispositions are 77% and Q1 is at 98% to 99%, to get some feel on the development for the quarter to quarter basis. But we don't have that specifically at the table today.

Okay. Fair enough. That was it. Thank you.

Okay.

Our next question or comment, follow-up from Mr. Nat Otis from KBW. Your line is open.

Good morning, gentlemen. The real Nat Otis is here. Just a couple quick questions. Most have been answered. But just timing of when you think you could get GSE approval?

Those discussions are ongoing. I don't want to even speculate relative to that, burr we have been in discussions with the GSEs and continue to be so.

I mean I guess is it something that is weeks or months away, or quarters away, is there any -- ?

I really can't quantify it. You'll just have to stay tuned.

Okay. Just on a second follow-up, assuming going forward everything works out all right and in, say three to four years time, MIC's doing solid business and MGIC's in runoff -- if there's a need for capital at MGIC, would the same recourse -- would the same methodology hold true of a dividend upward if need be capital coming back up from MIC to MGIC? Is that the methodology that would take place, or how would -- if MGIC in runoff actually needed more capital?

Well, theoretically, that would be obvious. They would look -- MGIC would look to any subsidiary as it does now for additional capital and that would be the obvious source.

Okay, fair enough. That's it.

Thanks.

Our next question or comment is a follow-up from Mr. Steve Stelmach from FBR Capital Markets. Your line is open.

Hi. Just real quick back to the rescission issue. I know historically you guys have been -- you were at least reticent to have high rescission amounts for fear of maybe losing share. Does the high rescissions at MGIC complement the efforts at MIC at all in terms of market share, new business? What's your take on that?

Well, let me get back to your statement. We've always -- we've had the same process in place ever since at least I've worked at MGIC relative to our rescission process. So, again, the reason there are more today is just that the volume is so much higher. So the process itself, again, we present to the lender and give them at least 60 days to respond to our findings relative to the broader misrepresentation that we believe we found and to see if there's an agreement or not. And if not, then we have other discussions relative to that and proceed on a general basis. I think it's almost like a 99% agreement rate that we have, however, with those findings, or a very high percentage.

So I think it's a very fair process that we've always done. It's just, again, back to there's just more opportunity today given the world and particularly the 2006 and 2007 originations. So does it impact market share? I don't know. I think people respect the fact that we've always been fair in the process.

That's helpful. Thank you very much.

Our next question or comment comes from Mr. Brian Montaglione from Barclays Capital. Your line is open.

Hi, good morning. This is actually [Ming Zheng]. I work with Brian. So my question was, what is the current excess capital position at MGIC?

Statutory basis, [1.1] the at end of this quarter. It was [1.3] at the first quarter. So that's the excess over MPP.

Okay, great. Thank you.

Our next question or comment comes from the line of Mr. Jordan Hymowitz from Philadelphia Financial. Your line is open.

Hi, guys. Just want to throw something at you and tell me if this is a reasonable way to think about it. If MGIC is in runoff basically or could be in runoff, and reserves equal paid claims, which you think is more than enough, and you've put $1 billion into this new entity that you think you're going to earn 15% to 20% on at this point, then basically in two or three years, MGIC's new entity MIC will own between $1.20 and $1.60 and the old entity will be a little bit better than breakeven. Is that a reasonable thought process?

Jordan, I don't think we're going to speculate on earnings per share and revenue forecast that far out.

Let me put it this way. Do you think your marginal business is making 15% to 20% on equity at an 18 times leverage?

Yes.

Okay.

Clearly.

Okay, and you clearly then think that your old business is at least breakeven, correct, or they would enable you to run off the $1 billion?

From a cash flow basis?

Yes.

Yes.

Okay. That's it. Thank you.

Okay. Thanks, Jordan.

(Operator Instructions). Our next question or comment is a follow-up from Mr. Connor Ryan from Deutsche Bank. Your line is open.

This is Shawn again. Just one question on the rescission. Just trying to understand where -- so the percentages that are in the chart that you guys have, are those actually confirmed rescissions, or are you still waiting to hear back from the lender and the servicer on whether or not you actually don't have to pay the claim?

We only rescind after hearing back from the servicer.

So is that a done deal? Are they basically--

Those are done deals.

Okay. And do you expect I guess just thinking about '06 to '07, that those were the largest -- that's where the largest portions of the rescissions are coming from? Like '08, on prime conforming '08, do you expect to find rescissions in any of those books? I'm just trying to get a sense of the '06 to '07 books where -- if there was prime conforming, where the rescissions or where the fraud is coming from or what portion of that book, or have you eliminated that when you're looking at the '08 books?

We did very little bulk business in '08, if any at all. So that won't be there and that's been a high percentage of our number. But I mean there still will be some in a way. There was some every year we've done business, but there'll be just less opportunity. '08 in totality will be much lower.

Do you have a sense of what it was prior to this downturn? Was it a meaningful percentage?

No, it was probably 1% to 2%.

Okay, okay. Thank you.

Thank you. Also just to clarify, when we say we rescind the percentages there, our rescission is actual attempts at signing letters of agreement. The policy holder still has rights of arbitration post that period of time. They are done and agreed upon, but they do have the right over a period of a year to come back.

Period of years, you said?

Yes. We've gone through the process with them.

Have you seen people take up that option?

No, limited pushback at this point.

Very limited pushback.

Okay, okay. Thanks, guys.

Thank you.

Our next question or comment is a follow-up from Mr. Craig Carlozzi from Mast Capital. Your line is open, sir.

Hi. So thinking about the capital being downstream into the new sub, using your definition and your calculation of excess capital, that would leave you with roughly $300 million --

That's a different calculation. What someone asked me was the statutory term, and that's a statutory calculation of what we call MPP, excess over MPP, which is minimum policy holders surplus.

Okay.

So I -- that was a specific question. So I think the $1 billion that you're talking about is a different $1 billion and it gets back to what Mike Zimmerman was saying before about excess resources. In other words, if you look at the book of business in runoff, you start with $8.5 billion of cash plus the future premiums and investment income versus the paid claims. And that's a different number.

Right, right. No, okay. Let me phrase it then. So the existing opco presumably minus the $1 billion is a weakened entity with respect to its ability to service policy holder claims at MGIC. I was just curious how your conversations with the GSEs are going. Is there any pushback and requirement with respect to some type of reinsurance agreement with MIC and MGIC, or is that something they are not even discussing right now?

We are not talking about reinsurance. I think through these discussions there's always pushback, however.

The asset is in MGIC in the sense that it's in a wholly owned subsidiary.

Right, in the form of capital stock. No, I understand that. My question is, though, is are the GSEs, being the fact that they are effectively your captive customers at this point in time, are they requiring any type of reinsurance?

Not at this time, but we're in discussions with both.

Okay, okay. Thank you.

Our next question or comment comes from the line of Mr. Dennis Clark from QVT Financial. Your line is open.

Hi. I just wanted to ask for a quick update on the holdco cash position. I know you commented on it somewhat extensively last quarter, but I would like to you roll forward all of those numbers if you could?

At the end of the quarter, we were $124 million.

Okay.

And during the quarter, we paid down the line, the $200 million bank line and we also repurchased some of the 2011, October 2011 debt -- $34 million of that. So we're at $124 million at the end of the quarter, but as of the end of -- as of today, we're about $120 million because we had another small repurchase of some of that debt. So it's approximately $120 million.

Okay. Then I guess there was a question earlier about putting an expense sharing agreement in place between the holdco and the opco and whether any discussions have happened there and I didn't think that got answered.

We don't have an expense sharing agreement with the holding company and the writing company. No, I -- maybe I misunderstood the question.

The question was, are there efforts to put one in place?

No.

Okay. Thanks very much.

You bet.

Thank you. Operator, anymore questions?

We have no further questions in the queue at this time, sir.

Okay. Well, thank you, all, very much for your interest in our company, and have a good day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.