MGIC Investment Corp (MTG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation second-quarter earnings results conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session later, and instructions will be given 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 conference, Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Mr. Zimmerman, you may begin your conference.

Thanks, Shandi. Good morning, and thank you for joining us this morning and your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2012 are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; and Executive Vice President of Risk Management, Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website, which is located at 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, and we have posted on our website the supplemental information containing the characteristics of our primary risk in force, and flow new insurance written, as well as other information we think you'll find valuable.

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

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

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

Thank you, Mike, and good morning. As reflected by the net loss for the second quarter of $273.9 million or $1.36 a share, our Company's capital position of financial results continue to be adversely affected by the lackluster economic recovery the country continues to experience, in particular the lack of meaningful job creation.

The bottom line is that the economy has not progressed as much as we would have expected over the past year, and at a pace that promotes sustained growth and the accompanying improvement in consumer credit performance. For our company, that means that new notices as a percent of the in force continue to decline, albeit slowly, but unfortunately, the cure rate is not recovering as fast as anticipated.

This has caused us to extend the timeframe of when we expect long-term cure rates to return to historic levels. So while we continue to monitor the macro economic environment and engage in conversations on the housing policy front, we spend most of our time on those variables that we can have more control over -- those being credit quality, allocation of capital, maximizing the profitability of the new business, prudently and thoughtfully mitigating losses, and minimizing operating expenses to maintain our cost advantage.

As of June 30, the combined insurance companies' preliminary risk to capital ratio was a little over 30-to-1 and MGIC was 27.8-to-1. This means that beginning in the third quarter, we will begin to use MIC, which has approximately $440 million of capital, where MGIC is not able to ultimately obtain a waiver of regulatory capital requirements. The plan to utilize MIC, which has been in place since 2009, is designed to allow MGIC to manage through the risk to capital issue it faces. There is no liquidity issue at the insurance operations, as we believe we have sufficient claim-paying resources to meet all obligations to policyholders, even under a stress loss scenario.

We are pleased to report that Freddie Mac has recently expanded the use of MIC to include seven additional states. The states are California, Florida, New Jersey, North Carolina, Ohio, Oregon, and Texas, and account for 33% of our new insurance written in 2012. In addition, we'll be using MIC for Idaho, New York, and Puerto Rico, which were previously approved by Freddie Mac, and account for about 5% of our business.

Freddie's expanded approval provides, by September 30, the Holding Company will contribute $200 million of cash to MGIC; that by October 31, MGIC and Freddie Mac reach agreement on substantially all terms regarding the pool insurance dispute; and that by December 31, 2012, the OCI will provide to Freddie Mac written confirmation that mix of capital will be available to pay MGIC's claims in full on an uninterrupted basis. As does the MIC approval given earlier this year, the approval for the additional states may be withdrawn at any time and ends December 31, 2012.

Freddie Mac's letter is an exhibit to our 8-K filed earlier today, and you should read it in full for the completed terms. As a reminder, Fannie Mae's approval of MIC, which expires at the end of 2013, previously approved MIC to write in all states that have capital requirements, in which MGIC does not get a waiver.

New insurance written in the first quarter was $5.9 billion, nearly double the amount written in the second quarter of last year, and up 40% from last quarter. More recently, in July, we wrote $2.4 billion of new insurance, our largest amount written since March 2009. The new business written since mid-2008 now accounts for approximately 28% of our risk in force. And as I have discussed on past calls, this business generates a significant amount of capital, which augments our existing claim-paying resources, as each $20 billion of insurance we write adds approximately $400 million of incremental capital over the estimated life of the book.

Reflecting the changes in HARP that went into effect earlier this year, an additional $2.7 billion of HARP refinance transactions were also completed during the quarter, bringing the total to $4 billion for the year, and $11 billion since the inception of the program. Over the last several months, we have seen the significant increase in the level of HARP activity, which should be positive to our credit performance, as the average payment savings for a borrower is just over $2,000 per year.

Our industry continues to regain market share from the FHA. However, the pace of the recovery is slower than we would like, as a combination of underwriting guideline differences between the conventional and government-insured loans, loan level price adjustment charged by the GSE's, and the secondary market gains associated with Ginny Mae securities, continues to exist in the market.

It remains difficult to get a good handle on our industry's market share on a monthly basis, as two companies only report this data quarterly; but we estimate the private MI's industries market share at approximately 6.5% to 7%. Within our industry, we believe that our market share has stabilized at 20%. Losses incurred in the second quarter were $551 million versus $459 million last year.

The level of incurred losses resulted primarily from the number of new delinquent notices received, which remain at elevated levels compared to historic levels, indicative of the impact that the sluggish economy is having on the 2008-and-prior books. And, as the data disclosed this morning shows, a continued decrease in the level of cures for loans that are 12 months or more delinquent. The claim rate assumption for new notices is approximately 1-in-4 going to claim. And while we are still processing July notice and cure activity that we received from servicers, which we will release next week as we typically do, I can tell you we expect that the overall delinquent inventory will decline modestly in July.

Paid claims declined in the quarter to $636 million, million, down 5% from last quarter and 22% from one year ago. The average claim payment continues to hold relatively steady at $49,300. We expect that the current claim-filing patterns we are experiencing will continue, and will result in claim payments trending modestly lower for the balance of 2012. Recently, we disclosed that we executed a settlement agreement pertaining to rescissions and denials with one lender, covering loans owned by private investors and one GSE. The terms of this agreement did not materially impact the quarterly results, as they were already included in the loss reserves, but it did result in a 150 previously rescinded claims being reversed and paid during June.

As we have anticipated and disclosed in prior quarters, overall rescissions and denials continue to slow as an increasing percentage of claims. We have continued to voluntarily suspend rescissions related to loans that we believe could be covered by potential resolutions of various settlement discussions that are taking place with certain lenders, assuming we can get all parties to agree. At June 30, approximately 1,600 rescissions remain in our delinquent and unpaid claims inventory, due to our decision to suspend such rescissions.

As a reminder, we have not established an accrual because we have not determined that a loss is both probable and can be reasonably estimated at this time.

During the quarter, we repurchased 71 million of par value of the 2015 senior notes, reducing future debt service by saving interest payments on the debt repurchase. In addition, the discount to par resulted in a gain of $18 million during the quarter. As of June 30, the remaining outstanding balance of these notes was $100 million, with over three years to maturity. The other senior debt of the Holding Company matures in November 2017.

Cash and investments totaled $6 billion at the end of the quarter, including cash and investments at the Holding Company of $411 million. Our thought process regarding the Holding Company's cash resources considers a number of factors, including the Holding Company's debt service obligations and the need to contribute additional funds to MGIC. We realized gains of $26 million that were embedded in the investment portfolio, and have realized a total of $104 million year-to-date.

So, to summarize, while we expect effects of the sluggish economy to continue to challenge the Company's financial results and capital, we are encouraged by the continued outstanding quality of the new insurance written and the growing opportunity to regain share from the FHA. Regarding Washington, at the moment, it appears that any meaningful housing policy is going to come after the November elections. Currently, we expect that the CFPB will issue a rule for qualified mortgages in January 2013, and the long-awaited and delayed QRM definition will follow that, although the exact timing is unclear.

Also, the Basel III comments are due in September, and MGIC will be submitting a response, as we did with QRM closed rule, demonstrating that private MI is a viable credit enhancement solution.

Finally, there are a number of bills at various stages regarding the role of the GSE's and FHA, but we do not expect any imminent action on those. Of course, we remain actively engaged in those discussions.

So, in closing, our Company and our industry will continue to deal with a difficult but slowly stabilizing housing market, a less than robust economy, and emerging housing policy regulations. We will continue to actively engage policymakers regarding the benefits of private capital and the operating efficiency of the private sector. And, as I said upfront, we will also keep focused on those areas we can control -- mainly allocation of capital, underwriting criteria, returns on new business, loss mitigation, and operating expenses.

With that, Operator, let's take questions. Operator? Hello?

Yes, Mr. Zimmerman?

We're ready to take questions, please.

(Operator Instructions) Randy Raisman.

Just want to kind of understand sort of the thought process on the Hold Co. liquidity from here. If you have $411 million of cash, and if I'm reading the language around Freddie Mac right, you're going to have to put $200 million down into the insurance stubs, and you're going to have to fund interest expense going forward. Doesn't leave a lot of cash for recovery for unsecured notes.

And if I kind of listen to your guidance, it sounds like you're kind of saying that the losses paid are going to kind of stay at this levels; maybe get a little bit better. But that would imply you're going to continue to lose money, and risk to capital can go much, much higher from here. So just kind of want to understand that from the perspective of how you think about that in relation to your senior unsecured bonds.

Well, first, let's talk about the risk to capital. And this is Mike Lauer. And the issue there was that we had projected as early as '09 that there might be some (multiple speakers) --

2009.

-- 2009 that there would be issues with respect to MGIC's risk to capital. So we dedicated the sub-MIC and, if you will, put in some $440 million. So with respect to the risk to capital issue on MGIC, what our plan would be is, where we don't get waivers, we would write business in MIC, and continue to write business in MIC. And that really has been the strategy.

And as of recent, we've got Freddie Mac to agree on certain states where we didn't get the waivers, which were not included in the original waiver. So we're still on that plan with respect to the risk to capital.

I guess, regarding any other issue with respect to Holding Company cash, we'll look at the availabilities we have and the resources we have, and what alternatives we would have. So we continue to look at that, obviously, on a monthly basis.

I mean, regarding the $200 million that Freddie approval requires, we received the Freddie approval at the end of the day yesterday. And only our Board has the authority to make that commitment. So, on that, the only thing I could say at this point, to answer your question regarding the $200 million, is that we'll be discussing it with the Board.

Okay. Thank you.

Conor Ryan.

I was just curious, does the Wisconsin regulator even have the authority to grant Stipulation 3 in the letter that Freddie Mac sent over yesterday?

I mean, it's a negotiation. Certainly, they have -- it's a three way, obviously, negotiation with the Company, the commissioner, as well as the GSE's. And the issue there, and always has been, and the ability of getting any dividends out of MIC relative to needs of MGIC. Our position going in has been that there's excess capital there will be needed. Freddie Mac wants to discuss some type of agreement with the Commissioner about some formula where it would come up, and we've agreed to negotiate that with them and have meetings with the OCI on that subject.

Okay, great. Thank you.

(Operator Instructions) [Sean Farrow].

Thanks for taking the question. It seemed like, in the release, you guys talked about late-stage delinquencies, and it sounds like the cure rate did drop -- or did drop based on what you disclosed. But in the prepared remarks, you guys were talking a little bit more about new delinquencies and cure rates potentially being lower on that. I mean, should we be thinking about these incurred loss numbers as being kind of a one-time catch-up to try and get your reserves for deliberate loans up? Or how should we really be thinking about the implied cure ratio on a go-forward basis?

Well, I think that's the key question. On a go-forward basis, it's going to be what will the development be. You know, we saw negative development in the second quarter. Will we continue to see negative development in three and four, or will it abate?

So I think that's going to be the issue. One of the things that we continue to see, and we've discussed on all the earlier calls, is that across all the books, we continue -- albeit a lower delinquency, as they continue to come. And even in the '04 and older books, that still represents about 30% of the notices coming in.

So it's a reflection of the economy and the fact that, on a quarterly basis, even on the older books, we're getting 30% of the notices are coming in on those books -- '04 and older. So there hasn't been a change on that trend in the last four, five, six quarters. So that's not encouraging. But, again, we'll look at each quarter and make adjustments accordingly.

So, was this an adjustment? I mean, should we be thinking about this as an adjustment? Or, I mean, if things stay the same, we should be looking at this trend continuing?

Well, I would say this, that that was an adjustment when we obviously increased the claim rate based on what we saw. If there's no change, with respect to that, then obviously, it will be at a lower level. However, if there was an adjustment the other way, there could be. But for the most part, you're correct. There was an adjustment in the quarter for what we saw was increased assumptions on claim rates. Now whether or not we need to make another one in the third or fourth quarter will depend, again, on development on a monthly basis.

Okay. And I think one of your competitors has started to disclose the breakdown of incurred's on new defaults versus existing. I think that's been helpful. And obviously, given this adjustment that you guys have put through this quarter, I think it'd be helpful for people to kind of see this -- see something similar for you guys, so we can kind of track what the impact of new delinquencies has been, relative to the existing delinquencies. So, if you guys could think about that, that'd be great. One other question (multiple speakers) --

Sean, I just -- this is Mike Zimmerman -- I just want to point out to you and the rest of the listeners that we do disclose that in our 10-Q, it's on a cumulative basis. But we'll certainly take it under consideration in doing that a little bit differently.

Okay. That's helpful. Interest on the subs -- is that something you guys are considering turning off, based on the current liquidity position at the Holding Company?

Say it again.

Interest expense on the subordinated notes -- on the subordinated converts. Is that something (multiple speakers) --

Let me just say that -- you're talking about the juniors, and (multiple speakers) --

Yes.

-- the only thing I'd comment on is that -- that, the Junior feature, to have that feature of refer-ability. And we used that in the past, but I won't comment any further on it. And we're entitled to use it in the future, but that's the only thing I can say.

Okay. And do you guys think that this as it relates to -- I mean, I think everyone that's been following you guys understands that you guys are focused on using MIC to write new business. Just trying to get an -- and Conor asked the question about where the OCI stands relative to their ability to grant, I guess, number 3 on their list of requirements for the waiver.

I mean, where do you think things stand as it relates to the regulator with your business overall at MGIC? Not necessarily your ability to write out of MIC. It seems like they're putting some substantial pressure on you guys to get MGIC into a better position. I mean, has that been contentious with them? Or is it something that you guys feel like you're seeing eye to eye and things are kind of -- are working there?

Well, I guess you're asking about the OCI note; correct?

Yes. (multiple speakers)

And I would say they've been in agreement with our capital plan and our activity since they won. With respect, as I mentioned, we went to them with this plan as early as '09, saying that these catastrophic losses and the tail features of them could drag on in the event we had potential problems with risk to capital.

So they've agreed to this plan. And as early as -- if you remember, our early discussions, with respect to MIC, we had planned to put MGIC in runoff with the Commissioner and drop down excess capital, and he agreed to that plan. And ultimately, the GSE's had different plans, and we had to adopt that plan, which we've got through now MIC, which had $400 million in capital.

And so the Commissioner agrees with our plan. He agrees with us that there's excess capital at MGIC, and he wants us to have uninterrupted capability of writing business with our customers, and that really is the focal point of his plan. So I would say that he's in agreement with everything we're doing.

Now with respect to the last comment, and that is this item in the Freddie Mac letter, we have to discuss that with him. We've discussed issues like that with him in the past, so we will -- that will be a major issue for us as we move towards the end of this quarter.

Okay. That's helpful. I mean, I guess, and just one last question on timing. So it sounds like you still need to discuss it with the Freddie Mac requirements (multiple speakers) with --

(multiple speakers) Well, yes. We just got it.

(multiple speakers) We just got it.

Yes, yes.

(multiple speakers) Yes. I guess that wasn't the question. More around the regulator, have you discussed your latest results with the regulator?

Yes. Yes. Yes. I was there a couple of weeks ago.

Okay. That's helpful. Thanks.

Thanks, Sean.

Douglas Harter.

I was just wondering if you could help frame the possible outcomes of a settlement with Freddie? Just sort of what's the magnitude?

Doug, this is Mike Zimmerman. And, no, we can't comment and wouldn't comment on any litigation. That's going to be a discussion that will take place in the future here.

Okay.

Anything else, Doug?

Jasper Burch.

A couple of questions here. On the opening remarks, you mentioned that you expect the delinquent inventories to decline modestly in July. I just want to make sure that's based on paid claims really driving that, and not -- you are not expecting a cure ratio above 100%?

That's correct.

All right. And then, second, on MIC, if the third stipulation in the Freddie letter were granted, and MIC was on the hook for losses at MGIC, what would the incentive be for states that aren't letting you write business above 25-to-1 now, why would they allow MIC to write business even if it's liable for MGIC losses?

I mean, that's -- you're talking now about Insurance Commissioner's regulatory power. The subsidiary is owned by MGIC, and effectively, he'd be controlling both of those entities in some kind of situation. The point is that he believes, as we do, that there's more than enough resources at MGIC to pay claims. Okay?

So the issue that Freddie Mac has, obviously, is a theoretical issue, that if it weren't what are the capabilities of getting money out of MIC. And the only way that you would get money out of MIC in that type of situation was if there was excess capital in MIC.

Okay. (multiple speakers) --

(multiple speakers) And in the near-term, I would say that we're not using much of the capital, obviously, and it's got a significant amount of capital in it to write business for the next five years. So it really doesn't have a capital issue going forward, no matter how much business we write in it in the next four years.

And the other piece of the puzzle, too, is the new business is very profitable, so you wouldn't want to turn that off. Especially given the fact that MGIC has a risk to capital issue, not a liquidity issue. And sub MIC is compliant with the risk to capital requirements.

But, I guess my question is, I mean, if MIC is ultimately on the hook for MGIC losses, could the California or North Carolina State regulator not allow MIC to write new business, even though, on a standalone basis, MIC would have a really good risk to capital ratio?

I don't know. I couldn't conceive under what conditions that would happen, I mean.

Okay. And then, I guess, just lastly. I just wanted to double check. You don't have any reserves set aside against the possible Freddie settlement?

Right.

Okay. Thank you, guys, for your time. Appreciate it.

Thank you.

Jackie Earle.

Thanks for taking the questions. I was wondering if there was anything that would change your expectation as it relates to seasonality of mortgage credits for 3Q and 4Q? And if you could maybe comment further on how it relates more specifically to cure rates and new notices of defaults?

Okay. Let me try to answer that question. The cure rate is probably the main driver, and that has been improving since 2009, and has kind of lost some steam here in the second quarter, probably reacting to the slower employment growth and the economy. So, for the rest of this year, we're assuming that the cure rate is not declining on new notices, but just kind of status quo. And hopefully -- and maybe we're starting to see the signs of it. The last two months, the home price Kaye Scholer has been positive. And maybe the employment starts picking up here.

But the game plan for this year, at least the forecast, is flat home prices for the next 12 months with normal seasonality. So in the middle of the year here, it's kind of a seasonally unfriendly period. And that's kind of why, as Curt alluded to earlier, the delinquency inventory here in July should just be down modestly. And that's pretty much in line with expectation.

Okay. Thank you.

Operator?

Scott Frost.

Just to make sure, you were saying that as far as the incurred loss goes, we're not going to be able to see how much of it is attributable to initial three months or less, repeat three months or less, and later stage delinquencies. Is that what I heard? (multiple speakers) -- now, right?

I guess what I said is that, relative to the third and fourth quarter, if things haven't changed, there would be an incurred trend, maybe slightly -- maybe less than what the current trend was for the second quarter. However, if there is another continuation of some adjustments, there might be one. But normally, we would see a slowing of the cures at this -- the second-half of the year. We've seen that earlier. Now does that continue or does it, as Larry just said, it might just flatten out. So we're looking at that monthly and adjusting accordingly.

Okay. All right. One of your competitors recently released a risk metric that shows risk in force on defaulted loans. Do you provide that metric anywhere? And, if not, would you start doing that?

Scott, this is Mike Zimmerman. We do -- we have been for several quarters in our 10-Q. It's in there as far as when we give you the net risk to force, we tell you what the delinquent risk in force is (multiple speakers) --

Sorry for overlooking that. And I want to just sort of ask when you're preparing for, I guess, year-end results and audited results for verifying reserves, if you had to characterize the process, is it kind of closer to one where the auditor takes your results and kind of scores what you've given them, and tests for reasonableness? And then sort of passes on the adequacy in a way that they have no reason to doubt you? Or do they do it in a more affirmative manner? (multiple speakers)

They do it independently.

Okay, okay.

They create their own reserve and compare it to ours actuarially. They have their own, and then the accounts look at their actual [rate] versus ours, our calculations.

And last question. I don't know if you -- I don't know how you guys can answer this or not, but -- one of your competitors also reports expected cure rates for seriously delinquent loans that are -- of close to 50% for a large block of seriously delinquent loans, it appears. In your case, how does your seriously delinquent bucket break down? And I guess the question that is on some people's minds is, why aren't you special like they seem to be?

Well, I'm not sure about the last part of that question, Scott, but I'll tell you, as far as the breakdowns, you're talking about the 12 plus and then breaking it out between 12 and 24, 24 to 36 and so on. The profile looks very similar to what was disclosed by the competitor there as far as 8% or [40] years or more. 12%, I think, in the [36 day] category. I'm not sure what you meant by (multiple speakers) --?

Well, okay. I guess that kind of answers it. You have a similarly broken down -- it sounds like your portfolios are similar and you just seem to disagree about how -- what the cure rate will be. Is that fair?

I don't know what they're necessarily assuming, so it's hard to say, but you can see what we (multiple speakers) --

Okay. It's stuff on there. All right, thank you.

Steve Stelmach.

Just to follow-up on a couple of the questions. Mike Lauer, you mentioned that if it's status quo on the cure rates versus the second quarter, you expected a maybe possibly a slight improvement on the incurred side in the back half of the year. Can you just kind of explain that dynamic a little bit?

Well, I just said, someone asked earlier about the second quarter -- did it have an adjustment? And I said yes. And so on a normal basis, then, would you have that same adjustment in the third quarter? Maybe not if there's no need for it. I mean, obviously, we have to look at the next three months -- July, August, September -- and look at the cure activity and new notice activity that whether or not there needs to be another adjustment, but (multiple speakers) --

What was the dollar amount of that adjustment?

What's that?

What was the dollar amount of that adjustment?

I can't -- I don't have that exact amount in it, but obviously --

Was it the majority of the difference between 1Q and 2Q?

Yes.

And it will be broken out as we -- when we finalize the [Q], Steve. So that will be all in there as well, where you'll be able to see the current period reserves and then in prior period adjustments.

Got you. Got you. Okay. And then just on that third condition for Freddie Mac, just so I'm clear. It's not that the OCI necessarily disagrees with that third condition from Freddie. It's just that, given that you've gotten this yesterday, the OCI hasn't had a chance to opine upon it. Is that a fair statement?

I think it's going to be -- I think it's one thing to agree to it in concept. It's something else to get the language, and can we get the parties to agree on the language on something like that. That will be my direction for the next two months, I guess, is to get all the parties together and reach some kind of agreement, where the concept is there and the agreement on the language. But it's a complicated issue, if you can imagine.

Sure. Any -- want to handicap it in any way? Feel good about it?

I can't do that. (laughter) General Counsel is sitting here. I can't do that.

Thank you.

Bose George.

This is Jade Romani on for Bose. Just wanted to follow-up on the Freddie Mac question. Can you just explain for us the nature of the disagreement?

What disagreement?

What disagreement?

With Freddie Mac, I guess surrounding the aggregate loss limit on pool insurance policies. The disagreement that you have with them, we just wanted to better understand the nature of the disagreement.

Sure. I mean, the dispute centers around whether or not there is still coverage on certain pool policies that have been in place for a number of years. We believe that the coverage expired. They believe that the coverage is in place.

Okay. And when -- what's the timeframe for any resolution to this?

Well, according to the letter that we just got yesterday, we're supposed to work -- we're working diligently towards October 31; whether we achieve that or not remains to be seen.

Okay. And then secondly, can you just tell us what happens next in the dispute with the IRS?

Next, I can't tell you other than that we're studying our options. As to whether or not we can have another meeting with them, if they want to have another meeting and what the alternative would be. So at this point in time, we're back at square one, studying what our options may be.

Okay. Thank you.

Ed Groshans.

Thank you for taking my question. I guess, Mike, you mentioned on the sub debt that MGIC in the past had, I guess, ceased paying -- making the interest payments on that. Could you just remind us some of the factors that led to that decision?

I think it had to be do with holding company cash and the amounts of capital we were putting down at the time into MIC. And there was a feature on the [63] to -- that you could defer the interest and, if you will, pay it later. And we exercised that. And then after we got some issues resolved with respect to Holding Company cash, we reinstituted it, caught up. We had a catch-up, if you will, on the deferred portion, and then began paying it on a current basis again.

And once that catch-up post the capital raise which is, I guess, is that two years ago now? A year ago?

(multiple speakers) The equity raise?

Yes. (multiple speakers) After the April 10 raise, right.

That's correct, yes.

Okay. Fantastic. And then completely off-topic, this whole issue of eminent domain that's now being discussed, I think it's San Bernardino, Sacramento, Chicago, and maybe one other municipality, at least in this. I guess my pick would be, would that be a positive for your model? (multiple speakers) I mean, if you had the insurance in force and someone through eminent domain took the mortgage, that's not a credit event, right?

Well, this is Mike Zimmerman. And we're reading the same articles that you are, but we don't have any knowledge or details of what's being considered. So it's difficult to say one way or another if it'd result in a claim payment. But you're right. Generally speaking, transfer title to the property is required before a claim could be filed.

But specifically to this issue, I mean, it goes beyond whether to claim. There's a lot of other legal issues before it would probably land on our desk.

Okay. And then, maybe you don't have a view yet, but I mean, are you just following it just to be aware of it? Or are you looking at ways to mitigate any impacts? If, I mean, because -- I mean this is I guess going to be a contentious issue if any one of these municipalities does pull the trigger on this.

And we're watching it, right.

All right. Thanks, Mike. Thank you very much.

David Epstein.

Two things. First of all, can you give any more color around how well Wisconsin determines hazardous conditions? And then the second question was, again, one of your competitors has obviously been winning a lot of new business, and I know some of the factors have been talked about -- driving that, have been talked about by them. But can you give a little bit more color of why you think you're winning less than this?

On the business side, I would say it relates to two areas. One is single premiums where our pricing is higher. I mean, we have returned hurdles that must be higher. Because if you look at the single premiums and giving how long policies will be on the books in today's world with today's interest rates, the premium rates that those are being sold at are substandard. And the returns are not high at all. I mean, you're getting cash in, but minimal returns.

I'd say the other item is the one underwrite whereby certain companies have delegated underwriting to the GSE's. That's something that, as we looked at the -- how did we get in this mess that we're in for the last five years -- that was one of the areas -- those control our underwriting pen and going forward. We won't delegate it to anyone else, regardless of the underwriting engines that they -- or purchase engines that they have, which is what they are.

Those two areas in particular. So I'm really pleased with the business relative to the credit quality and the pricing that we're receiving, and the higher returns that we're achieving on that business. So we're getting the business we should be getting.

Now, you had another question about the OCI regulator. And I would say his analysis stems from -- or not the company, the writing company that MGIC has sufficient claims-paying resources. And that's where his focal point is. But since '09, he has used outside advisers and analysts to study the book on a run-off basis, and he keeps coming up -- they come up with that conclusion.

So he's, as I said before, he's comfortable with our claims-paying resource position of MGIC. And, therefore, he's satisfied with our plan and our MIC plan. That would be his keynote and that would be are there insufficient funds. That would be a benchmark for him. But that's not the case here.

Okay. And you guys certainly are winning plenty of new business, even if not as much as the competitor. With the low returns out there, with the delegated underwriting, can you just give a little bit more detail of what are the major -- what is the major business that you are winning that is meeting your standards?

Well, we're -- I mean, our market share is approximately 20%. We have obviously a nice dispersion relative to customers and states. I think all-in, the states breakdown is in our detailed information.

It's generally monthly premiums, fixed rate loans, FICO scores above 760, very high-quality business, excess of -- probably in line with our excess of 20% returns. I think the '09 book has an incurred loss ratio of 11%. The '10 -- 2010 book, 4%; and '11, 1%. So it gives you an idea of the credit quality that we're writing and the premium rates that accompany that. And as we said, a 20% market share. That's a nice business.

And that's one of the things that's so important relative to looking at what's going on with the Company and as we deal with the risk to capital ratio issue. Again, as we've said earlier, we don't have a liquidity issue at all at this Company. What we have is a risk to capital issue. And we're trying to eventually get all business written through MIC. It makes sense for everyone. The GSE's, as I mentioned earlier, $20 billion adds $400 million of capital to our legacy capital support.

And so it's in everyone's interest that MGIC continues to write business, that being the GSE's, the insurance, the OCI, and obviously, our shareholders. So while we have a difficult quarter, where lots going on, the bottom line story of what we're doing here is the right thing.

And the competition can't really undercut you on that business that you are winning? Or they're choosing not to?

I mean, you can always price differently, but again, there is some rationality in the world we've been through so much as an industry. And I think everyone is cognizant of that. Some may have a need to get more business than others at certain times relative to their own operations. And they price in the short-term to achieve that. I can't speculate on why people do what they do, in my opinion, to get substandard returns. But that can always happen.

So we need to run the company, as we said earlier, the way we do relative to underwriting quality, pricing, allocation of capital, our expenses, that makes sense for MGIC. So, all in all, we're in a terrific industry. I mean, I think, in the long-term, as you look over the next 5 to 10 years, this is going to be a golden period, relative to mortgage lending and those involved with it. And our movement to MIC is a very important part of making that happen.

Thank you very much.

Jack Micenko.

This is John Benda on for Jack. (multiple speakers) I just had a couple questions for you. Just on Fannie and Freddie real quick. Because it seems like the size of the disagreement is $535 million, as disclosed in your 10-Q, if I'm reading that right. And I know you can't comment on this negotiation. But have you had favorable settlements with them on prior negotiations, if there were any at all?

We haven't had any in the past, John.

Okay. So I mean, so for a fade perspective, we should be assuming that 100% of that $535 million is what comes out of that capital, that service?

I think you've got to make your own assumptions at this time.

Okay. And then on the 2015, no repurchases? I mean, I guess that kind of speaks to that there isn't a liquidity problem, but we looked at this $200 million that's going to be downstream that basically cuts capital in half. I mean, if you turn the interest off on the subs, are you allowed to try to issue a new note? Or are there covenants in there that restrict that from happening? Should you push interest off on those notes?

No, everything is kind of independent. I mean we, if that interest, as it was in the past is deferred, we have to use -- there's an alternative payment mechanism that's described in the indenture that would have to be utilized to bring it current. But that doesn't preclude any other type of activities.

Okay. And then I know you guys mentioned earlier on the call and maybe I just didn't pick it up, what was the percentage of risk in force for the book for -- in post-2008?

Well, it's about (multiple speakers) post-'09 forward is 25%; at mid-'08 forward is about 28%.

Right.

For '09, 28%. Okay. And then -- and when you guys speak to insurance regulators looking at the claims-paying ability of the entity, would they be talking cash and investment portfolio to loss reserve? I mean, now would you say (multiple speakers) --

It's cash (multiple speakers) --

(multiple speakers) -- and investments.

-- premiums, investments, offset by losses.

But now as we look at the loss reserve, I mean you give them a go-forward projection? So what was that, just at today's current reserve level? I mean (multiple speakers) --

No. It's not reserves. Make sure you understand it. It's cash on a runoff. So they take the book and they run it off [to] premiums, future losses, plus the beginning cash.

Okay. And could you guys offer an ultimate claim rate on the late-stage default book, if you had to put it into perspective -- a percentage?

John, we haven't broken out the claim rates. We look at it in totality. I mean, as far as the claim rate of the overall delinquent inventory. Not necessarily by category. And but you can deal with the data disclosed, you can see what trends have been and use that for modeling purposes.

Okay. All right. Appreciate the time. Thank you.

Ethan Auerbach.

I was just going to ask if you can't come to an agreement with Freddie Mac, whether you'd still consider downstreaming the capital from the Holding Company to MGIC?

Well, again, that's, as I've said earlier, the downstream is a question we haven't discussed with the Board, given the lateness of receiving that. So we're not in a position even to say we're going to downstream the capital. So, lots to be discussed yet.

Have you considered other alternatives for using that?

Using --?

I mean, what else are you going to do with the cash of the Holding Company?

Well, we have debt outstanding, interest payments.

And to what extent do you think that the OCI actually cares about the risk to capital, and to what extent will their decisionmaking be impacted if the -- if MGIC has an incremental $100 million or $200 million of capital? Or is this (multiple speakers) strictly an issue with Freddie Mac and not really with the (multiple speakers) OCI?

(multiple speakers) This is an issue with Freddie Mac. The Insurance Commissioner was comfortable where we were. And so going forward, we requested a meeting with the Commissioner to bring him up to speed on this new issue now. So we're in the process of that. But really, he was comfortable where we were before; didn't require any more capital. And now we need to discuss with him the Freddie Mac proposal, which has a number of things in it. And we need to do that.

Great. Thanks.

Jordan Bloom.

It's actually Dan Vasquez. Just to follow-up on your comments, on your solvency comments -- sufficient claims-paying resources under stress scenarios. Wondering if you could tell us how recently that analysis was done? And if you could comment if there were any external advisors involved in that?

Yes, Dan, this is Mike Zimmerman. You'll recall back in April 2010 was the last time we published the estimate of the assets remaining at the completion of the run-off. Then we estimated, which was as of March 31, 2010, that the consolidated insurance operations had excess claims-paying resources of approximately $2.1 billion.

We -- using a similar methodology, but clearly with updated assumptions, we would estimate that, as of June 30, the excess claims-paying resources were approximately $1.9 billion. Now that $1.9 billion amount makes no provisions for any adverse contingency development that could arise from disputes with Countrywide, Freddie Mac, or the IRS and is not a stress scenario. It's kind of a baseline scenario.

I do need to point out that the April 2010 estimate was, and the current estimate is, a forward-looking statement and the actual results of the run-off might differ materially from those forward-looking statements. Actual results, regarding premiums and losses since April 2010, have materially -- have been materially different from those estimated this time. And all that information concerning factors that could cause actual results to be different from what we're assuming into $1.9 billion in the forward-looking statements are in the risk factors.

And as usual, we're not going to update this and undertake any obligation to update the forward-looking statements, even though these statements may be affected by events or circumstances in the future. And you shouldn't rely upon this estimate and the fact that we're making the statement at any time other than the time I'm giving it to you right now.

I think the key is that the Insurance Commissioner does this independently with his outside advisers and actuaries. So, I mean, that's the point.

So, you're -- just to understand what you're saying, and I do appreciate the disclosure, but the excess of the $1.9 billion, that's a MGIC number and EOCI is running his own analysis?

That's correct.

Okay. Is that currently ongoing right now? Was there a recent one? Or is there any kind of sensitive timing on what's going on at the OCI?

The OCI runs that at least annually -- (multiple speakers) semiannually.

So was the 2012 analysis, at least the first one, already done? Is that a safe assumption?

The last OCI analysis that has not yet been finalized, we haven't seen the final result, was as of the end of 2011. And we've submitted some information as of June 30, so that will take -- they take a little bit of time to complete that. So we haven't seen the final one, but the last one that they have basically completed is as of 12/31, 2011.

Got you. Thank you. One more question, please. If you can -- can you comment at all if there's any expectations that any additional funds will come out of the Holding Company, to satisfy any of the potential settlements that are potentially in the works with Freddie and/or Countrywide?

We're not going to -- Dan, we're not going to comment on any potential settlements with the other -- with all the disputes at this time.

But the pot in which you're initially looking to is the operating company -- or which the counterparties are looking to is out of the operating company, correct?

That's correct.

Okay. All right. Thank you very much.

Conor Ryan.

Conor? Why don't we go ahead on -- Shandi?

We have a follow-up question from [Sean Farrow].

Just wanted to ask -- I don't know if you guys talk much about it. I know the last question about Countrywide, but where does that stand? It sounds like you guys have pushed off the arbitration for 60 days. Is there any update to where that stands?

Well, as we described in the -- this is Mike again -- as we described in the risk factors, we continue to hold mediation discussions with hopes of being able to reach terms that all parties involved can agree upon.

So there's no arbitration panel that's been scheduled at this point?

Same schedule that we said -- which I think it's for March or April of next year.

Okay. Okay. Thanks. That's all.

Geoffrey Dunn.

I wanted to understand the claim rate adjustment a little bit more. It hasn't been new for several quarters, that the cure levels have been running well below what is implied by the reserve provision levels. So what's changed versus first-quarter? Or is it something that's just a subjective adjustment?

And if that's the case, going forward, how do we think about when that could be further adjusted? Is it a couple more quarters where cures don't materialize? We could be facing another claim rate shift? I mean, how do we think about that? And, again, what triggered it this quarter particularly?

Well, I guess, if you look at it, the cures have the claim, the first and second quarter. And whether or not that's going to continue, as someone said earlier, we'll look at the adjustments every month. And on a quarterly basis, if we have to make an adjustment because of something that continues to deteriorate, we would.

We made an adjustment in the second quarter. Whether or not we'll have to make an adjustment in the third and fourth is going to be dependent on what happens in the next three months again. So the -- unfortunately, we have not got the cures that we would have anticipated, especially in May and June. And if that trend continues, we'll have to look at the adjustment to see if we need to make another adjustment. I'm thinking maybe not, but we'll have to wait and see.

A lot of where it seems the -- at least the implied [roll] rates seemed well below their current performance, and a lot is predicated on what happens in the future, with respect to natural cures and the economy turning. So when you make this adjustment, based on a lot of it is on future projections, how do you determine a certain amount versus a higher amount? How do you get the confidence, given kind of the lag in the economy, to not make a more significant adjustment there?

Well, I mean, once again, we're looking at data -- various data sets, not only geography and book years, but also a little bit more specifically, and looking at rates, given on a monthly, quarterly, and multi-quarterly basis. So the only thing I can tell you is that, as we get into the third quarter and the fourth quarter, we'll look again at the trends. And are the trend lines changing? Or are they pretty much on track again? And that's where you get the changes.

I mean, we clearly saw a trend change in May and June, and made adjustments accordingly. Now, if it doesn't change much off that line, as Larry said, he thought maybe it would be flat, that would indicate that no significant change for trends. If, in fact, there's a trend line change, then you make adjustments to everything again. That's where the adjustment comes in.

And Curt, as you and the Board think about Freddie's terms and the decision to put down capital, is -- when you weigh the long-term debt obligations of the Hold Co. versus the near-term capital needs of the operating company, does it just boil down to that excess claims-paying ability, and the expectation that you could get money out of the operating company down the road to satisfy those longer-term debt obligations?

Yes. Exactly, Geoff.

Okay. Great. Thank you, guys.

You bet.

Mark DeVries.

Thanks for the disclosure on the Countrywide lawsuit. When did you agree to suspend rescissions with them?

I believe it was in November of last year, Mark.

Okay. So that $97 million impact that you cite, and that's about a half-a-year (multiple speakers) --?

No, they go back -- for the most part, yes. It might go back a little bit more, but the decision was there. I mean, we were obviously in discussions about that, leading up to the actual agreement to suspend those. But I think that's approximately right.

Okay. And has that had somewhat of an effect on the adjustments you've had to make for prior years of reserves, where you're now having to provide your assumptions for, at least for now, for rescission levels that you would expect on incoming claims?

No.

No?

No, because, Mark, we don't know if we're going to be able to reach terms with them, and whether or not then the GSE's. So again, it's a complicated transaction. So we haven't made any of those adjustments for that.

Okay.

Still assuming they'd be rescinded.

Okay. All right. Thank you.

Sure.

Shandi?

Operator? Hello?

Yes, sir.

Any questions?

Is there a question there?

Yes. One moment. We have David Epstein with a follow-up question.

Two quick follow-ups. First one, can you tell us what the capital ratio would have been if you were allowed to keep retaining the deferred tax assets in the calculation?

I think it's 25-to-2.

25.3, yes.

Yes, 25-to-1, yes. (multiple speakers) 25 to 2 or 3.

Okay. And two questions ago, someone asked is it -- the excess claims-paying resources that sort of influences whether you would downstream cash. I think that's what they said. And you sort of said, exactly. But could you put a little bit more color around that? Because it's sort of a complicated philosophy.

If you have excess claims-paying resources, that could be -- you could argue that either way. You don't need to [thin] cash down or you don't mind sending it down if you have to, because everything -- everybody is still solvent. So I honestly don't know if you'd be more or less likely to send it down if you have excess claims-paying resources or if you don't.

Well, in the past, our argument was we have it and we wanted to send capital down directly and into MGIC and then down to MIC. Particular conversation we're having right now is the Mac letter says that at a minimum, whether or not we can reach agreement, that we want to write it in MIC and put it further down in MIC. But I don't know where that will be. But for now, this letter, they've asked us to put $200 million down.

The question about the -- I don't know if that answers your question?

Right. So you're saying in the past, the regulator has thought there's excess paying resources, so you've been able to send it directly to MIC. Now Freddie's sort of indirectly may be questioning whether there is excess paying resources in MGIC and therefore asking you to send it directly to MGIC.

I don't know if they're saying that. I don't know exactly -- they're not really saying that right now. We haven't had that discussion. They've just said, with respect to this request that we had from waivers of these states and they'd like to cover these three things. Between now and September 30, we'll get that resolved as to whether or not they agree with the Insurance Commissioner, and whether or not we need to put -- the Catch-22 on the MIC capital is that we've got $440 million there and none of it's being used yet. So their argument is that you don't need it now. So that's the issue that they could send it later.

And can you remind me, MGIC, how much credit, if any, does it get for the existence of that capital in MIC?

100%. It stacks with 100%.

Right. Thank you.

Timothy Mullen.

Regarding the Holding Company, are there any other expenses at that level other than the interest expense?

Primarily just that. Nothing of any consequence. (multiple speakers) There's no staff or anything. Nothing there. Just interest (multiple speakers).

Right. Okay. Now, have you guys had to hire advisors? It seems like you have a very tricky combination of issues there. And have you had to hire financial and legal guys for all that?

(laughter) We've got a team of them, yes.

You do? It's very similar to some of the big California thrifts in the early '90s, who had similar tensions between where their fiduciary duties lay, did they downstream the money to their possibly insolvent subsidiaries. Did they take care of bondholders, shareholders? You've got that same list of issues, which sound very tricky.

Welcome to our world.

Yes, we'll invite you to one of our Board meetings. (laughter)

Well, good luck with it. Thank you.

Our final question comes from Mr. Ed Groshans.

Thank you for letting me back in. I guess through this conversation, it seems that the legal issues are focused on the operating company. And it does seem like you have excess claims-paying ability. So if there was a judgment, how does the Insurance Commissioner look at which capital can be used to pay that judgment? It would seem to me that you can't take it out of that excess claims-paying. Or can you?

Well, back to your point, the judgments relate to MGIC. So, it's MGIC's obligation.

So that's the parent company then?

No. (multiple speakers)

The holding -- the operating company. Right. Okay. (multiple speakers) So let's say there's a settlement and this payment that's going to be made. I mean, is that part of the reason that you're looking to push the $200 million down? Or would some of the $200 million (multiple speakers) -- for that?

(multiple speakers) We're aren't looking to push -- we're not looking to push the $200 million down. Freddie Mac would like us to put down and we have to discuss that and a solution with the OCI. It has to do with writing in MIC, again.

Right. Okay. But still, I guess I'm still unclear if there was a settlement, where that --

Yes, this is Mike. We're not going to speculate as to if there's going to be a settlement what the amount would be, and then what the Commissioner's reaction would be. It's just not appropriate to do that. I mean, it's all hypothetical and (multiple speakers) --

Mike, I'm not asking about it. I'm just wondering, when you look at the operating company and you look at the capital stack, what's available versus what's not? (multiple speakers)

(multiple speakers) It's at the writing company. As I've said, the obligation is at the writing company, MGIC. Mortgage and the (multiple speakers) insurance.

Sure. So one other question. I would guess that the parent company, if it was going to put the capital down, I guess cash, we would acknowledge that the parent company is going to remain solvent even after putting that capital down. Would that be a fair comment?

Yes. (multiple speakers)

Okay. All right, gentlemen. Thank you very much for letting me get back in the queue.

Since there are no more questions, thank you all for your interest in the Company through what has been a difficult quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. And everyone please have a great day.