MGIC Investment Corp (MTG) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the MGIC Investment Corporation third 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 be given at that time.

(Operator Instructions)

As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Mike Zimmerman, Senior Vice President, Investor Relations. Please go ahead, sir.

Thanks Jonathan. 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 third 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 MTG. MGIC.com under investor information includes additional information about the Company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures.

As 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 Form 10-Q that was filed earlier this morning.

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 events. 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 Form 10-Q.

With that, let me turn the call over to Curt.

Thanks, Mike, and good morning.

As reflected by the net loss for the third quarter of $246.9 million, or $1.22 a share, the elevated level of new delinquent notices we received, although trending lower on a year-over-year basis and as a percentage of the performing in force book of business, as well as a slow improvement in the cure rate continue to pressure our Company's capital position and financial results. While the quality of the new business remains outstanding and our industry continues to grow its share of new business, the lack of a meaningful economic recovery has caused the overall purchase origination market to be depressed and thus limits our new business writings and the resulting premiums written.

I know most of are you anxious to hear about our discussions with Freddie Mac, so let me provide an overview of where things stand. As we disclosed in our 10-Q that was filed this morning MGIC and Freddie Mac have agreed on all terms and language of the definitive settlement agreement with the possible exception of minor drafting issues.

The agreement is subject to approval by the Boards of Directors of MGIC, Freddie Mac, and FHFA. MGIC is to pay Freddie Mac $265.5 million in settlement of any further obligations of MGIC under the policies in dispute. $100 million is to be paid upon effectiveness of the settlement, and $167.5 million over the next four years.

However, we are unwilling to sign the agreement unless MIC is approved by Freddie Mac and Fannie Mae to write business in jurisdictions where MGIC cannot write due to a failure to meet capital requirements, and for a period in which all parties agree. Also, any definitive settlement agreements would only be signed concurrently with the satisfaction of the condition in the September Freddie Mac letter that Freddie Mac and the OCI agree, MGIC having access to MIC's capital as needed to pay claims.

If a definitive settlement agreement is signed, we are willing to contribute $100 million to MGIC from our Holding Company. As a result, we have not made any loss provision for a settlement and we are unable to predict whether it will go into effect. 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 have a waiver. So the bottom line is that MGIC and MIC are eligible insurers for both Fannie Mae and Freddie Mac.

As of September 30, the combined insurance companies' preliminary risk to capital ratio was 34.1 to 1, while MGIC on a stand-alone basis was 31.5 to 1. And MIC's preliminary risk to capital ratio was 0.3 to 1. The increase of MGIC's risk to capital above the 25 to 1 threshold was expected by us and by our regulator, and is exactly why we established in 2009 our plan to utilize MIC, which allows MGIC to manage through the risk of capital issues it currently faces.

We regularly provide updates to both the GSEs and the OCI of our expectations regarding our capital position and as a result, this quarter's results, including the risk to capital ratio, are not a surprise to them. The GSEs and the OCI understand that our forecast calls for the risk to capital ratio of MGIC to continue to rise for some time to come. The exact timing of when it will begin to decline is subject to, among other things, the level of new notices and curers, the amount of new insurance written to MGIC and the outcome of dispute resolutions.

It is important to point out, however, that with the $440 million of capital already in MIC, we could write 100% of new business out of MIC for at least 5 years at the current quality and volume levels of new insurance written we are writing at, if we obtain GSE approval. We are currently writing new mortgage insurance in MIC in seven states. The jurisdictions that MIC writes in are subject to change based upon additional waivers being received, or if MGIC no longer complies with risk to capital ratios from states that previously provided waivers. So while risk to capital will continue to rise for some period of time, I want to emphasize the fact that we believe there is no liquidity issue at the insurance operations and we have paid over $10.5 billion in claims since 2007.

We believe that even given consideration to adverse outcomes and various legal contingencies, we have a significant level of excess claims paying ability at MGIC. That is the sources of claim paying resources, namely cash and investments, plus future premiums from the existing and in force portfolio, comfortably exceed the level of expected claim payments, even with reasonably adverse outcomes and various legal contingencies. Furthermore, we believe that we have sufficient claim pay and resources to meet all obligations to policy holders, even under a stress loss scenario.

Now, back to our operations in the quarter. New insurance written in the third quarter was $7 billion, up 80% from the same period last year, and up 19% from last quarter, and includes approximately $600 million through MIC. More recently in October, we wrote $2.5 billion of new insurance. The new business written since mid-2008 now accounts for approximately 31% of our risk in force. And as I have discussed on past calls, this new 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 $3.7 billion of HARP refinance transactions were also completed during the quarter, bringing the total to $7.7 billion for the year and $15 billion since the inception of the program. All in, approximately 9% of the primary insurance in force has benefited from HARP for similar refinance programs, and substantially all of them are current, which should be positive to our credit performance as the average payment savings per borrower is just over $2,000 a year. Additionally, approximately 10% of the insurance in force has been modified through HAMP, or other loan modification programs.

Our industry continues to regain market share from the FHA. However, the pace of that recovery is slower than we would like, as the combination of underwriting guideline differences between conventional and government-insured loans, loan level price adjustments charged by the GSEs, and the secondary market gains associated with Ginnie Mae securities continue to exist in the marketplace.

We estimate the private MI's market share at approximately 10% in the third quarter. Within our industry, we believe that MGIC's market share is in the 19% to 20% range. The quality of new business as evidenced by the credit performance continues to be outstanding.

Losses incurred in the third quarter were $490 million, up 6% from the third quarter of 2011, but down 11% from last quarter. 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 -- 2008 and prior books, and as the data disclosed this morning shows, a lack of recovery in the lack of the overall cure activity.

The average reserve per delinquent loan increased modestly during the quarter. The claim rate assumption for new notices remains at approximately 1 in 4 going to claim, and as shown in the release of earlier today, new notices received in October declined modestly from September, while cures improved 7%. After considering the impact of claims paid, recisions and denials, the net result is that the delinquent inventory fell 2% in the month of October, ending at 146,282.

Paid claims declined in the quarter to $587 million, down 8% from last quarter and down 22% from one year ago. The average claim payment declined marginally to $48,000. We expect that the current claim filing patterns that we are experiencing will continue and will result in claim payments trending modestly lower for the balance of 2012 and into 2013.

As we have anticipated and disclosed in prior quarters, overall recisions and denials continue to slow as a percentage of claims. We have continued to voluntarily suspend recisions related to loans that we believe could be covered by potential resolution of various settlement discussions that are taking place with certain lenders.

At September 30, approximately 2,000 recisions remain in our delinquent and unpaid claims inventory due to our decision to suspend such recisions. As a reminder, we have not established an accrual to reflect potential settlements, because we have not determined that a loss is both probable and can be reasonably estimated at this time.

Cash and investments totaled $5.7 billion at the end of the quarter, including cash and investments at the Holding Company of $425 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.

As of September 30, the remaining outstanding balance of the 2015 senior notes was $100 million, with approximately three years to maturity. The other senior debt of the Holding Company matures in May of 2017. The annual debt service for the senior debt is approximately $23 million per year, and as most of you are aware, we exercised our option to defer the interest payments on the junior debentures.

So we believe that the near and midterm liquidity at the Holding Company is not an issue. We realized gains of $5.7 million during the quarter that were embedded in the investment portfolio, and have realized the total of $110 million in 2012 through September 30. Additionally, in October, we realized $79 million of gains, and as of the end of October, there remains $55 million of unrealized gains.

So to summarize, while we expect the 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, the slowly declining trend of new notices, and the growing share of business from the FHA. Regarding Washington, meaningful housing policy has been delayed by the elections, currently we expect that the CFPB will issue a rule for QM or qualified mortgage within the next few months, and the long-awaited and delayed QRM definition will quickly follow that.

Also, in October, our industry submitted a response to the Basel III proposal demonstrating that private MI is a reliable credit enhancement solution and suggested that the risk to capital ratio be supplanted with a model that would measure the adequacy of a mortgage insurance -- the adequacy of a mortgage insurer's financial resources to survive a specified stress period and remain adequately capitalized at the end of that stress period.

Finally, there are a number of deals in various stages regarding the role of the GSEs, although with the election results being what they were, I'm not sure there will be much interest in pursuing them at this time. Recently, we have also been hearing reports that suggest that the FHA will soon announce the need for a capital infusion for the first time in its history, which could have positive implications for our industry.

And with that, operator, let's take questions.

(Operator Instructions)

Jasper Burch, MacQuarie.

Good morning, gentlemen. Starting off with on the potential settlement, how does that flow through -- if you were to sign it, how would it to flow through earnings and stat cap, would it all hit when the settlement was signed or would it hit as it was paid?

What would happen is when the document is signed, we'll book the whole $267 million and then there would be a payment made also for $100 million on a cash flow basis. Then the rest of it would be paid over time, as Curt mentioned.

Okay.

And that would hit GAAP and stat simultaneously. $267 million.

Yes, okay. And then on the short sale streamlining with the GSEs, does that have any impact that we should look at? Does it mean that the highly seasoned book will sort of roll off faster? Any read-throughs there?

Jasper, this is Mike. On the short sale, it's going to increase, as most of the short sales seem to be occurring on the earlier stage notices than the later stage ones, and right now, we're already probably about a third of our claims are a result of short sales. So, we'll have to see and keep monitoring that. But, most of that's on the newer delinquencies versus the older ones. But, we could see a pickup in the, in the later stage, but we'll have to wait and see on that. So far, it's been on the early stage ones.

Okay, that's helpful. And then I guess just lastly, do you guys provide statistics on how much of your portfolio goes through HARP?

Yes, we just did. 9% of the in force has been in HARP. Are you talking about what has been done or what's eligible?

What has been done.

9% of the primary insurance in force at the end of the quarter has been HARP'ed.

Okay. Great. Thank you guys very much.

Thank you.

Douglas Harter, Credit Suisse.

Thanks. The first question is just to make sure I understand it, the cash that will be paid on the settlement, that comes out of the MI subsidiary, not the Parent Company?

That's correct, the Writing Company, MGIC.

Great. And then on the, on the late stage cures, it looked like the cure activity there picked up in the current quarter. Is there anything that you're attributing that to?

No it, really was modest. We had a down quarter the previous quarter. So there was some uptick, but not, I wouldn't say material. In the sense of overall trends, I would say not material.

Great. So over a longer time period, if you kind of smoothed out the quarterly volatility, you're seeing consistent trends?

Yes, I would say -- as Curt mentioned, unfortunately, not as strong as we would like to see. That's a function really of the economy and the late stage bucket still hanging there. It's still a high percentage and hasn't changed much over the last eight quarters really on a percentage basis. It's gone down, but on a percentage basis, it's still about the same as it was for the last eight quarters.

Got it. So to see a real change there, you would probably need to see a material change in the economy?

Exactly.

Okay. Thank you.

Seth Glasser, Capital Management.

Hi, guys. Good morning. I have a couple things actually, start with this one. It states in the 10-Q that was filed this morning, quote, that Wisconsin does not regulate capital by using a risk to capital measure, but instead requires a minimum policy holder position, or MPP. So you've also stated previously that the OCI wants you to maintain a minimum keep well level of $1 billion of liquid claims paying assets.

Now, obviously, with the Freddie-incurred loss coming up, coupled with ongoing elevated other incurred losses, risk to capital's going substantially higher in the next two years and MPP is clearly going substantially lower. And so my question is, how confident are you that the OCI will continue to look at the keep well assets of $1 billion, you know, even as risk to cap starts approaching levels that were reached at PMI?

I mean, when I model it out, I don't see keep well assets getting anywhere close to the minimum. But, I think it would help your case substantially in terms of market perception if there was more confidence around that issue.

Well, I think if you go back to Curt's comments, this, this process that we've been in with the OCI began four years ago and it has all of our forecasts. It has outside advisors. They get monthly financials. We get updated third party analysis on the book at least twice a year.

So unfortunately, what we kind of predicted might happen has happened and that is that the risk to capital has come under pressure, and for that reason, we did prepare the MIC strategy and put capital in it. So the OCI is comfortable with our forecast. They haven't changed.

The ability to write in MIC is approved by the OCI. He has our forecast. He knows where the risk to capital's going. His whole focal point is the ability of us to have sufficient claims-paying resources to pay over this valley, if you will, and comfortably be within that $1 billion cash number that you talk about.

So, I guess the only issue we have obviously is meeting separately with Freddie and Fannie and getting them to understand the same issue and allow us to get waivers to write in MIC. And that's been our focal point the last two years. The OCI has been in agreement with our plan, has approved our plan and monitors it monthly, but is comfortable with the forecast and the ability that we have to have sufficient claims-paying resources over this forecasted period and to be able to write business in MIC.

Right, okay. So I mean, it sounds like your customers and counter parties are comfortable looking beyond risk to capital. But when you look at the market, both equity and credit markets clearly aren't as comfortable with that yet. How does that perception get changed? Is it possible--

Notwithstanding what we have had some shocks here this last three or four months with the shorter term date, we had to meet with Freddie Mac. But notwithstanding that, I think we're getting through that, as we outlined today. We've made agreement on the material terms of the pool issue. We'll move forward hopefully and get the rest of this resolved and then we'll be able to continue to write business in MIC and we'll kind of be back on track.

I think short-term basis, we've got more than enough liquidity at the Holding Company to service debt and '15's especially and have longer term issues, but more than enough time. I think if you look at the Writing Company, it's got sufficient capital resources to pay claims during the period, so it's the ability to convince the regulators that we can write business.

And I think when that probably smooths out, then the market may react a little bit more comfortably to say, well, they are Writing business, they don't have immediate debt issues, and as long as they can continue to write under this waiver requirement, they should be coming out on the other side of it. And the good news is, as Curt pointed out, we're writing more good business each quarter. That's a positive. And that continues to prove out our original plan. And that was that we need to get through the period. We have sufficient resources to meet those obligations, and we need to continue writing good new business in that new subsidiary.

Right, yes, that's fair. So, going back to the comment about the liquidity at the Hold Co also, it seems clear both you and the OCI are trying to strike a balance between leaving enough cash at the Hold Co to address, or at least partially address future debt maturities, but on the other hand, continuing to send cash down to manage capital and liquidity levels.

So, now that you're sending down $100 million upon the final agreement with Freddie, where do you think you stand on future cash downstreams? You've disclosed that you wouldn't need to send any more cash down until you've reached the keep well level, which, again, I don't have you ever getting anywhere near. So, am I thinking about that correctly, with regard to future cash downstreams?

That's correct. You wouldn't under our forecast, you wouldn't deem it necessary to put any additional cash downstream under the current forecast. We've got sufficient cash resources at the Holding Company, not to breach the $1 billion issue, based on our current forecast, and that with respect to additional down streams from the Holding Company, we wouldn't deem those necessary. Because as Curt, again, pointed out in MIC with $440 million of capital, it has sufficient capital to write business, even if we were to write 100% of the business at the current levels, we would have sufficient capital to write for five years.

Okay, great. That's, that answers it, and congrats also on getting the deal done with Freddie. I know it took up a lot of your time and it's definitely a big deal for you guys. Thanks.

Thank you.

Randy Raisman, Marathon.

Couple, just I have three questions. The first one is on the deal with Freddie, so you take the whole $267 million hit to capital now, but you only pay $100 million out. Why -- it just seems odd to me, if you clearly have a lot of cash and liquidity down on the Op Co, why are they giving you 48 months to pay out $167 million? I mean, what is it -- are they concerned about the Op Co liquidity? And then I have two others after that.

No, I think if you remember, the original pool transaction, there was a time period over which those are going to be paid anyway. So it somewhat matches that. In other words, those, those pool claim payments wouldn't have come all in this year or next year. Do you follow?

I see.

So, there's timing on the pool was something we agreed to negotiate the timing period.

So, you just negotiated a 48-month payment schedule?

Right. Exactly. It's nice to have them as partner for the next four years.

Right. And then just want to clarify, you said you realized $79 million of gains in October. I didn't catch, how many -- what's left in the bank there in unrealized gains that you could realize going forward?

About $55 million.

Okay, and then the last one I have is, it seems like over the past few quarters at least, the reserve increase, right, is, one of the ways you guys have explained it to me is because the cures as a percentage of beginning delinquent inventory remain at a low level. What percentage on that ratio, when does that shift? So when will you stop having to take reserves up by, even if it's just a few hundred dollars per delinquent loan, it's like a $50 million hit to your capital each quarter. At what level in that ratio do you stop having to do that?

Well, I think what we'll have to do is report out to you that quarter when we start to see those trends significantly improve. And I can't give you the number. But clearly, we have not seen it. As I mentioned earlier, someone else asked the question, too, and that is if you look at the percentage of over 12-months inventory, it's still in the 50%-some and it stayed there, 52% over the last eight quarters.

So it's not improving significantly enough, and, remember, I think we -- this is something we talked about in the last several quarters, too, that even on a quarterly basis, we're still getting 30% of the notices granted around the '07 book, but another 30% are coming from '04 and older books. That -- the '04 and older books to me are an indicator of the economy. '07, we understand that difficult period, but '04 and older really are a function of how slow the economy is recovering, that people are still losing homes that were booked that long ago. And we would like to see that decline and cure up faster.

Why aren't you, why aren't you experiencing the benefit of the lift in the housing market that we're seeing everywhere else? That's just what doesn't make sense.

When you say the lift in the housing market, you're talking about new mortgages and refinance mortgages, that lift, or--

Just in general.

Talking about-home prices?

Higher home prices, better data coming out of that market. Shouldn't that mean that your book should start performing better, and you are continuing to say that it's getting worse.

The home price, you got to remember, a lot of these borrowers were 30% and 40% under water to begin with. So, the fact that they are now improving somewhat on -- doesn't make a difference on whether they are going to make their payments or not. So, the -- the home lift, the home price lift you're seeing or the housing lift you're seeing is coming up from such lows that, again, it's not making a meaningful dent in the marketplace.

Is there anything we can look to, like where we as kind of outsiders, as investors can, data point that we should be focused on, a certain -- what should we be focused on for when it will flip over for you guys? What metrics?

I think--

I mean, employment is where things are. You've got a current book of business that has very stringent underwriting guidelines, really since -- they are going to do well. But as Mike mentioned, with 30% of our new delinquencies coming from old books of business, that all reflects the fact that people are suffering with employment. And so as employment improves, the book will improve.

Until you start to see that and until you start to see that 12-month and over bucket, like materially go down, I think as, I know you're not giving guidance, but just as an outsider, we should continue to see the reserves per delinquent loan tick up, even if it's just a few hundred bucks per quarter, we should -- that should continue -- that trend will continue for the time being, until we see unemployment get better in that 12-month and over bucket go down. Is that the right way I should be thinking about it?

I would say generally, yes. You would like to see a better trend on cure significantly higher and especially coming out of some of the older books.

Okay. Thank you, guys.

Keep in mind too, it is a mix issue, as you have 59%, or 50%-plus of them in that 12-plus, so that percentage needs to come down. So, it's not about the macro economy issues, but on a metric basis, that percentage needs to come down and be shifted, weighted more towards the front end of the delinquency buckets.

Okay, thank you.

Thank you.

Nathaniel Adair, Panning Capital.

Actually, this is Craig Perry. Sorry, Nathaniel just signed in to the call for us. I had three quick questions. The first is as I was reading your Q, it looks like there was a change by the Wisconsin regulator where they have begun to allow some of the deferred tax asset in the statutory capital calculation for the end of September. Could you comment on whether that's an expectation of future profitability or what that change, what drove that change?

The second is, you've often cited the $20 billion of new insurance in force would ultimately lead to $400 million of net present value of kind of future premiums, net of losses. Over what timeframe are we supposed to kind of use, think about those cash flows coming in, sort of an average of five years? Then the third is, thanks for your disclosure around kind of the duration of delinquencies. Is there any way you could segment out of the delinquencies that are 12 months or older, roughly what percentage are sort of north of 2 years delinquent?

Thanks so much.

Mike, do you want to go on the --

Let me first talk about the accounting, the stat change. That was admitted practice, approved practice. And it gets us about $90 million. Yes, you're correct, it's the ability of the commissioner looking at forecast and realizing that is an asset that could be deemed usable.

You know, it is subject to 10% of surplus, so we don't get a real big benefit for that until we start to get positive surplus growth. But then that will be a significant benefit for us in the future. The other question -- the last question was Mike's going to take--

Yes, the delinquency mix question, so 7% of the delinquencies are greater than 48 months old, 11%, 3 to 4 years old, 13%, 24 months, 36. So you're looking at 31, about a third of the delinquencies being 2 years or older, in the inventory as of September 30.

Larry?

Larry will comment on the calculation as far as the premium flow. I just wanted to point out that's not an MPV calculation, but I'll let Larry get into the timing of that.

Basically on the $20 billion book of business leading to $400 million net profit, that's over the life, and how that breaks down is roughly about $500 million of earned premium, roughly $100 million of losses over the life netting to that $400 million, and as far as timing goes, a $20 billion book of business over its first year our average premium rate is roughly 60 basis points, so 60 basis points on that $20 billion is $120 million. So a lot of that revenue of $500 million comes in the first few years. So you're getting a lot of positive cash flows from the earned premium stream early on and very little of the losses. So the $400 million is net lifetime, but a lot of it is over the first two to three years.

That's very helpful. I'm sorry. I mean, I guess, if you just wrote $20 billion of business and let it run off, what would you expect the average duration would be based on your model today? Is it five years or six years?

Well, at these interest rates at 3.5, probably 4.5 to 5, yes.

Okay. I'm sorry, lastly, under your master servicing agreements, which they may or may not, I apologize, I haven't read them, if you have a loan that's delinquent for more than two years, do you think you're likely to ultimate pay out on that claim, or has that been serviced properly?

Well, let's talk about servicing negligence. On the claims that we have received to date, we have not seen significant incidence of servicing negligence. We review every claim, the claims that come in. If there's negligence, we will curtail the claims accordingly. But to date, we haven't seen a large incidence of that.

I'm sorry. I actually just meant under the terms of the agreement, if it's sort of two-years plus delinquent typically, there's--

No, as long as it follows the terms of the agreement, there's not a time limit per se as to when that foreclosure has to start. There's been a lot -- forbearance, modifications, et cetera, bankruptcy could take up to four or five years, so there's not an explicit provision that says you must foreclose in two years.

Great. Are those available on your website? Have I just missed them?

Our master policy was filed with either last year's 10-K or 2010's 10-K.

Terrific, thanks.

It's not necessarily right on the website, but it's filed as an exhibit to one of the recent 10-Ks.

Terrific. Thanks so much, guys. Appreciate your time.

Thank you.

Sure.

Sean Perot, Deutsche Bank.

Hi, guys. Thanks for taking the question. In looking at the GAAP versus stat loss this quarter, was the main driver between the two, was that really just the $90 million that Craig had just asked about on the DTA? Or were you guys--

Yes.

That's--

Yes.

-- obviously, be another benefit to that --

In October, yes.

Okay, okay. And then we talked about -- I know you guys have been talking about this a lot. When you look at your new delinquencies, obviously they ticked up a little bit this quarter and you talked about the claim rate continuing to stay high. Should we be viewing this quarter as a one-time adjustment as well? Or should we be looking at the kind of, the implied cure ratio on, on the older delinquencies staying at this lower level that seems to be coming through?

Well, I think you can never say that the trends will stay at this level. Every quarter is another development of three months worth of activity. So I think clearly this year, the claim rates have been adjusted upward, or negatively. If you go back and look at last year, we had a redundancy. This year, we got a negative. And it's all a function of estimates in how things develop out versus what we had. And we've seen developments negatively this year, and most of it has been the drag on the older delinquencies.

If that trend continues, and generally speaking in the fourth quarter it does, we never get -- we usually get some of the improvements in the first half of the year, and especially in the first quarter. So we would, we would hope that maybe claim rates might tick down and cure rates might tick up in the first half of next year. But that, again, as Curt said, a lot of that is dependent on the economy and what's going to happen. But I wouldn't expect any improvement in the fourth quarter traditionally.

That's fair. That's fair. And then as far as mods and the efforts you guys have there, do you feel like you've -- as far as low-hanging fruit, do you feel like you're getting to the end of the low-hanging fruit? How do you think that that may impact the later stages there?

I think the HAMP numbers, although the new trial starts, the numbers are down from the, from a few years ago when the programs were first announced. The conversion rates on those more recent starts is much higher because they are doing the paperwork up front rather than after the trial. So, they are still contributing -- probably 10% to 15% of our overall cure activity is coming from HAMP.

Okay. That's an interesting way to look at the worst case scenario on those 12 payments or greater, is that you think that you'll have those mods coming through?

A good portion of the 12-plus delinquent cures are due to HAMP and non-HAMP mods, and those tend to be choppy quarter-to-quarter. So, that's why the reserves kind of react to some of that choppiness.

Okay. That's fair. Okay, thanks, guys, appreciate it.

Thanks.

David Epstein, CRT.

Hi, two questions. First is, when you said you wouldn't see the need to down stream additional cash, I know it's tough to foretell the indefinite future. But sort of what period were you referring to and what if the OCI revokes some waivers?

Well, once again, everything is based on where we currently are, so I tried to qualify that. I didn't -- I said I didn't see a need to downstream any capital, because I feel based on the forecast that the OCI is seeing and has seen over time that he's comfortable, they are comfortable with the amount of resources we have at MGIC, and he understands that the risk to capital is going to increase.

He's looking at resources, claims paying resources at MGIC and provided that they continue to run at the forecasted levels that we've seen and the economy doesn't deteriorate, et cetera, that there shouldn't, there shouldn't be a need for any additional capital because we're writing at MIC, and at Curt said, at these levels and these conditions, we should have more than enough capital to write at MIC. That's the qualifier.

I think you said that even in a shock scenario, you still have excess claims paying resources, but are you of the view that even if that shock scenario plays out, that he wouldn't demand extra cash, because even if he might not need it to pay claims, he might want a greater comfort level?

Well, again, that's all speculation. I really can't get into that. Comfortably, I would say that notwithstanding everything we've been through here for the last four years, he's been comfortable with our forecast and the deterioration at some different times and the amount of cash. Remember, we did raise capital. So, all of that's been a positive. And as someone pointed out before, we've had that the luxury of even buying back debt at some time.

He's comfortable with our forecast, claims paying resource. Could that change? Certainly, some things could change. Anything could happen in the future but based on where we've been and what he's seen over the last five years, the OCI is comfortable with our forecast. That of course, is a month-to-month change, obviously, but right now, we're comfortable with where we are and the OCI is and we think MIC is in a good position to continue writing business.

I want to point out, too, that when the state does their work, they don't do it just on a base case scenario. They do apply a shock to stipulate either a Moody's S3 or S4 scenario, so they're looking at not just a base case, but at an adverse scenario when they are making all of their assessments on a monthly and quarterly basis.

Okay, thank you for that. And then on the issue, and you might have mentioned it earlier, forgive me if you did, regarding Freddie Mac wanting to be sure that the OCI will be willing to allow MIC's capital to be available to support MIC's policy holder obligations without segregation of those obligations, where do we stand on that? And where do we stand?

That's still, that's still being negotiated. I mean, that's another -- third party, if you will, Freddie Mac, OCI, and we have--

FHFA.

FHFA also, yes.

Thanks.

They are in discussions. That's all we know right now.

Okay, and you guys certainly characterized a positive tone to reaching resolution, so you think this is something that can be overcome?

We're hopeful.

I think it's in everyone's best interest to make that overcome. And that's what we're counting on, that common sense prevails.

Thanks very much. Good luck.

Thank you.

John Benda, Susquehanna.

Hey, good morning, guys. Couple of questions for you. On the reserve figure in the quarter, the new loss incurred estimate, could you possibly break that down? You mentioned that new reserves are the primary driver of that figure.

Well, John, this is Mike Zimmerman We told you that roughly one out of four new notices goes to claim. So that's, you have 34,432 new notices that came in. You multiply that around $12,000, $12,500, that's going to give you a $430 million of the $490 million and about $25 million for pool. These are rough numbers, those claims are estimates. It all depends on the mix and where they are coming from, et cetera. But broad brush, that kind of gives you a breakdown of it.

All right. And then on the cure rates, could you offer an assumption of what you use on a forward-looking basis for your late stage and midstage?

It's Mike Zimmerman again. Again, we look at the overall notices of inventories that have come through, but the statistics that we put out tells you that on a monthly, or a quarterly basis, about 4%, so late stage delinquencies cured, relate to an annualized rate of around 15% or conversely, 85%, 90% claim rate--

On those--

-- and the middle one, somewhere in between.

Okay, and then on the $400 million of capital generated on that $20 billion in IW scenario, with declining persistency rates, since for the last three years or so, how certain is that figure? I mean, what if persistency rates drop back into the 70s, like we saw in '07 or the 60s like we saw in '06? I mean, is that a function of interest rates moving up is clearly going to helper persistency stay low, but if they remain low, what kind of variance do you see around persistency and that $400 million figure that you offered?

Well, the persistency we are talking about is on new writings, and the persistency on that new book is going to be a function of the interest rate on the underlying mortgages, which today is about 3.5%, and the interest rate environment going forward. So, I don't know about you, but 3.5%--

Very, very favorable.

-- mortgages, ought to last a long time. Where we're seeing the drop-off in the persistency is on books of business like the '09 book, where these coupons in the '09 book is roughly around 5%, 5.1% in a 3.5% market. We're seeing it there, but once again, the $20 billion, that's what we're talking about, is the '12 book business and that's on a 3.5% coupon.

I would offer also that if persistency starts falling, it's (technical difficulty) wonderful economy that the loss side will probably be better than our expectation.

All right, great. Thank you very much.

[Stewart Inks, Clarion.]

Hi, guys. Thanks for taking the call. I wanted to check on the Countrywide loans, the 32,000 delinquent loans. Are there any reserves against those today?

Yes. They are even included in our delinquent inventory. They are certainly loans, whether they are Countrywide or others, that we have made adjustments for expected recisions. But for the loan, any loan that's delinquent with an assumption for recisions, there's reserves established for all of them.

Okay. Thank you.

Dan Vasquez, RBS.

Hi guys, two questions. First off, if we can just follow up with Dave's question about the shock scenario. You've said that your claims paying resources comfortably exceed all obligations of policy holders. Can you provide updated guidance by how much that is in your new models here?

Sure, Dan, this is Mike. If you may recall, we went through this last quarter, but I would be glad to update that, as using similar methodology that we've used in the past and it's really unchanged as of June 30, the excess claims paying resources is approximately $1.9 billion. Now, in that $1.9 billion, or in the resources, it includes the capital that's in MIC, capital that's in our Australian subsidiaries of about $100 million, and the $1.9 billion doesn't make any provision for the Freddie Mac settlement or any adverse contingency development that could arise from disputes with Countrywide or the IRS.

And of course, got to tell you this is a forward-looking statement and the actual results could differ on a runoff from the statements that I'm telling you about, and you've got to look to the risk factors that are in the 10-Q to talk about all of those risk factors. But it's effectively unchanged from where we were at last quarter.

Great. Thank you.

And we're not taking -- we don't update that on a monthly basis or quarterly basis. So you can also consider the new business that's come in in the quarter.

Okay.

So, once again, those numbers, that $1.9 billion, that's a runoff, so that doesn't take into account any new business. So, a year from now, if we wrote the $20 billion we talked about earlier, that should add a net $400 million to that number to help offset, potentially, some of these contingencies that may be down the road.

I appreciate that. That was part of my question. So, moving on, if we could talk about Freddie, can you just help me understand some of the potential impediments here a little better? So, it seems like one of the -- from your partner, not one of the three conditions from them, is that you want an extension of the waiver probably sometime in excess of next year. Can you elaborate on what you're looking for here, how much, how long?

You would like to go as long as you can. The reality is Fannie Mae's is through 2013. So I think that's what you're looking at relative to Freddie Mac also, and its ability to write in MIC where we need to, where by, you know, even though I think we have 34 states that now do not require waivers, but if any of those would change to where we would need to use MIC to write in those states, we like that capability, which is what we have with Fannie Mae also. So that's what we're looking for. Just an ability to write in MIC wherever we need to write in MIC, given the strong claims paying position that the Company's in.

Right. And just lastly here, can you elaborate a little on condition number 3? I just don't understand how the mechanism would actually work, where capital would be drawn out of MIC to potentially pay MGIC losses. Can you just say, can you just elaborate on what they are looking for, how they would perceive impairments and so forth?

It's a theoretical exercise. What they are looking for is to say if there was an event where MGIC was no longer writing business and that there was excess capital in MIC, what kind of assurance can the OCI give to Freddie and Fannie, that that excess capital would be able to be upstreamed to the MGIC, the Writing Company. So it's a, it's effectively looking for some kind of language in it that would get them comfortable with that excess capital calculation and the ability to dividend out that money, under what kind of conditions.

I'm sorry. That was never clear to me. So just to reiterate here, the condition number 3 is only applicable under runoff scenario?

No. If MGIC cannot pay 100% of its claims, valid claims when they are submitted, that would only come about if MGIC is not writing business and is running out of cash, which we don't foresee happening.

Okay. I understand now. All right, guys. I appreciate it very much. Thank you.

Yes, thank you.

Scott Frost, Merrill Lynch.

I just wanted to go over some of the incurred, to make sure I understand what happened. When you have an increase in incurreds, it looks like current year incurreds actually went down, but what it looks like happened is that you have a continued turn of favorable development last year to unfavorable. That's what you're talking about when you talk about an uptick in the claims rate and older loans? That's the first question. The other one, should I think of current year incurreds, does that include borrowers that have gone through a mod and redefaulted?

Well, on the last question, Scott, you're referring to the disclosure in the 10-Q, I assume, correct?

Yes.

Okay, just wanted to make sure. So, the current year is any notice that we receive from January 1 forward, so that could include a modification that was current, but then redefaulted. It could also include any adverse development under notice that we received in January through the end of September, so all that activity is contained in the current year line item there. And I'm not sure if you--

Yes. Well, I think you're referring to the Q disclosure and that is we break out incurreds and, for accounting purposes, for SEC recording, they say identify incurreds for the current period versus the prior period. And for the nine-month period, the current incurreds were lower versus last year, but for the prior year, they were up, so effectively, there was a redundancy for the same period in '11 for 9 months, but in '12, for the '12, 2012 period for 9months, we've been in occurring incurreds for prior year books, that's correct.

So that was notices that were on hand at the beginning of the year where we had estimates on how they were going to develop out and in effect, we had to incur greater claims assumptions, claim rates, primarily in rates, not so much on severity side, so there's been an increase for $287 million through nine months, and I think it's about $90 million for the period, or $60 million for the period, about $60 million, yes, for the third quarter. So that's the breakout difference.

Okay, so what I'm saying is, you're saying that the claim rate reflects more loans than you expected from older books coming to potential loss, is that--

That's correct. I would say not so much on severity, but rather just in number.

Okay, and why do you think you were off in your estimations?

Well, once again, it's the assumptions, you know, it changes month it month, year to year, but for the most part, it's a continued duration of this economy, as Curt talked about, and the lower percentage of these loans curing out than we would have anticipated and it depends by some markets, too. But for the most part, it was across the board. There wasn't too much changing in markets in this last nine-month period.

Okay. All right, thank you.

(Operator Instructions)

Douglas Harter, Credit Suisse.

Thanks. My question has been asked and answered. Thank you.

All right.

Okay.

Thank you. This does conclude the question-and-answer session. I would like to turn the program back to Management for any further remarks.

Thank you for your extensive questions today and your interest in the Company, and have a wonderful day. Thank you.

Thanks you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.