Old Republic International Corp (ORI) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Old Republic International fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead.

Thank you. Good afternoon. Thank you all for joining us today for Old Republic's conference call to discuss fourth quarter and year-end 2008 results. This morning we distributed a copy of the press release and hopefully you've all had a chance to review. If there is anyone online who did not receive a copy, you may access it at Old Republic's website at www.oldrepublic.com or you may call [Hahn Hoy] at 312-640-6688 and she will send you a copy immediately.

Please be advised that this call may involve forward-looking statements as discussed in the press release dated January 22, 2009. Risks associated with these statements can be found in the Company's latest SEC filings. With us today from Management, we have Al Zucaro, Chairman and Chief Executive Officer, and Chris Nard, President Old Republic Mortgage Guaranty Company. At this time, I'd like to turn the call over to Al for his opening remarks. Please go ahead.

Thank you, Leslie, and we will proceed real quick with some commentary on this morning's release. And then, as Leslie just said, we will open it up to your questions. Again, as she said, Chris is on the line with me out of his Winston-Salem office and he will come on and participate in the question and answer portion of this call.

Let's see; the news in this morning's release was not much different in terms of operating trends and bottom line results than what we've posted for the most recent quarters. With the end of last year's fourth quarter, unfortunately we have now reported six consecutive quarters of negative bottom line performance at Old Republic. And as we indicated at the top of this morning's release, it is, I would say, more likely than not that we will be experiencing a repeat of this less than stellar performance for another four to six quarters before more positive consolidated earnings trends can emerge. All of this, of course, will be due to the continued difficulties we foresee for our mortgage-related businesses of mortgage guaranty and title insurance in the fourth quarter of last year, as well as the full year 2008. As you see in the released consolidated operating results continue to benefit from reasonably good underwriting and investment income contributions by our general insurance business.

But as you can also see, the performance in the mortgage guaranty line worsened to some degree and the same thing happened to a much smaller degree in our title insurance segment where the last quarter's earnings downturn was magnified to some degree by the usual slow production that befall that business in the fall and winter of each year, as well as the higher provision we've mentioned of about $6 million, as I recall, for various class action type of litigation exposures we have in that segment and that we reevaluate as of year-end.

Focusing on the general insurance, we experienced some slippage in underwriting profitability in both the final quarter as well as the full year when we compare those periods to 2007. At the beginning of 2008, some of you who follow us may recall, we suggested that our general insurance segment would likely produce underwriting results within a composite underwriting ratio range of about 95% to 98%. And as you can see, the actual composite was a shade above 97% for the entire year. I would say that the increase in last year's underwriting ratio was driven mostly by our consumer credit indemnity coverage with general aviation providing a much smaller uplift to the ratio, if you will.

As we've noted before in past conference calls, the consumer credit indemnity, or CCI product line, as we refer to it internally, which currently represents about 10% of our general insurance earned premium base, is producing, by far, the worst underwriting results we've experienced in the 50-plus years that we've offered this product. Last year, the line added, by way of reference, it added nearly 400 basis points, or 4 percentage points, to the general insurance segment underwriting ratio, whereas its effect on the same ratio for all of 2007 was negligible. The line, as the name implies, is tied to consumer borrowings for purchases, such as home improvements and expenditures that are financed typically with second liens on homeownership and, therefore, as you might expect, the CCI underwriting experience is being impacted by the overabundance, one might say, of the very stressed credit conditions that are currently affecting the American economy.

We currently expect that the underwriting trend line for this product will probably mimic that of the mortgage guaranty line, because again, of its relationship to the credit finance business of this country. Its dollar impact, however, on our results should be and have been a lot less due to the much smaller size of this line and a different pricing and underwriting considerations that apply to it and have so applied for many years. All in all, the majority of general insurance coverages delivered flattish to moderately better underwriting results, and in total, those results overcame most of the damage from the CCI claim costs in particular.

Investment income in general insurance slipped a bit in 2008 and that was due to the lower dividend income on our relatively small amount of equity holdings and a somewhat reduced or flattish yield on the aggregate of our long and short-term fixed income securities. As we point out in this morning's release, this group of companies delivered, still, very positive cash flows for the year, though the cash flow was at a lower level than had been the case in 2007, which I think I recall, was probably the highest cash flow year we've ever had at Old Republic.

While we have not buttoned down our budget for 2009, we do have some reasonable clarity about the likely costs that our general insurance business will follow. Such that, absent any acquisition of a book of general insurance business, which is always a possibility, though I've got to say, we don't have anything on the burner as we speak. We are basically looking at a more or less level earned premium line for 2009 in this segment. We may deliver a little bit more than that by virtue of some tinkering we continue to do by reducing purchases of reinsurance coverage.

But the fact is that we have enough capital in our general insurance business to increase the amount of risk we carry and, thus, the tinkering I'm referring to relative to our retention levels, which, as you know, have the impact, however small it might be, of increasing the earned premium line. Underwriting-wise and general insurance we feel reasonably confident about delivering an underwriting ratio within the bounds of let's say a 96% to 98% level in 2009. Our comfort in this respect is based, I would say, on the overall feel that we have that the pricing that's baked for all intents and purposes into the business currently in force should not show significant deterioration as that business earns out throughout the year. And also, we feel that renewals will likewise occur with very little, if any, material price or terms of trade concessions.

And finally, we continue to believe, as exemplified by our continuing posting of reserve adequacy, that our claim reserve structure is sufficiently strong as to preclude any meaningful adverse development and, therefore, no incursion in to the current year's profitability. Let's see; turning to our mortgage guaranty business, it obviously continues to run a pretty high fever on the claim side of the ledger. The more accentuated than earlier expected trends in loss emerges as well as severity patterns in this business unfortunately are leading us to eat some humble pie.

And by that, I mean that for several quarters since mid-year 2007, we had convinced ourselves that this business would produce a cumulative loss ratio of about 150% on total mortgage guaranteed premiums for the 30-month period stretching between mid-year 2007 when, as you recall, housing and finance (inaudible) began to fall out of bed and year-end 2009 or third year period, as they say. As matters currently stand for just the 18 months that have already transpired through year-end 2008, the cumulative loss ratio in mortgage guaranty has already reached approximately 190%.

So as we look at the world through this latest set of numbers, it is not inconceivable that performance of the book can still show improvements during the second half of 2009. But this can happen only with a very gradual unclogging of the country's lending pipeline, and with the ultimate beneficial effect of all the foreclosure stemming and loan modification initiatives that have been factored into various and sundry US Government as well as private sector activities in all these regards.

But our current view, nonetheless, is that all of these positives will require a longer period of gestation before a more benign state of claims activity occurs and for the beneficial effects of the better underwritten and better priced product of 2008 and 2009, for sure, for that better price product to kick in and begin to offset the damage of the business underwritten principally in the years 2006 and 2007. So the long and the short of it is that the cumulative MI lost cost for that 30-month period are more likely than not to gravitate toward the 200% mark rather than the 150% level that we had contemplated starting as, I say, around fall of 2007. At least that's our best guess at the moment as to how loss costs will shake out in mortgage guaranty before there is any kind of resumption shun of a more stable situation.

The type of outcome that I'm just describing in mortgage guaranty has obvious repercussions on the capital levels we have been committing to this business. Everyone that's familiar to any degree with the mortgage guaranty industry knows that there are certain regulatory guidelines that all MI companies need to observe when it comes to minimum capital requirements for a mortgage guaranty insurer with an active book of business. And while there isn't total uniformity among the various states that regulate mortgage guaranty companies, the generally observed guidepost is for insurers to run the business at a 25 to 1 risk to capital ratio. That's the maximum ratio.

For our part, we've previously said that our game plan was to run this segment with a statutory ratio ranging between 17.5 and 20 to 1. In the -- as you can see in the statistical exhibits and the foot notes that are appended to this morning's release, you can see that that ratio stood at 17.6 to 1 or 16.4 to 1 at year-end 2008, depending on the alternative calculation methodology followed in determining what true risk in force is or was, I should say, as of that date. Incidentally, those year-end 2008 figures, as I just mentioned, do reflect a capital addition of about $150 million to our mortgage guaranty group of companies as of December 31st, 2008.

So, based on our current expectations relative to the loss ratio trends we've just mentioned and given the assumptions we are currently making, vis-a-vis 2009 new business production, as well as persistency rates, which we estimate will likely be in the mid 80s, we think it is more likely than not that our mortgage guaranty risk to capital ratio will crossover the 20 to 1 mark and nudge itself more closely to a 25 to 1 level as year-end 2009 approaches. And to stay within that 25 to 1 level and absent the utilization of several controllable variables we have at our disposal, such as reducing our intake of new business in order to mitigate the impact of a growing book of risk in force, we currently believe that we need to add between $50 to $100 million to the MI segment's capitalization by year-end 2009.

Again, as I say, based on our assumptions as to the likely course of events as it applies in particular to loss ratios, premium levels, persistency of the business, et cetera, et cetera. And I would say that at $50 to $100 million that's something that we should be able to do with relative ease and without undermining in any fashion the capital structure of our general and title insurance businesses. Suffice it to say that for the foreseeable future and until the dust settles, our clear intent is on managing our mortgage guaranty risk and capital structure with a sole and primary focus on meeting our obligations to policyholders rather than being proactive in securing market share growth.

On that score incidentally, when you look at our numbers quarter-to-quarter, you will see, as is the case I suspect, with mortgage guaranty competitors, that the amount of business that we've put on the books, new business, I should say, has been somewhat declining particularly since the second quarter of 2008, and as we indicated in the press release, that to a large degree, is a reflection of two key factors affecting the business and that is one, the much more stringent underwriting standards that are being applied by both the GSCs as well as the mortgage guaranty and insurers, as well as the fact that the FHA is making a dent in the insurable loan volume that there is out there.

So managing the business in that fashion, as I say of managing the capital and the business, with a clear focus on our primary policyholder obligations, we think that that's the responsible thing to do for the best interests of existing policyholders first, and Old Republic's shareholders secondly.

Turning to our title business, not much needs to be said in addition to what we've already indicated about the impact of housing and mortgage lending issues on any business that's related to those industries. From an earnings standpoint, the title segment is likely to, how shall I say, idle within a range of the bottom line results we've posted for 2008. It's not out of the question, however, that our title insurance group could pull out of the doldrums somewhat earlier than mortgage guaranty since, as you know, title premiums and fee revenues respond very quickly to any uptick in housing sales and mortgage lending activity.

There is also, of late, in the last month, couple of months or so, a silver lining emerging in the form of greater refinance activity. And as you might well suspect, that's due to the recent evolving downturns in mortgage rates, which for qualified borrowers, allows a refinancing of loans at better terms. We do not, however, expect this refinance activity by any means to reach the fever pitch refinancing levels that we experienced several years ago. But nonetheless, it should be of some beneficial affect on our title business. Consolidated-wise we've included the usual shareholders equity per share reconciliation at the tail end of the release. And the reconciliation, of course, brings together all the elements of our business activity into very clear focus.

As you can see, just about half of the equity lost last year came from bookkeeping entries to record mark-to-market impairment adjustments as well as market value allowances related to our bond and principally equity investment portfolios. The lion's share, again as we indicated in the release, the lion's share of the bookkeeping adjustments stemmed from the significant holdings we have in the two largest mortgage guaranty insurers in the nation. And while this was a painful accounting exercise, it is redemptive, I think, to consider that those investments have been written down to a level not very much north of zero so that any further market valuation decline would not result in as bitter a medicine as we have already gulped.

These elements aside, however, Old Republic's balance sheet retains a great deal of staying power and is very sturdy and is going to see us through this downturn in the housing related area. The quarterly cash dividend payout has been kept at the higher rate we announced back in February of 2008. As we have said often, we look at this rate every quarter in conjunction with our board meetings and the next time we visit this matter will be in late February of this year. That's the extent of the additional overview commentary we were prepared to make this afternoon. So now, as we indicated beforehand, Chris and I will take your questions as they come.

Thank you. (Operator Instructions). We'll take our first question today from David Lewis with Raymond James.

Good afternoon. Thank you. Thank you for your comments and thoughts on the outlook. It was very helpful. I want to make sure I'm clear, if you are going to pull back in the MI new business, does that mean that we may actually see the premiums start to shrink on a year-over-year basis? Would that be your expectation or more of a flattening out?

No, I think the implication of what I said or tried to say was that one, the business inherently has slowed down for all of the mortgage guaranty companies, including ourselves. We have differences among the companies, but still, the production of new business has been on a down trend for the last nine months, I would say, as I recall, of 2008. And perhaps the other thing you're referring to, David, is the fact that I indicated that one of the instruments we have at our disposal is to not accentuate as much our production in order to better control risk in force and therefore the capital allocations we have to the business.

I guess I'm surprised given your low debt-to-capital ratio you wouldn't look to maybe take down some debt to continue to produce the more favorably underwritten mortgage guaranty business.

We still have that in mind. I'm just suggesting that's just one of the alternatives we have. And certainly not the only alternative.

Sure. I understand. Couple of questions from a clarification standpoint, there's been a lot of talk within the bankruptcy judges on the cramdowns and I guess I'm curious if a cramdown occurs, does that come back to you in the form of a claim or do you share some of that with the financial institution or how does that impact you?

Yes. I'm going to ask Chris to answer that question.

Sure. Hey, David. The way that works is if, in fact, you had a change in the system whereby bankruptcy judges could cram down a loan amount. That does not generate a claimable event for us. So if the judge were to write a loan down from $250,000 to $225,000, you can't file a claim for the $25,000. What we will do, though, is the policy stays in force at the higher amount, so in my example while you'd now have a new loan at $225,000, the coverage would remain in force for the $250,000. We'd collect slightly less premium on the new loan amount, so you could think about that as a contribution in essence to the cramdown.

And that's helpful. So do you anticipate that some of the new cramdown rules for the bankruptcy judges will have much favorable impact? It can't hurt obviously, but I guess what I've heard is some of these restructured loans may prolong the ultimate situation.

Well, I think where we are -- I saw some things yesterday and I don't know if you've seen something new today, but I think as of yesterday that the cramdown provision was not going to be in an Obama stimulus package right out of the gates. I don't know if that's in fact still true today, but that aside, will it prolong, I don't know, but generally if you have a borrower who has shown some willingness and ability to stay in the house, then the bankruptcy court judge rewrites the loan amount. Generally that should be positive for us insomuch as now the borrower has a fighting chance and an incentive to stay into that house because the loan's been written down to current market values.

That's helpful. And Al, back to you on the outlook in the mortgage guaranty loss ratio, would you expect that it probably climbs through maybe mid- year and then we kind of reverse a little bit but still hit high levels for the full year, would that be a good guess at this juncture?

Yes, I would say so. I think Chris and I are in agreement that that could be a likely scenario. But then again, as I tried to indicate in the overview comments that I just made, it just takes time for all these positive inputs from the fed, the treasury, et cetera, et cetera, to take hold and therefore I would have to hedge the comment by saying, yes, by mid-year things should -- you should start seeing the light at the end of the tunnel, but it could be the fall or what have you.

I understand.

I think 2009 overall from a loss ratio standpoint is a cooked goose.

Sure. Well, I'll requeue with some other questions. Thank you.

Our next question will come from Dan Johnson.

Thank you for taking my call. Al, can you speak a little bit about the captive relationships with the banks? What's going on there? How many have continued to fund as normal if they've gotten to that point versus how many have been -- I don't know what the technical term is, but sort of wound down, if you would please, thank you.

Chris, why don't you speak to that.

Sure. The -- well, none of them -- well, we got out of the captive reinsurance business for new writing several quarters ago. So all we are currently seeding to captives are premiums on the in force books, we just simply made the decision to no longer continue with excessive loss captives.

Obviously, several of them are currently into their loss layers. We don't have any except maybe one very small one as of this point that have totally pierced through layers but certainly this continued stress in the market is beginning to push these guys up through their layers at this point in time. But again, we're not seeding any new business, they are all effectively in runoff, and again we haven't blown through any of the -- any significantly sized captives.

And all of them, Chris, are owning up to their obligations, right?

Yes, to the extent that there are funds in the trust accounts, they are all continuing to operate as we expect.

What do you think happens or what have you heard from others in the industry that's already seemingly happening with trust accounts that may need more funding from the banks? Should we count on them bringing their checkbook or are they going to walk away?

I certainly can't speak for any of the financial institutions. While we might hope that they would honor their obligations, they don't -- I think at this point it would be too early to tell.

Is there any way you can help us -- give us a sense of -- somehow to give a magnitude sense here, if they don't -- if we do end up in the 200 loss ratio scenario, which I believe is probably a net number, would that put these banks in a position where we would have to count on them putting more money into the trusts?

Well, I don't know when you sit here today and project these trust accounts out, it's a difficult exercise because each one of them is full of different productions with different geographic concentrations and each player had a different risk appetite so they're full of different kinds of risks, so it would be really difficult for me to give you a feel for what the ultimate exposure is because again, each one of the some odd 40 or 50 trust accounts is going to be very different. Obviously, if you had one that was heavily concentrated in California or Florida, you are going to run a much higher percentage chance that you completely blow through them, but most of the big ones were reasonably nationally diverse in their mix.

Then just finally, one last question. The claims ratio of roughly 220 on a net basis, if we were looking at that on a gross basis.

We said 200, by the way, Dan.

Oh, I'm sorry. Yes, I'm sorry.

Oh, okay.

On to the quarter is now where I'm at, I'm changing gears onto the quarter of about 220, where would that be on a gross basis?

I don't have -- unless you have it, Chris, but I for one can say to you Dan, that the amount that we have recovered from the captives has been on incline fairly steadily throughout the year. As to how many points of loss ratio we've saved by virture of those recoveries, I don't know. As I say, maybe you do, Chris.

No. I don't have it in front of me. My guess it's is in that $50 million to $75 million range for the quarter.

That's dollars, right?

Right.

Okay.

You can multiply, divide that 75, let's say by the earned premiums for the quarter in mortgage guaranty and that gives you, obviously, the loss ratio affect.

Very good. Thank you very much.

Now we'll hear from Kevin from (inaudible).

Hi, Al and Chris, how are you?

Okay.

Good. Hey, a quick question on the LandAmerica that you owned, how much was that and did you sell after Fidelity announced the deal or where in the timeline?

That was about a $3.9 million investment on our part. It accounted for about 10% of the LandAmerica shares outstanding. We wrote down the security as of December 31st and as you may know or recall, Kevin, that is pretty close to the date I think they declared -- LandAmerica declared bankruptcy shortly before Thanksgiving last year.

Were you guys still in it when they declared or were you out?

No, we owned and still own the stock. The stock has been written down in value as a other than temporary diminution in its value. As you know, as you well know, there are a number of tax planning and other considerations that enter into an insurance company's or financial institution's determination as to whether it's going to take an actual hit, which is deductible on the tax return, or just a bookkeeping entry which is what we have done with that particular transaction.

Okay. On a happier topic, looking out to the future, right now I know PMI and Radian are competitors and if you throw in MGIC and Genworth into the mix, your market cap is $1 billion more than the combined market cap of those other four. Discuss with me the opportunity for market share shift and if you're seeing any of that now and especially over the next 6 to 12 months, particularly if you raise this extra capital and have that once we get to the end of the tunnel and the light at the end of the tunnel.

Well, the capital raising, of course, is going to be for us, and I imagine it's going to be similar to other companies, the cap is going to be predicated on whether we can derive an appropriate return for the shareholders and perhaps more importantly, whether we need the capital to support our existing obligations to assurance. As to the lay of the land, based on the latest information we have, we don't sense that there has been a significant shift in market share, I think MGIC, day before yesterday, indicated that theirs was around 24, 25, which was about in line with what they were, we sensed that Radian, another competitor, may be somewhat ahead, may have gained some market share, however it's done it. With respect to the others, we don't know of any significant shift. Chris, you're better quipped to address that issue.

Yes. Here's what I would say, we think about this from a number of different aspects. One and probably most importantly, the period immediately after a terrible market is never the best period because if you had decided that, let's say hypothetically we decided we were in a good position in the fourth quarter of 2007 and made a big run for share in 2008, we would have been building share in what is a market that continues to see declines in home price appreciation.

So we were very focused through the period on essentially keeping the share flat to slightly down, we obviously need to serve our customers, but we wouldn't want to aggressively build share during a period of declining (inaudible) prices irrespective of how much the guidelines and the pricing had improved simply because that declining share or the declining home prices are going to be a continuing drag on performance. And I think really we find ourselves in the same spot here early in 2009, that as Al mentioned earlier, you're not looking to really dramatically grow risk in force at a period that is still under pressure.

The only other thing I would add to that is we spent a lot of time thinking about lessons learned from this last risk cycle we are going through, and I think one of the things is always to make sure that RMIC size is balanced against the rest of the Old Republic family. To make sure that it's a diversified financial institution, all the pieces fit together and one does not overly large vis-a-vis the rest of the institution. So all those go into planning for essentially market growth in the coming years.

It would seem that given your position and you have the ability, I have no doubt you will be able the raise that capital. If you're Curt Culver right now, you are going to have a heck of a time raising your capital and the same goes true with the rest of the industry.

Yes, but the point is, Kevin, I mean what you are saying is all true. But I think what Chris just said at the tail end of his answer is also very true. What we have to keep in mind is that we are running a single business of insurance. New true enough, we have different pockets. We've got a mortgage guaranty pocket by way of several insurance companies, a title company pocket and so on and so forth.

But the critical element that has gone into building Old Republic over its 85 year history has been just what Chris said, to make sure that you employ the diversification of risk by type, by amount, by geography,et cetera, in the organization so that no single risk or accumulation of risk defeats a very important principle of managing an insurance institution, which is diversification of risk among two or three other key principles. So that's what you have to keep in mind.

If your focus is solely on the mortgage guaranty business, well we're not game for that, we don't want to be just a mortgage guaranty company, because again, as Chris just said, if there is any lesson to be learned from this debacle, it is that diversification is critical, whether you're a bank or an insurance company, it's important. That's what our focus is on.

But even that being said, and I think in a normalized environment you guys were what, 60, 30, 10, GI, MI title?

In terms of our capital allocations, you are correct. But while I think of it, before I forget it, let me just throw in one other element into the equation. And we've said this before. The rhyme and reason for our investments in PMI and MGIC was an ability to in fact not override the necessary diversification we had in the business but to get a passive interest in the marketplace through pretty significant ownership percentages in those two companies.

And we feel comfortable with that approach, okay, of a mix. In so far ours are mortgage guaranty orientation is concerned, we feel comfortable with this mix of a 10%, 11%, market share, direct controlled market share, and a 5% or 6% passive market share through those two company holdings. That's our game plan, Kevin. Because otherwise, what you say is true, we could build, we have the wherewithal to build our mortgage guaranty business to a fare thee well, but within limits, of course, but that's not part of our business insurance management of the business consideration right now. It has never been really.

Sure.

Okay?

But it just appeared, given the landscape that you face and the position you're in right now and the mortgages that are going to be written from here on out are going to be of a much higher quality than what burned your competition.

Well, Kevin, that's true. But again, listen to what Chris just said. I mean, this housing and mortgage lending situation in this country is still very much in disarray.

Right.

And I think Chris is entirely right when he says when it's in disarray you better lay in the weeds and wait until things have got better prospects of making a buck.

I agree with all that, but I guess my point is that now is a time when you lay in the weeds, but you raise your capital and you're ready to pounce at the opportunities that you're going to have 12 to 18 months from now when things are better.

Yes. But I don't need to tell you, Kevin, not to belabor the point. That's easier said than done as well, right? Because while we do have a very good ability to raise more capital whether it be in the form of debt or preferred in particular since as you know we're not about, if we can at all help it, we are not about to abuse the common shareholder by issuing stock while our stock is in the pits the way it is.

No, understood.

That would be counter productive in terms of the long-term interest of our shareholders, so then that leaves some sort of security, whether it be debt or a common equivalent type of security. But in this market, as you know, access to the capital markets is still very limited. We are just beginning, and you must see this yourself in your management of investments in the business you're in, that there is just a slight indication now that there is a falling in the market, right?

I mean, if you eliminate the fact that you had a government, a US government guaranty of debt instruments issued by Goldman Sachs and so forth in this country, they would not have been able to access the markets I don't think. I mean, the markets are still frozen. That's reality.

So therefore, when we say, and we talked earlier about managing our business as if we are going to be left to our own devices in terms of meeting our mortgage guaranty obligations to the assureds we have, okay? When we say, yes, we are going to need 50 to 100 to stay within the confines of what is required by the regulators, we are talking in terms of not being able to access the markets in a very cost efficient basis from both shareholder standpoints, as well as policyholder stand points. As you know, we have in the insurance business in particular, we always run a very delicate balancing act, right? We have to please policyholders, we have to please insurance regulators, we have to please uncle sam, we have to please the shareholders, right? And all of those four people, right, have got different agendas and different requirements.

So what we're saying is at this stage of the game, we have to assume that the capital markets are going to stay relatively frozen for another six months, nine months or so. That's the way we have to manage our business in a responsible fashion we think.

Understood, thanks.

Stephen Mead with Anchor Capital Advisors has our next question.

Hello, Steve, how are you?

I'm all right, Al. Just going back to the general insurance business and I thought it was interesting when you were talking about 2009 in terms of the range of the combined ratio plus your expectations for premium, and I was trying to contrast that with what happened in this CCI business and your comment that in terms of the affect on the combined ratio from CCI, that it was a 400 basis points?

Yes, 4 percentage points. So if our combined ratio, composite ratio for the general insurance business for the year was 97% as we published, right, if we did not have the CCI business, it would have been 93%.

So that begs the question, as you go forward into 2089 in terms of your outlook for CCI and some of the strengthening factors in the general insurance business or say pressures that you're going to face in the general insurance business. Hello? I was just wondering in terms of your out look for the CCI business and also from a business model standpoint and an insurance underwriting standpoint, where is CCI from your perspective as far as a business where you can generate decent returns or not?

Well, right now CCI is truly in the doldrums in terms of new production, because again, lending, forget about first mortgage lending, but second lien and similar type of lending is really under pressure nationally as you know. So there is very little new merchandise available to provide our insurance for. And secondly, I will harp back to what Chris said in the last question about what you do in a bad market when a market that still does not show an indication of resurrecting itself and that's the way we see CCI right now. We are in a holding pattern mode until we get a better feel for the quality as well as the availability of loans to be insured in that business.

And therefore, just as I said that the last year the CCI product represented 10% of our net earned premiums, I would not be surprised if in 2009 it comes down to 8% or 8.5% of our volume because of the reluctance on our part to assume underwriting risk at what we consider is a period with still, with many question marks attached to it.

Now going back to the question of sort of the positive or negative forces that you face in the other areas of general insurance, I was wondering in terms of a going forward basis, whether '09 is still going to have a similar kind of 400 basis impact on that?

Well, that's the assumption we are making, Steve. And I think my gut, our gut right now for what it's worth, our best guess is that it doesn't get worse, there is a chance it gets better, but we would rather lean towards assuming that it stays in its current state, which is not an acceptable state.

Then, if you could, going back to the mortgage business, I'm just curious on the FHA kind of competition or the different factors that you referred to in terms of your premium growth in the mortgage insurance business. I was trying to get a sense of which factors were having more or greater impact? And going forward, the other question is going forward in terms of whether -- what the government does as it relates to backing mortgages -- whether the business model holds up over time. In other words, whether the government will still, in a sense, allow a market to function for you?

I will tackle the first part. When you look at the mix and how the new writings have declined as you can see in the press release from the fourth quarter of '07 to the fourth quarter of '08, it's a combination of things, but first and foremost, we made dramatic changes in the underwriting guidelines. We made then significant increases in prices, then that was followed on by obviously the reduction in business affected by those changes.

Then the market began to come down dramatically and then the FHA stepped in to begin to stabilize the market by writing a lot of the business that we have in fact stepped out of. And that pattern very much follows the last stress period in this industry, which was in the late 80s, obviously from the oil patch. We are really the first credit enhancer to take our lumps week year back out, the FHFA steps in to help stabilize the market, the market stabilizes, they take some lumps and then we come back in. That's sort of the flow between credit enhancers, public and private, when you look at these catastrophic periods.

I think one thing, secondly, you asked about the government's view of the business model, I think one thing that this disaster has shown and I wish there was an easier way to show it than having occurred these losses, but there are very few other ways to credit enhance high LTV residential mortgage loans than with mortgage guaranty insurance. If you think about the people in the mortgage business as a whole that have left or gone out of business, those people have diverse mix of businesses amongst high and low LTV products, the six of the seven mortgage insurers, the smallest one obviously is not writing new business, are all still in business, writing loans and paying losses, and the sum total of what we did was very high LTV mortgages across the country. So I think what we are seeing today very much bears out the model.

The other obvious credit enhancer that was in the business on the private side was the piggy back structure, and I think that has shown not only to be absolutely unreliable, but to, in essence, has exacerbated the problem, not made it better. So obviously there is a lot going on as the governments think about how Fanny and Freddie roll back out, but I think the industry's performance to-date bears out that there isn't a better way really to credit enhance high LTV loans than with profitably capitalized and regulated mortgage insurancers.

And then, Al, just on a more general basis -- and maybe you all have talked about this, but how are you dealing with a low interest rate environment in terms of generating a return on the investment portfolio?

Well, of course, given our operating philosophy, we are stuck with having to invest in the highest quality paper that we can find. Of course the reason for that as we've said repeatedly over the years is that in the insurance business all of our risk that we get paid for is on the right side of the balance sheet, we don't get any money, for taking risk on the left side and therefore that forces us to not play games with the asset side. And that's why you find us in the very high quality area.

And that, therefore, to answer your question, Steve, we are stuck with having to invest in a lower yielding paper today. As a matter of fact, we are accumulating a greater amount of liquidity. For both business reasons, to match our asset and liability payout structure on the one hand, but also with an eye towards the fact that it is more likely than not that we are bound to get a spurt in inflation in this country given the fact that the money press is going full tilt.

All right. Thanks.

Our next question will come from Mike with Key Colony.

Hey, guys. Couple questions. Could you give us kind of a highlight on the fraud claim rescissions and what the trend has kind of been there in your mortgage insurance business? And then, Al, could you talk a little bit about the outlook or the potential for any capital via the TARP?

Sure. This is Chris. I will tackle the first one. It's obvious that you cannot get these kinds of defaults at a marketplace in the kind of collapse that you have seen in the residential real estate business without their having been a tremendous amount of fraud enter into the business. As we look at our book, really you see it most aggressively in the 2006 and 2007 origination years. The mortgage insurance policy doesn't cover losses for fraud and that's because of the structure of the business. We are not on the front end of the food chain where one could patrol for fraud, so it's not logical that a back end credit enhancer would cover an exposure that you really have to be on the front end to control.

So we have always very thoroughly reviewed the delinquent population, and it particularly shows up when you have loans that miss payments in the first 12 months, to make sure that those loans are in fact not -- do not have misrepresentation in the files. And we will obviously investigate and review and rescind on those with obvious misrepresentation. There is always some misrepresentation in high LTV lending. You simply had a significant increase through the period of '06 and '07 for the reasons that we are all familiar with.

Could you give us a sense of the units you've been rescinding the last couple of quarters and what the trend has been?

The trend is absolutely up. And I would tell you that when you get into certain pockets, Southern California, certain higher risk loan products, reduced stock, those sorts of things, you again have very, very high rates of misrepresentation in those files.

As to your question on TARP, as I'm sure you've got your ears to the ground like everybody else, and there's all sorts of buzz out there that some TARP money might be made available to financial guarantors of one stripe or another. We are obviously looking with interest at that, both as a Company and as an Industry. Though we have to say that the benefit of TARP would be as we see it, primarily as providing an ability to keep companies that do not have access to the capital markets, to keep them in business in order to satisfy the validity of the mortgage guaranty instrument as Chris just described a few minutes ago.

It is the best that there is out there to provide a third party guarantee. But other than that, we don't know of anything that's in the pipeline that assures that TARP money would be made available to financial guarantors at this point in time.

Okay. Then just two quick follow ups, could you tell us your ownership position today in MTG and PMI? What exactly is it?

It's shy -- just shy of 15 in MGIC. I think it's 14.9. As a matter of fact, we are in process like all other owners of stock to file regular, was it 13G or 13D or whatever it is filings with the SEC that are due within 45 days of the end of a quarter. It's a little more than 10% on PMI.

Okay, and then one last thing, Al. Did you say in your prepared remarks that you did put $150 million of additional capital into the mortgage insurance subsidiary?

Yes. We said that -- I said that we added $150 million of capital to our mortgage guaranty group.

Okay. Thank you.

Yes.

We will move on to Matthew Goetzinger with Fiduciary Management.

Hi, Al and Chris. Thank you for taking the question. Could you remind us of the remaining size of the '07 and '08 vintage mortgage books?

In terms of what, Matt?

In terms of the remaining, I guess, risk in force.

Can you put your hands on that, Chris?

Yes. I think it's in the 30% range. As we are talking I will dig through for that.

Yes. If that could be like split between the two years, that would be great. And then also, could you talk about the relative performance of those two books?

The '06 and '07?

I think about 30% of the traditional primary book is in that '07 vintage, and probably something close to 20% in the '08. So about half of it's probably '07, '08 traditional primary. Your follow up, sorry, I had to look through real quick for that, your follow up was the performance of '06 and '07.

The performance of more so '07 and '08?

'08 is kind of the Tale of Two Citys, in a book. That first quarter of '08 looks a little bit like the end of '07, it took a while for all the guidelines to get worked through the system. The third -- or the second, third, and fourth quarter of '08 looked much better. They looked much more like previous book years. The thing that you will see, though, in the early '08 and '07 books are those books have a lot of misrepresentation in them.

The worst of the behavior along the lines of misrepresentation always seem to work its way in right before the markets collapse or go away. So what we are finding in particularly late '07, is very, very high rates of rescission so while those books don't look great on the early -- right out of the chute, again a lot of that book ultimately likely to be rescinded because of high levels in the misrep in the files.

What would you guess your true delinquency is on the primary side of the business excluding fraud and rescissions?

I'm not sure how to get at that. I don't mean to dodge you here. That's a tough question. I would have to give some thought to it.

And then in terms of the capital that was put into the MI business during the quarter, it looks like the outstanding debt went up roughly $100 million. I'd assume that that speaks to part of that $150 million and my question, I guess secondarily, is where is the other $50 million from?

Well, we always have some money and we do as we speak have money at the holding company system. Money from tax recoveries, money from dividends received from subsidiarys in excess of our needs at the holding Company level. So, the sum total of those funds together with the additional debt that you detected on the balance sheet were the source of most of the money that we put in the mortgage guaranty business.

How much excess capital, Al, would you say is in the general insurance business at this point?

Well historically we've had anywhere between $500 million and $750 million of true excess capital. I would say today it's probably a quarter of a billion. Needless to say, our investments in MGIC and PMI in particular when they primarily in as part of the investment portfolio of those companies, and therefore the reduction in the market valuation impaired and otherwise of those securities took a chunk out of that perceived excess capital.

Was the majority of the $50 million, that was distributed down to MI, was that from general insurance?

I'm not following the question.

Was the amount that was --

We put in $150 million in all in the mortgage guaranty group and as I said that came from assets that we had at the holding Company level. Those assets included, I guess, accumulations, cash is very fungible as you know, those assets came from an accumulation over time, of dividends received from subsidiarys in excess of what we needed at the parent holding Company level. That money goes up and down during the year.

And then just lastly,Al, what are the other options that you're contemplating with regards to the additional capital you feel you need at this point?

I'm sorry, say that again?

What are the array of options that you're considering to fill that capital?

Some of it would be obviously either access to bank debt or otherwise. As well as I indicated before, we do have still some significant amount of money at the holding Company level. And the combination of those $50 million here and $25 million there and $75 million there gets us to the $50 million to the $100 million that we need.

David Lewis with Raymond James has a follow up question.

It's gone pretty long, so I will make it quick. First of all, Al, was there any favorable development in the quarter?

Are you talking about our general insurance business? Although I have to say, whether it's general insurance or mortgage guaranty or title insurance, our reserves last year all played out favorably with specific reference to the general insurance business. What you see in the 2010K, the triangles that we have in there, which indicate on an average maybe the last five or six years, couple of 3 percentage points of redundancies in our general insurance company developments. Loss developments is just about what we had last year so there was no significant difference between the years affecting the loss ratio by virtue of lost development.

So it's been pretty consistently in that 2 to 3 percentage points annually for several years, I think.

Correct.

That's helpful. The refie market, I know it's not getting back to levels we saw a couple of years ago, but I know it picked up in December, just when rates were coming down. Any sense of what the reifies are on a year-over-year if you looked at December just from a high level point of view and someone had mentioned to me that even though the refie activities picked up, it's not necessarily meaning that a lot of those are getting reified because they may not be qualified borrowers.

Correct. Correct on all accounts. And don't know with respect to your question as to comparing November, December, let's say of last year with November, December of 2007. We don't have a feel for that. Although my guess would be there was very little relatively speaking, very little refinance activity in 2007 the same period.

Okay. Just kind of to look at the dividend. I just ran a calculation if it was correct, your dividend generally comes out of the general insurance operations and if we look at where the dividend is today it's about 58% of your 2008 general insurance net profits. It seems like that would be manageable if, in fact, you decided that you wanted to maintain that dividend. Is that the right way to look at it?

We look at it the way you just described, which is we look at the sources of our dividends to the holding company, the stability of that. We also look at how much risk we expect to add to individual insurance companies. And as I indicated before in the comments, we basically set, even though we look at it on a quarterly basis, we basically set the dividend rate for the year in February at the February meeting of our Board of Directors.

That's very helpful. Thank you have a great day.

At this time, there are no further questions. I will turn the conference over to Mr. Al Zucaro for any additional closing remarks. .

Well, we don't have any other comment. As David just said, this turned out to be a pretty long call and for good reason. I think a lot of the questions that were raised pertain to significant parts of our business and address issues that are on everybody's minds at this time. So as always we are very appreciative of the interest that you all have in our Company and we look forward to our next visit following the release of our first quarter 2009 results. Having said that, we will bid you a good afternoon.

Thank you. That does conclude today's conference call. We thank you for your participation, and have a nice day