MGIC Investment Corp (MTG) 2011 Q4 法說會逐字稿

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

Thanks, Becky. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the fourth quarter of 2011 are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; and the Executive Vice President of Risk Management, Larry Pierzchalski.

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

As we have indicated in this morning's press release, we have posted on our website the 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 an obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of a press release. With that, let me turn the call over to Curt.

Thanks, Mike. Good morning. I am happy to announce that we have successfully concluded our discussions with the OCI of Wisconsin and the GSEs that allows us to continue our strategy of using a combination of MGIC and MIC to position us to write new business on a nationwide basis.

We have received a few calls this morning, so I want to clarify that the $200 million contribution to MIC is the same $200 million we contributed in December. To date, we have not needed to fully implement our strategy, which has been in place for over two years because MGIC has been compliant with all capital requirements. However, we expect to use MIC sometime in the second half of 2012 in certain states where MGIC would not be able to obtain a waiver of regulatory capital requirements.

For a number of reasons, the exact timing of when we need to use MIC is difficult to predict. More information can be found about the terms and conditions of the OCI and GSE arrangement in our SEC filing of this morning.

The continued but lessening impact of the legacy books of business combined with the slow economic conditions of 2011, especially the lack of a meaningful decline in the number of unemployed people, continued to pressure our Company's financial results and its capital as reflected in the net loss for the quarter of $135.3 million, or $0.67 a share and a net loss of $2.42 a share for the full year.

Reflected in the results for the fourth quarter were two financial transactions. First, we repurchased 74 million of our 2015 debt, leaving a balance due of $171 million. This transaction realized a $24 million gain and will save about $16 million of interest expense over the life of the debt.

Second, at the end of the third quarter, the unrealized gains in the investment portfolio were $200 million. During the fourth quarter, we sold a significant portion of our municipal bonds, along with some treasuries resulting in a gain of $104 million. The proceeds from these sales were reinvested in taxable securities. At year-end, the portfolio had approximately $120 million of net unrealized gains.

Now that all our MI competitors are publicly reporting their new insurance volumes, we can once again report on the industry's marketshare. Based on the last public data, the industry approximated 6% for the first nine months of 2011 compared to 4% in 2010 and is estimated to be 6% to 6.5% for the fourth quarter.

Our industry continued to regain marketshare from the FHA throughout 2011, but the pace of that recovery is slower than we would have liked given the continued differences in underwriting guidelines, loan level price adjustments and the secondary market gains associated with government-insured loans versus loans insured by the private sector.

The consensus view for 2012 residential mortgage originations is about $1 trillion, down from $1.2 trillion to $1.3 trillion in 2011 and will be down primarily due to less refinance transactions. As I mentioned, we don't expect to see significant changes to the FHA or GSEs in 2012 or at least early enough to impact 2012 production. So for the coming year, we would expect the industry's new insurance written levels to be modestly higher in 2012 from the 2011 levels.

Within the industry, for the first nine months of the year, our share was effectively flat to the same time period in 2010. However, more recently, our share has slipped some and we estimate our fourth-quarter share to be approximately 20%. New insurance written in the fourth quarter was $4.2 billion compared to $3.9 billion last quarter. An additional $813 million of HARP refinance transactions was also completed during the quarter. For the full year, we wrote a little over $14 billion of new insurance, up modestly from last year's levels. An additional 11,000 homeowners modified their loans through HARP programs totaling $2.9 billion, thus improving their ability to continue making their payments.

The new business we have been writing since mid-2008, which comprises approximately 25% of our current in force as shown on page 10 of the portfolio supplement, is of very high quality and based on credit performance to date should be some of the best business we have ever insured. So with that as background, we would expect new insurance written for 2012 for MGIC to be modestly higher than 2011.

Losses incurred in the fourth quarter were $482 million versus $448 million last year. The level of losses incurred in the quarter were primarily a result of the slight increase in the claim rate on previously received delinquencies that are still in inventory. For the year, the number of new delinquencies received was down 17% from 2010. However, the cure rate did not recover as fast as we had expected, most likely due to the sluggish economy. The level of cures was also impacted by fewer completed loan modifications than in 2010. As a result, total losses incurred for 2011 were $1.7 billion versus $1.6 billion last year.

Paid claims in the quarter declined modestly and totaled $704 million. The sequential decrease was due primarily to a lower level of pool paids as we have discussed on prior calls. The average claim payments stayed level at approximately $51,000 per claim. It is still our belief that assuming the current foreclosure pattern of lenders and the courts and given the relatively lower level of unpaid claims inventory that we have that total claim payments peaked in 2011 and while there may be some volatility on a monthly basis, will continue to trend lower in 2012.

Rescissions and denials continue to have less impact on our financial results. As described in the risk factors of this morning's press release, in the second half of the year, we saw an increase in the level of pre-rescission rebuttals received from one major servicer, which has caused a percentage of claims resolved by rescission to be lower for the most recent quarters. As the higher level of these rebuttals are resolved, they may cause a short-term increase in the number of rescissions. But overall, we expect the level of rescissions for the entire year of 2012 to be lower than 2011.

Cash and investments declined throughout the year ending at $6.8 billion, reflecting the elevated level of claim payments, the decline in premiums from the smaller in force book and the retirement and repurchase of outstanding debt.

At December 31, 2011, the combined insurance company's risk to capital ratio remained below the 25 to 1 threshold at 22.2 to 1 and MGIC and MIC are eligible insurers of both Fannie Mae and Freddie Mac. As we have said in the past, we believe MGIC has more than sufficient claim-paying resources to meet all of its policy obligations, even under stress loss scenarios.

So to summarize, while we expect the effects of the sluggish economy to continue to challenge the Company's financial results and capital in 2012, we are encouraged by the support of our strategy by the OCI, Fannie Mae and Freddie Mac, the continued outstanding quality of the new insurance written and the growing opportunity to take share from the FHA. In addition, the delinquent inventory continues to decline and as I mentioned earlier, we believe paid claims have peaked on an annual basis.

Before we take questions, let me make some comments about the state of affairs regarding housing finance reform, including the FHA, GSEs and QRM. To be brief, I do not expect to see much movement on these topics over the next several months. A consensus seems to have been reached at limiting exceptions to risk retention to either 20% down payments or government-insured loans is not the way to go as it will need to mostly limit the number of borrowers that can purchase a home in a responsible manner and increase taxpayer exposure to housing. It is our continued belief that the QRM definition and GSE reform need to be linked together and should be addressed in a coordinated manner along with further FHA changes if the Administration and the Congress' goal of reducing the government footprint in housing is to be realized.

Unfortunately, the lack of clarity surrounding housing finance will continue for some time as there is much to play out in Washington. However, we remain encouraged by the central theme of shifting lending activity back to the private sectors. With that, operator, let's take questions.

(Operator Instructions). Steve Stelmach.

Good morning. Congrats on the waivers and approvals, guys.

Thank you.

On the cure rate guidance, guys, can you just give me some more color on why you suspect cures will be improving throughout the coming year? Is that simply just a mix shift issue in terms of the state of delinquency -- the current delinquencies are in or is there something else going on there?

Well, there's a number of factors. First off, the economy, hopefully employment and home prices start to improve and hopefully at a pace faster than what has occurred so far. Secondly, as you stated, the mix. Fewer of the new notices coming in the door are from the peak of market -- the policy years '06/'07. Few are from the more distressed markets such as California and Florida and few are from some of the higher risk segments such as reduced stock. Now, they continue to decline from those various segments, but a good part of that happened a year ago. It is still occurring, but at a slower rate, so that is part of it.

The second thing is -- or another thing is the help we got from HAMP. We had a lot of help a year or so ago when the program was introduced. A lot of the cures resulted. It is still contributing, but at a slower pace. So it is a number of things, primarily though the economy.

Okay. And I didn't, I think, fully get the rescission guidance. You sort of guided to maybe a little slight uptick in rescissions because of an uptick in rebuttals. Is that just because you are moving denial to rescission rather than any sort of improvement in the rescission activity?

Well, actually, rescissions will be down year-over-year, but, in the early quarters, we may have a higher level because we are dealing with some of the rebuttals that we received from one servicer in the fourth quarter. And so those will be playing out in the first and second quarter and they will, I think, take the rescission level higher than they had been over the past couple of quarters. But then for the year, we expect 2012 to be lower. So we may have increased activity early, but then trend lower throughout the year.

Okay. So it's more of just a timing issue than anything else?

Yes, totally.

Okay, got it, got it. All right. And then, last, Curt, you mentioned the government's goal of reducing its footprint on the mortgage market. Meanwhile, now 10 basis points of a [G] fee for the Fannie and Freddie, go directly to that treasury. Presumably it makes it harder to sort of reduce the GSEs' role in the world. Not necessarily a bad thing for you guys. Would you agree with that or is that maybe overstepping the bounds?

Well, more importantly is the 10 basis point increase on FHA that will happen; although we don't know the date on that. To reduce the government footprint, they need to take care of all three of the GSEs and the FHA and somehow that seems to be lost on a number of the policymakers. However, we are seeing improvement. Certainly HUD needs to -- at a risk to capital ratio I think of 846 to 1 on the FHA, they are dealing with the issues both on fraud and premium rates and they have proposals to deal with that. So that is the real change that needs to happen more quickly than it has happened.

Relative to the GSEs, I mean they are still an important part of the housing finance chain and I think it will take time to move them to whatever status they may move to. But along the way, I know we will be important partners.

Great. Thanks, Curt.

Chris Gamaitoni.

Thanks for taking my call. Could you give us a little clarity on what drove the increase in the claim rate?

As you looked at notices again, as Larry pointed out before, the trend of notices has continued to be seasonal, if you will and lower notices in the first half and higher in the second half. The cures have been lower for the most part in the last several quarters. I guess I would say, as we said earlier to Curt's comments, lower than expected in our case. So you have got a continual aging on the inventory, especially on the notices and older books, '07 and back, if you will.

If you looked at the number of notices at year-end, the notices from the '08 through '10 books are less than about 15,000. The rest of it is '07 books and back. And while those notices have been declining, as Larry indicated, on a quarterly basis, they have been declining slower, if you will, throughout this year, those books of business. So albeit on a monthly basis, they are lower. They are still not as low as we would have anticipated throughout the year. So we have increased the rates, if you will, on the back half of the book. Nothing new on the '08 and forward books and nothing new on severity.

That makes sense. And in response to MIC, what kind of risk to cap would you be willing to go in that -- I know that is unlevered today. So I'm just trying to get a sense of how much volume can be funded with that $400 million.

Chris, this is Mike Zimmerman. The state regulations -- they are non-GAAP, so they can go right to the full NPV or 25 to 1. However, there's conditions with the GSEs that would limit it to 20 to 1. So I guess the oversimplified math would be -- there would be a little over $400 million of capital at 20 to 1 leverage would give you the amount of risk, sometimes an average coverage percentage of --.

And do you know -- can you give us what percentage of originations in 2011 were from those states where you would be using MIC?

Well, half of it is in the states that have the capital requirements. New York, for example, is a state that does not have the authority to give a waiver. I think we wrote a little bit over 2% or so of our business in New York. I'd have to look up Idaho and Kentucky to be honest with you. It's a relatively insignificant amount. But it is dependent on whether the states provide the waivers or not, but all states that have the capital requirements account for about 50%.

Okay. And then I just wanted to make sure -- I'm not sure if I heard this right. Did you say you have updated the actuarial analysis and even under a stress scenario, you would be able to pay claims?

We made that statement that, under distressed scenarios, we have more sufficient claims. We went through that stress test we do with the state on a regular basis and then more recently, Freddie Mac had commissioned one as everybody is aware of. So that was the update. There wasn't one updated in January.

Okay. I think that is all I have. Thank you so much.

Doug Harter.

Thanks. I was wondering if you guys could talk about sort of your willingness on the further opportunities to repurchase more of your 2015 debt.

Again, that is a subject that we look at every month and every quarter relative to everything else that is happening. One would be obviously the opportunity to repurchase at a price. In that particular case, we had a large piece that became available to us. Subject to that, it would again just be discussions with the Board what the market price is and other uses of capital.

As you can determine during the fourth quarter, we had a number of activities going on with respect to the new agreements with the GSEs and the OCI and dividending down some capital. So it was a busy quarter, but we continue to look at that on a monthly basis.

And is it still the plan, as you guys talked about last quarter, to maintain enough parent company cash to cover that debt maturity?

The 2015?

Yes.

Yes.

Great, thank you.

Mark Devries.

Yes, thanks. Does the $200 million contribution you are going to be making this month from MGIC down to MIC, does that impact the risk to capital ratio of MGIC at all or do you continue to have credit for that?

No, it is already calculated. The $200 million in MGIC is there today and when you dividend the $200 million down to MIC because it is a sub of MGIC, it remains the same.

Okay, okay, thanks. Could you comment on any kind of competitive dynamics that you are seeing now with PMI and Republic out of the market and how different players are responding, how share is moving around?

I think we have seen a pickup by both United Guaranty and Radian in share. In one case where we have lost business, it has been on business that has been single premium-oriented that our premium rates weren't competitive because what the business was being booked at didn't hit our return hurdles. And so rather than use capital on business that to us didn't hit those return hurdles, we allowed that business to go to others.

And also, I think one of the companies has delegated authority back to the GSEs relative to underwriting and that is a difficult equation for us to look at also. And so in the case of that, it is based on more business available, but it is just something that is difficult to pursue right now for our company.

So where we have lost share, it is not that you lose it for the right reasons, but it is things that just didn't hit our underwriting or return hurdles. It wasn't -- I mean it was business we would have liked to have had, but, at this point in time, it didn't make sense for us to do that. So we continue to monitor that situation and where business will hit underwriting and return hurdles, we are going to be very aggressive pursuing it.

Okay. And I just want to make sure I understand the requirements to maintain your new waivers. Is it essentially just making that capital contribution down to MIC and then also maintaining that minimum liquidity at MGIC or are there other important requirements?

Well, the first benchmark obviously is risk to capital, but the Insurance Commissioner has got the authority to give us waivers in states -- in our state to go beyond that and in other states, they look to the Wisconsin Commissioner. In the cases where if in fact we would go beyond that and couldn't get a waiver then we have the opportunity to write in MIC.

Relative to his other controls, obviously, he has got access to books and records monthly and advisers that come in and monitor the business and then, overall, there is a keep well in there with respect to that cash and investments during the period can't get below $1 billion at the MGIC.

Okay, but because you now have approval to write out of MIC, you should, even if at MGIC you exceed or on a consolidated basis receive 25 to 1, as long as you are below 20 to 1 I guess is the threshold under Freddie, at MIC, you can then continue to write effectively in every state.

That's right.

But we will need to with Freddie Mac get approval for those states.

Right. You're right. So there's a couple of nuances. There are the 16 jurisdictions that have the capital requirements. In the case of Fannie Mae, MGIC needs to seek waivers in those states. If we do not receive them, then we would write it MIC. Under the case of Freddie Mac, they've specified just a handful of states initially that they believed that we would be able to get waivers in all the other states. So if there is a state that is listed or a state that doesn't have a capital requirement today that would enforce one, then we would have to get Freddie Mac to modify MIC, as well as Fannie Mae (inaudible). So effectively, yes, we are under the presumption that waivers are granted where they are available.

Okay. So presumably they just want to make sure you are making a good-faith effort to get that waiver (multiple speakers).

Exactly, that is exactly the point.

Got it. Thank you.

Jack Micenko.

Thanks for taking the question. I guess just looking at your expectations for 2012, the home price expectation of flat I guess was a little surprising to us. And just thinking about sort of the puts and takes you guys go through in coming up with that forecast, as well as thinking about the servicing settlement that is on one hour, off the next hour, whatever it may be, can you talk about what that means? I mean does that accelerate cures? Does that begin to work the pick through the snake, if you will, in terms of getting some of these banks to start moving on these foreclosures accelerating the claims and finally clearing this inventory out? And how do you relate that back to prices and just some -- just any kind of thoughts you can offer on the robosigning issue.

This is Mike Zimmerman. On the AG settlement, you're right. I don't know if it is on or off. We read the same articles that you do with that. It does not apply to GSE loans is our understanding. Any settlement that would be reached would be for private label securitization, not Freddie/ Fannie securitizations or loans.

But clearly, I think if servicers got clear rules of engagement relative to how to proceed with foreclosures and they held harmless from other litigation, that that's going to make operationally things easier because the factors will be known what the process needs to be.

Now what does that do relative to capacity within the servicing shop? The court system, that is the unknown and we are saying we don't see much great change in that yet. We think there will be a normalized process, but it is going to be extended from where it has been at historically. But clearly, any company that can get rules of engagement down and knows how to operate is going to be smoother. How that affects home prices, I guess it's kind of hard. I'll let Larry jump in more, but obviously economically related as well.

Our forecast, as you stated, for home prices in '12 is flat. I don't think it is out of line much with a lot of the other forecasts out there and I think there might be really two markets -- the distressed market and those homes that are selling out of foreclosure, but it is that foreclosure segment that is still a sizable segment and there is a lot of shadow inventory. If you pick up papers here and there, they typically have an article. So I think when you put those two markets together, the foreclosure distressed versus the non-distressed sales, you get to kind of that flat overall home price appreciation number.

Particularly in our segment, I would add, first-time homebuyers.

Okay, thank you.

Geoffrey Dunn.

Curt, a bit of a high-level question for you. Obviously, there has been a lot of loss provisioning over the last several years, but when we take a step back and look into the Company with employment stagnant, with a huge inventory of delinquencies, especially late stage still to go through, it can seem like we don't have any more clarity on the ultimate loss profile of the Company than we might have had even two years ago or three years ago. So I am curious if you can discuss, over the last year or two years, what has changed in the marketplace that you think gives you more clarity on the ultimate loss profile for MGIC and ultimately the capital needs for the Company?

Well, I think as far as new business expectations, we have more clarity on that. On the loss side, I mean you have got inventory that is evolving to the 2008 and later books of business. So where we know where we are on the existing inventory, I think you get a lot more clarity on relatively new development from those later books of business and a much higher cure rate on those as you move forward.

Rescissions have played out; we pretty much know where they are. So that gives us more clarity also. So I think the combination of the newer books taking over, if you will, from the legacy issues, clarity on new business writings, changes to happen with FHA, all those I guess give us comfort relative to where we are both in the new writings, the level of delinquency and the level of paids going forward.

How about specifically for the problem vintages in terms of cure rates or ultimately the ultimate roll rates of those problems?

That is still in play. I mean I wish we had perfect clarity of how those will play out. The longer you are in it, the more you realize how they are going to develop and I think we have a much better handle on it than we did two years ago or much more comfort with those numbers anyway. But, hey, I will be honest, they still have to play out and we still have to play out in a world that we don't know where employment is going to and an Administration and Congress that doesn't seem to get stuff done. So yes, there is still a lot of uncertainty as you read through our risk factors that we don't have all the answers.

And just lastly, as you think about the capital evolution of MGIC and the expectation to breach 25 to 1 in the back half, do you have any sort of specific employment level that is associated with that expectation?

For this year, we are assuming income or employment growth of about $2 million.

Okay, great. Thank you.

But to be clear, there is no specific target and as Larry said, it is difficult to predict the exact timing of when MIC has to come through with it, but with a backdrop of slowly growing employment to that 2 million level for the --.

Yes, I know you don't directly tie it. I was just curious directionally how you were --.

Improving but slowly.

Okay, great. Thank you.

Matthew Howlett.

Hey, guys, thanks for taking my question. Just on the guidance for new delinquency notices are expected to go down in 2012. The rate has been about 17% 2011. That was down a little bit from 2010. Is there more clarity on the rate in which it will continue to go down? Can we assume mid-teens or is it going to be lower than that?

Well, we have clarity, but it is not something we are going to discuss publicly. We have our -- obviously, we have our thoughts on what that number is, but it is just not something or I would've told you in my comments.

Okay. There is -- well, I say that because we look at -- my question is the HARP program, the 2.0. Could that -- is that going to drive that number significantly depending on how successful that program is? And I noticed that most of the industry went along with the waiving of rep and warranties or the indemnification of the banks, which the GSEs are now going along with. Is that going to change things or what is your expectation on that program?

Mine is that they will help, but that we don't know -- I mean our numbers are based on just lots of years of performance and looking at them. To the extent government programs help more, that is a bonus for us. So they will help though.

Matt, again, with the HARP 2.0, this is Mike, that it was announced in November. It has been now 60 days. You're not going to really see -- we will be able to tell more. Over the course of the first half of the year, we will see what volumes are doing. We did about $800 million or so in the fourth quarter, but obviously that was the old program. So we will just have to wait and see. Hopefully, lenders take advantage of the programs and the conditions and solicit these borrowers and give them the opportunity to refi and not put them on the slow track that they have been on. There is opportunity, but to dimension it right now, it is really in the lenders' hands to get a hold of these borrowers. We will be monitoring and reporting out obviously as we see it.

Is there any sense of eligibility? I mean what is the average underlying coupon to the borrower, the rate for like the '05 to '08? I think Radian went out and said 50%. Can we assume that the underlying borrowers that would be eligible for this program are paying somewhere about 6% on your portfolio?

Yes, it is all mid-'09 and back. Yes, you are over a 6% coupon. So no, on the ones we have done, we have seen about a 1.5 point reduction in rate and that is a cumulative over the three years of HARP 1.0 and significant payment reductions. So yes, it could be meaningful payment relief.

Got you. And then just with that rep and warranty issue, if you do find fraud under new HARP 2.0, is that -- you can't put it back to the bank. Is that sort of the way you have to go along with the guidelines, the same with the GSEs?

If it complies with the program -- we match the GSEs' program. That is what we have done.

Okay, got you. And then just a last question on modeling, the net earned premium rate, it looks like it sort of flat-lined again. Is there any adjustments in there this quarter or can we assume that it has basically troughed here in terms of that line item?

There is about a -- almost a full [pik] basis point, it is about 62 and it is probably really running at about 61. There is some accounting in the -- because of accruals on rescissions, etc. and return premiums. So it is about 61 basis points.

Okay, great. Great, thanks, guys.

[Eric Frial].

Good morning. The earnings release states that you expect the amount of liquid assets to continue to decline materially after 12/31/11. I would like to know if you'd provide further guidance on what that means. Should we be expecting the liquidity burn rate to subside from where it is currently and if so, by how much?

Well, what we did indicate, as Curt mentioned, this year, we have paid claims of almost $3 billion, so negative cash flow of a couple billion and he indicated -- the biggest number there obviously is paid claims and our expectation is that the paid claim amount will decline. We didn't give a range on it, but to the extent that it declines somewhat, we will still be in a negative cash flow position. That is the thought process there.

We are still materially negative in '12 relative to cash receipts and disbursements with paid claims coming from a level of $3 billion declining. But that is the best I guess thought we can give you that we anticipate that we peaked in the middle of -- on a quarterly basis in the middle of 2011 and that from there on, claims will begin to recede and we anticipate that they will continue to recede quarterly during 2012. But that is about the best guidance we can give.

What is driving the decrease in paid claims in an environment where foreclosure processing speeds are increasing?

Well, you look at the notice inventory level. I mean that is the beginning of it and then secondarily, we also give you claims received inventory. But last year, we were in the 20,000 area of claims received on a quarterly basis in claims received inventory. At year-end, we finished with 12,600. So the overall trend is down. Notices are declining overall, as Curt mentioned. The claims inventory is declining, so we are moving through, if you will, those pre-'08 books, '07, '06, '05 and so on.

And again, the notice inventory was 175,000 at year-end. 15,000 of that is '08, '09, '10, '11 and the balance being the older books, '07 and back. And that is what is declining, but not quite at the rate we'd anticipate. But that is the driver of that assumption to get to your point. The notice inventory is declining and the peak of those books' claims received have been seen and are declining.

Thank you.

I am showing our next question comes from [Tim Mullen].

Hi, thanks for taking my questions. You have pretty much covered everything. I would love to hear you talk just at even a 30,000 foot level about the holding company liquidity and just how you think about what you might do with the cash there and the tensions between I am sure the bondholders liking the cash staying there and the equityholders liking it being downstreamed and extending out the optionality of the business and everything. Could you just generally talk about how you look at things like that?

Well, we have $486 million at year-end at the holding company and that obviously includes that $200 million that we dropped down from the holding company to MGIC. We did pay back some debt last year. There was a debt due last year in October; we paid that off. We also repurchased some debt.

Going forward, our interest carry is about, on all the debt we have out currently, is about $57 -- $59 million on an annual basis. So we have got that kind of obligation, if you will, on an annual basis, plus or offset by some investment income. So the ability we have going forward is to look at how much cash do we need? Do we need any additional cash to go down to the writing companies? What do we need -- the most nearest debt coming due is 2015. And as we mentioned before, that is $171 million that is due I believe in November or October of '15. Not really near term, but a few years out to coin the phrase near term. And then in '17, we have got $345 million due.

So we have some flexibility. Our ability -- I think the important point is we have got sufficient cash at the holding company to cover interest in the next four or five years. And we also believe we have sufficient debt capacity at 2015 debt. Whether or not we need to use some of this cash in the interim at the writing company will be a function of what happens to the business.

Is there a negative -- or I should say what is the negative associated with not paying the cash coupons on the subordinated debt? Do those holders get Board seats or something like that or not?

This is Mike Zimmerman. It gets deferred and compounded. So the cost is that 9% and then once you defer it, the only way you can become current is to raise capital of some form. Now, you have to start doing that after five years. So there is a financial cost (inaudible) just in the compounding of the deferral plus obviously the potential for further dilution down the road.

Okay.

But you are correct. That particular instrument does have a deferral capability.

Yes, right, right.

Okay, so that could help you make the maturity and at least not have an issue -- for sure not have an issue with the '15.

Theoretically, yes. It has got an option on that payment. That's right.

Great. All right, thank you very much.

[John Evans].

My question just got answered on the capital issues. Thanks.

(Operator Instructions). [Jacob Mueller].

Good morning. Could you please give a little more clarity around the evolution of the pool reserving relative to the delinquent inventory?

Well, it is pretty much just like the primary notice inventory. The reserves are established based on a combination of the notices that come in and the amount of cover under the pool policy.

And there is a couple of maybe nuances too on the pool side. Some of the pool policies have deductibles. So we may have delinquent inventory, but if we are within a deductible yet, we would not necessarily set up a reserve. And then also, some of the pool policies have aggregate loss caps. So if we think the inventory takes us beyond that, we wouldn't necessarily be reserving for those items either.

Do you have any like percentage number for what percentage of those delinquencies fall into those categories?

Not at our fingertips.

All right. That's all I have. Thank you.

I am showing no further questions at this time.

Okay, well, thank you all for your interest in MGIC and have a wonderful day. Thank you.

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