MGIC Investment Corp (MTG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MGIC Investment Corporation first quarter conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question and answer session and instructions will be given at that time. (Operator instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Mike Zimmerman. Sir, you may begin.

Great. Thank you. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the first quarter of 2011 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 participant that our earnings release of this morning, which may be accessed on MGIC's website which is located at www.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 information on our low new insurance written. I'd like to point out at this time that on page 13 of that supplement that's on the website, the average they paid claims is incorrect and will be reposted after this call with the correct information. During the course of this call, we may make comments about our expectations of the future. Actual results could difficult 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 the issuance of press release. And with that, let me turn the call over to Curt.

Yes, thanks, Mike. In the first quarter we reported a net loss of $33.7 million versus $150 million loss last year. The loss reflects the continued impact of the weak but modestly improving credit and economic conditions. New insurance written for the quarter was $3 billion, up from $1.8 billion from the same period last year. During the quarter an additional $894 million of HARP refinance transactions were also completed and were not reported as new insurance written as we treat such volume as modifications. The HARP program was originally scheduled to end this June but recently was extended by one year to June 30, 2012. These transactions are good for MGIC in that they continue to allow current borrowers that are already insured to improve their credit profile through lower monthly payments by refinancing at today's lower rates.

Absolute levels of new insurance written volume continue to remain low due to the weak housing market, the continued strong but diminishing presence of FHA and the add-on fees the GSC's impose on borrowers. [Borrow] the private mortgage insurance industry market share continues to rebound from the low of 3.6% in the fourth quarter of 2009 and is currently estimated at 5.5%. On April 18 the FHA higher premiums went into effect and we expect that our industry will continue to regain share against the FHA. And importantly, MGIC should get a disproportionate amount of business from higher credit score borrowers, reflecting our credit teared premiums.

So at this point for 2011 we still expect new insurance written to be in the $12 billion to $15 billion range. Persistency in the quarter was 83.7%, which was down modestly from last years level -- last quarters level of 84.4% and as a result, insurance enforced declined to $187 billion from $191 billion last quarter and $207 billion a year ago. The average earned premium yield was 61 basis points, up marginally from last quarter's rate of 60 basis points. Underwriting and expenses totaled $57.6 million versus $59.9 million in the first quarter of last year. Cash and investments totaled $8.3 billion as of March 31, risk to capital declined marginally to 19.7 to 1 -- down from 19.8 last quarter primarily due to the decrease in risk enforced and is down from 20.2% -- 20.2 to 1 in March of 2010. The year-over-year decrease in risk to capital also reflects the $200 million contribution made in the second quarter of 2010. Losses incurred decreased during the quarter to $310 million versus $448 million last quarter and $445 -- $454 million, rather, in the first quarter of last year with loss reserves now totaling $5.5 billion and the average reserve per delinquency on the primary loans which increased to $24,331. The number of primarily delinquent loans decreased by 18,839 units due to a materially lower level of new notices, a modest increase in the number of reported cures and an increased number of paids. The recent trend of new notices has been better than expected, even after considering typical seasonal patterns. The delinquency improvement was widespread. Flow delinquencies were down 9.4% while bulk decreased 7%. California and Florida delinquencies decreased 10% and 6% respectively, while 2007 and 2006 book years decreased 9% and 8% respectively.

The cures continue to be concentrated among the delinquent loans that are in the earlier stage of their delinquency. Despite a decrease in the number of delinquent loans in all categories, the average reserve per delinquent loan increase in the quarter as a percentage of delinquent loans aged 12 months or greater increased to 57% from 55% last quarter. The level of non-modified or natural cures continue to increase as the modifications fell to approximately 16% of all primarily cures reported, which was down from 22% last quarter and our peak level of 33% in the second quarter of last year. As of March 31, 15,400 loans of the primary delinquent inventory were reported to us as being active in the HAMP trial process which is down modestly from last quarters level of 16,800. In the quarter there were approximately 4,000 new HAMP trials reported to us. As we have previously reported, HAMP activity has slowed but still accounts for a meaningful percentage of cures. The number of loans modified under HAMP in the quarter totaled approximately 3,800, or just over 8% of all cures. In addition to HAMP, other alternative modification programs continue to produce results and those cures totaled 3,400 in the quarter. Currently the HAMP modifications and alternative modifications with adequate seasoning continue to perform better than our historical redefault rate of 50%.

Paid claims in the quarter were $687 million versus $631 million last quarter and $519 million in the first quarter of last year. The average paid claim was $47,900 which was down from last quarter's $48,800, due primarily to average claim paid in the bulk business decreasing. As most of you are aware, many services -- servicers suspended foreclosures late last year as they have made adjustments to their processes. Recently many servicers have resumed processing foreclose and as a result, we have seen an increase in the number of claims filed with MGIC over the last several weeks. At the end of the quarter there were approximately 17,700 loans that have been received but not yet paid and there are 94,000 loans that are 12 months or more past due. So with that as background, we expect paid claims for the balance of the year to be at or higher than the first quarter run rate. Total estimated primary and pool loss mitigation savings continue to decline and totaled $503 million in the quarter with $237 million of that in recessions and denials, compared to last quarter's savings of $617 million where we had $288 million in recessions. As I have previously stated and shown on page 15 of the supplement, the percentage of claims resolved through recession has peeked and that it should continue to climb over the next several quarters, although the rate of decline is difficult to estimate.

Now let me discuss two key issues relative to our Company and industry. The implementation of the Dodd-Frank Bill, specifically the recently issued QRM definition, and the status of GSC reform. As many of you are aware, the federal regulators have issued for comment (inaudible) for risk retention for residential mortgages, which includes a definition of a QRM that would exempt securitizers and/or lenders from risk retention requirements. It took eight months to prepare and is more than 360 pages in length and has more than 170 questions seeking public comment. There is no specific implementation date set but the Dodd-Frank called for it being adopted one year after the final rules are published in the federal register and the comment period runs to June 10 if not extended. Currently the definition of QRM is very narrow, and while purposefully designed to be a small percentage of the overall market, we think that if enacted as is it could unnecessarily raise the cost for a large number of prospective quality borrowers. For example, FHFA has reported that for loans that the GSC's purchased or guaranteed between 1997 and 2009, less than 20% would have met the definition. Based on conversations with housing regulators and politicians, we believe that many parties will or already have voiced their concern about the narrowness of the QRM definition. And while we are disappointed with the initial definition, we are encouraged by the fact that the regulator specifically requested public input and data that demonstrates that loans with mortgage insurance are less likely to default than other loans and they are also requested public comments regarding the possibility of expanding the QRM definition to include loans with 90% loan devaluation that have mortgage insurance.

Since a release of the definition we have been working within our industry with our trade associations, regulators and with members of the administration and Congress to provide the necessary response to ensure that the value and benefit of mortgage insurance is well-understood. So what does that mean to MGIC? In the short term, under the proposed rules, because of the capital support provided by US government, the GSC satisfy the risk retention requirements while they are in conservatorship. Therefore lenders that originated loans that are sold to the GSC will not be required to retain any risk associated with these loans. This means that originators do not need to change their loan origination process and that we expect they will continue to offer conventional loans with mortgage insurance to their customers. The GSC reform debate continues in Washington, in February the US Treasury and HUD stated that their goal is to reduce the federal government's foot print in housing and in February, to promote that goal, they proposed three different versions for housing finance that is intended to frame the debate. Since then there have been several congressional hearings on the topic and we expect many more meetings and discussions will take place both publicly and privately. And while the House Republicans recently introduced eight separate bills addressing various topics of concern with the GSC's from increased guarantee fees to compensation, we do not believe there is any consensus with the House Democrats or in the Senate. Recent actions and conversations reinforce our belief that regulators and politicians understand that in order to achieve the goal of a reduced government foot print in housing, that any changes need to be coordinated and complimentary regarding the GSC's and FHA to avoid increasing the FHA's and taxpayers exposure to housing. So there is much more to play out on the GSC, FHA and QRM front but we continue to be encouraged by the central theme of the entire process of reducing taxpayer risk by shifting it to the private sector. With that, operator, let's take questions.

(Operator Instructions) Steve Stelmach.

Could you just give us a little bit of color on the age delinquency inventory for the 4 to 11 month bucket? What percentage of that bucket tends to move to a claim historically and where are we at today?

The number of delinquencies in the 4 to 11 month bucket is about 57,000. It was 58,000, almost 59,000 at year end and about 90,000 a year ago. So you can see that there's been a transition. Relative to the timing of when they go to claim, a lot of that's been affected as we reported out the last several quarters. Many things have been delayed this last 2 quarters so you can't really look at it from a normal, I think, transition period. We did see some free up, obviously. And that's why we did see the increase in claims in this last quarter. But for the most part, it's been a very slow transition in the -- because of a number of things. First of all, the delay in foreclosures, second of all the extensive work that we've done in examining the claim prior to payment. So the combination of those things is really been affected in that area.

Okay. I guess the question was what sort of percentage of that bucket ends up going to claims historically.

Steve, this is Mike Zimmerman, we haven't disclosed in the past cumulative claim rates nor certainly not by granular buckets of 1 to 3 months or 11 to 12 months so I think we'll be sticking with that at this point.

Okay, great. And just housekeeping, how much cash is at the wholesale?

About $888 million.

Okay. The vast majority at that rate is still there? Okay. And then can you talk a little bit about the expense base for you guys? I mean, obviously it originates that I think -- are generally lower than most would have expected. Is there any room for you guys to sort of trim that expense base or do you feel like you're adequately staffed for your outlook on NIW?

Well, it's going to be a function, I think, of a couple of things. We've staffed up significantly over the last 2 years with respect to claims administration, even though we've decreased on the front end of the business and I think, well, for this current year we're probably at this run rate right now. To the extent that we're able to get efficiencies in other areas, we'll continue to do that. Relative to volume changes, we have the capability of obviously writing more volume with this current fixed cost. But I think at this level, we're running at this level for the balance of the year.

Douglas Harder.

I was wondering if you could talk about the composition of the new notices between sort of re-defaults and sort of never -- customers who had never been defaulted before.

Doug, this is Mike. I'll look that up. I do not have that specifically handy and so maybe we'll see if we can go back during the other questions. We'll try to get that answered while we're on the call here.

Yes. And then I guess sort of on the new notices, any thoughts as to how sustainable the improvement is? I know that you talked about it was being broad-based and better than seasonal -- sort of any outlook for the ability to sort of continue to improve from these levels?

The -- just a little color on the new notice activity, I guess, from my book of business standpoint the worst performing books, namely the '06 and '07 books of business, they are the ones that are showing the most pronounced drop in new notice activity. They were at pretty high levels and they're coming down at a very steep rate. The older books of business are also declining but at a much flatter pace and that kind of scenario would also carry over to geographies, the ones with the most problems and the highest rated notice activity in the past -- they're coming down rather steeply. So, quite frankly, it's the uglier books of business, geographies and product segments that are showing the most pronounced decline.

Matthew Howlett.

Hello, you guys. Thanks for taking my question. Just on the delinquent inventory getting back to what's delinquent 4 months past -- any indication what's in trial mods? I know you give us a HAMP number but is there anything on what falls out of hand and goes into alternative proprietary mod programs?

Well, Matt, it's Mike Zimmerman again. We don't have much trial there other than from HAMP. So the alternative mod will go to 3,400 modifications that are completed, I'm sure some of those will fall out of HAMP. We don't have an exact statistic on that but, again, we don't get a lot of trial reporting on anything other than HAMP.

Is there anyway to estimate what percentage of those deeply delinquent loans that are in the alternative mod or is there just sort of no way to tell?

We don't think there's any reliable way to estimate that.

Got you. And then just, again, moving back to the seasonality, did the March query show -- was that [150]? Did I get that right?

If you exclude the rescission, I think that's generally -- I think that's correct.

There is obviously some seasonal benefits. I mean, if you look at the drop, where we'll go in the next rest of the year -- you had about a -- I think it was a 23% drop last year. I mean, can we assume -- a 31% drop in sort of what the peak when March was to what it was in the average for the remainder of the year. Can we assume the current ratio's going to be around the 115% to 120% area on average for the reminder of the year given where we're starting March off at?

This is Mike Zimmerman again, Matt. I think if you look at historical data there's no support for that type of assumption. So really it would all depend on your view of credit improvement or deterioration.

Mike Grondahl.

Just a couple quick questions. Curt, first of all, could you kind of expand on your comment where you said new notices were better than expected even after considering the seasonality? Just -- what specifically drove that? You've given us some numbers but if there's something in the macro world that's driving that? And then secondly, maybe for Mike, have you guys had any denials or lower claim payments because of server adequacy or inadequacy so far?

Well, the second question again, what do you mean by inadequacy?

Well, by -- the -- (inaudible - multiple speakers)

-- claims if there is negligence or servicing errors or deficiencies. So, yes, we do curtail claims and we have for -- I mean, forever.

And relative to the delinquencies being better than you -- seasonally we expect it to be good, particularly March to start a real positive run for us. But we outperformed our expectations in the month. What that's a result of, I'm not sure. I think the employment sector is a little better than we would have thought. The underwriting criteria under which these loans are underwritten is very strong. So even if values decline, borrowers are still realizing the benefit of housing. So I think it's just a combination of the economy being a little bit better, Mike, and the strength of the underwriting criteria that these loans were booked under.

And then maybe just lastly, the $310 million provision this quarter, was there any swings positively or negatively? In the fourth quarter there was that $300 million negative adjustment due to lower future recessions. Any swing in this quarter?

Yes, I'd say the only -- with respect to the provision for the quarter, the only thing that you see is that the average case basis is up slightly and that really is a function again of what we talked about the aging, the fact that we've got a higher percentage of notices a little bit older, over 11 months past, and the mix of inventory. So that was a modest change, if you will, in the quarter vis-a-vis the fourth quarter. So no significant change other than the aging of the inventory.

Okay.

No change with respect to recession assumptions.

Sean Forrad.

I want to talk a little bit about premium yields and where you guys see those going for, I know they picked up a little bit in this last quarter but where you see those going forward?

Sean, this is Mike Zimmerman. Part of the change was, if you remember last year we saw decreasing premium yield as we were adjusting for rescission's as they were increasing. Now you have the other side of that taking place with it. So, to the extend that we're on track with the rescission activity, we should be hovering right around this area, I would think.

So you guys think you can maintain in the 60 basis point range for a while here? Anything you see changing that going forward?

I don't see any increase in it.

Yes. I think we'll be in that range for some time.

And then one other question, I know you talked a little bit about the expense base from a previous question but when you look at the quarter-over-quarter change here or the increase in quarter-over-quarter, how much of that is driven by seasonality and just where you guys are with -- was that driven by the increase in cures and, obviously, delinquencies dropping or should we expect to see that number come down from seasonality going through the year or should it stay at a similar level?

Well I think, as I reported earlier, I think it will probably stay at about this level. It's up slightly from the fourth quarter but down from a year ago. But I think that at this level we'd anticipate probably staying at this level unless we make some other change with respect to staffing relative to volume, et cetera. As I said, we're kind of at a full pace now with respect to claims administration which we've staffed up over the last 1.5 years and we're paying at some significant levels for this period all through this year, and then we'll look at it again as we get into 2012.

But there wasn't a specific change as far as being up, I guess, whatever, $4 million quarter-over-quarter.

Well, the quarter -- as you mentioned, quarter-over-quarter is -- there is some seasonality from fourth quarter to first quarter relative to benefit costs FICA, et cetera, so there's generally an increase fourth quarter to first quarter. That's predominately it.

(Operator Instructions) Nat Otis.

Just -- I guess a question has to do with home price depreciation, certainly getting maybe more questions these days on where home prices might go. Any thoughts on what your thought -- what 2011 could have on home prices and what, say, a depreciation of maybe 5% to 10% would necessarily have on you guys?

For the 2011 year-over-year, the FHFA index, which we think ties best to our business given that it is mostly Freddy Fannie, our current assumption is for a decline of 3% over the course of the year. And relative to the losses, I guess the models really haven't seen this kind of scenario. I guess back to an earlier question about what is driving the -- our view of new notices versus actual being better, one reason might be that even though home prices are down, if these borrowers have made it this far, even though their home is under water, as long as they're employed they are faring better than a lot of people think and a lot of those models might anticipate. So we continue to update our models. But I guess that's a thought I'd just throw out there.

Yes. I would augment that because just from my years of experience in the business, with the price declines that we experienced over the past few years, what that did to me, or what thought it weaned out all of those people who were investors or marginal to housing. And over the last few years we've put on people that, one, their expectation is that I'm not sure if housing will go up or not but I'm going to buy a house or a home. So I do not think that the decrease in values, the 3% to 5% in that range, would have a significant impact on MGIC at all because we've got, you know, relative to our severity we're already modeling in 100%. Now where in a perverse way that it might help, if you will, is an argument against FHA because as those values fall where they have 100% insurance that will increase the size of their losses rather dramatically. And just, again, point out to the housing regulators and the administration and those involved, that private capital needs to replace that model because of the huge taxpayer risk that's associated with those values falling on FHA. I don't think it has a big impact on us but I think it helps us make even more clear the case for private capital in the housing system.

And then just lastly, any thoughts -- you had a little commentary in the press release on your dealings with Bank of America and it looks like that arbitration hearing was pushed from October to 2012. Any commentary on why that shift took place or anything you can update us on there?

I don't really think other than what we've said is -- that's pretty much where we're going to leave it.

Mike Grondahl.

Just in relation to Bank of America and what not, do you think their recent settlement with AGO helps your case that you have with bank of America, and then maybe secondly, kind of where are your current relationships with your customers? How would you characterize them generally?

Well, again, back on the bank of America, I don't think there's anything we can comment on relative to what they're thinking. So, I don't think there is anything more we can say on that, Mike. Relative to our relationship with customers, all I can say is I think the January market share, which is the last official market share, I think we were at 24%, Pat, so we were at 24% in January. Unfortunately United Guarantee has left MIKA so that delays us getting market share information any more relevant than that. But until the quarter ends -- or inside mortgage finance publishes numbers but -- so I'd say our customer relationships outside of Bank of America are very good.

Okay.

Yes, there was an earlier question from Doug relative to the makeup of the new notices. As of late, about a third of the notices coming in -- as a new notice to us each month, about a third of them had no prior notice. A year or so ago about half of the new notice activity had to do with first timers, let's call it, first time delinquents. So now we're down to a third. And I can tell you historically, that means that 70% or so are repeats and those repeats, those habituals, generally have had a higher cure rate than a -- somebody that's not been delinquent before. I hope that answers your question. Operator?

Donna Halverstadt.

My questions were asked, thank you.

Steve Stelmach.

Curt, love to get your thoughts on consolidation within the industry. You talk in the press release about a couple new competitors, but at this stage in the game with credit losses pretty much coming to an end, does consolidation seem to make a lot more sense today than maybe in the past few years?

Well, I thought that consolidation always made sense so we'll have to look and -- I just think that it makes sense for industry and I do not have any more to say.

Yes. Do you think there are more opportunities out there than there have been historically now that people may get comfortable with books of business?

Let's just leave it at consolidation makes sense.

Matthew Howlett.

Have you guys updated your lifetime profitability forecast for the book similar to what you gave last April?

No, we have not.

No.

Can I -- I mean, can we still expect -- do you still expect the book to be profitable? I might say that in the context to the reserve on the full -- on the deferred tax asset. I mean, eventually do you think that will be realized?

Yes. This is Mike Lauer. We have to run a book runoff scenario for the accountant so, yes. The premiums exceed the expected losses, otherwise we'd have to set up a premium deficiency reserve.

Thank you. I'm showing no further questions at this time, sir.

Well, with that, I thank you all for your interest in our Company and have a wonderful day. Thank you.

Ladies and gentlemen, thank you for your participation. That concludes the conference.