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MGIC Investment Corp. (NYSE:MTG)

Q4 2008 Earnings Call

January 20, 2009 10:00 am ET

Executives

Michael Zimmerman – SVP, Investor Relations

Curt S. Culver – Chairman, CEO

J. Michael Lauer – EVP, CFO

Lawrence J. Pierzchalski – EVP Risk Management

Analysts

Donna Halverstadt – Goldman Sachs

Dave Katz – JPMorgan

Jordan Hymowitz – Philadelphia Financial

Mike Grasher – Piper Jaffray

Scott Frost – HSBC

[Mike Randall]

Scott Frost – HSBC

Ron Bobbin – Capital Returns

[Brian Long]

Operator

Good day ladies and gentlemen and welcome to your fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Mike Zimmerman. Please go ahead.

Michael Zimmerman

Thanks Mary. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the fourth quarter of 2008, are Chairman and CEO Curt Culver, Executive Vice President and CFO J. 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 Web site, which is located at mtg.mjc.com under investor information, includes additional information about the company’s quarterly results that we will refer to during the call and includes certain non-GAAP financial measures.

As we have indicated in this morning’s press release, we have posted on our Web site supplemental information containing characteristics of our primary risk in force, and flow new insurance written. As well as other information which we think you will find valuable.

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

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

Now before I turn the call over to Curt, I wanted to let all the participants know that we’ll be trying to end this call a little bit before 11 o’clock eastern time, about five or ten minutes before the hour, given the scheduled time of the inauguration ceremony. We’ll try to get all participants that wish to ask a question; however, if your question has not been addressed during the Q-and-A, please feel free to call our investor relations department; that can be reached at 414-347-6596.

Thank you, and Curt?

Curt S. Culver

Thanks Mike, and good morning. For the fourth quarter, we reported a net-loss of $273 million and for the year a loss of $519 million. During the quarter, we insured $5.5 billion, down from $9.7 billion last quarter and $24 billion a year ago. The lower volume reflects the much more stringent underwriting guidelines in increased pricing that we have in place versus a year ago, as well as the increased pricing that GSEs have added to conventional loans.

Our market share remains strong, approximating 23 to 24%, but our industry has lost significant business to the FHA. Persistency continued to improve in the quarter, standing at 84.4% versus 82.1 last quarter, and 76.4% a year ago. Our quarterly run rate was 88.2% versus 83.6 a year ago.

Insurance in force of $227 billion was down slightly from last quarter, but up 7% from last year’s total of $212 billion. The average premium yield on the insurance portfolio was 62.4 basis points, up from 60.2 basis points last quarter, primarily reflecting $11 million lest being seeded to captives during the quarter.

Underwriting expenses were $66 million in the fourth quarter versus $64.6 million last quarter, and $74.6 million a year ago. We have made staff and expense adjustments throughout the year reflecting our lower volumes. So I think the fourth quarter is a good indicator of the run rate for expenses in 2009.

Losses incurred in the quarter were $903.4 million, up from $788 million last quarter, are reflecting a $30,288 increase in the delinquency inventory in the quarter. Claims paid in quarter total $310 million, down from $330 million last quarter. For the year, claims paid totaled $1.4 billion. A year ago, we thought paid claims would approximate $1.8 to $2 billion. The reason we didn’t pay more in 2008, was a combination of reasons, including foreclosure, moratoriums, servicing delays, court delays, MGIC fraud investigations, borrow or loan modification, discussions with servicers, MGIC loan modifications, and MGIC claim rescissions and denials for misrepresentation.

While it is difficult to assess the impact of the above factors, let me try to quantify those numbers where MGIC is involved. In the fourth quarter, MGIC worked with servicers/investors to modify approximately 63 million of MGIC insured loans, and for the year modified approximately $235 million worth of loans. By way of comparison, in the fourth quarter a year ago, that number was $28 million, and for the year $82 million for all of 2007.

These figures reflect our traditional re-default rate of approximately 50%, as loan mods historically do not always lower the borrower’s payments. But with today’s new modification programs centered on reducing the borrower’s payments, we would expect a higher success rate going forward, although we’re not sure to what level.

As you are aware, there are a number of low modification programs in the marketplace, from those negotiated by the GSEs, to those instituted by major lenders. Of our 182,000 delinquencies, approximately 60% of the delinquencies are GSE loans, and 40% are part of private label securities, or portfolio loans.

Out of this universe, the key will be how many qualify and given that we don’t yet have updated income information of property values, it’s difficult to assess the size of the benefit to us. Additionally, if cram-down legislation has passed, it will also benefit us. But again, it is too early to speculate if such legislation will indeed be passed and if so, what the ultimate benefits will be.

Primarily claim rescissions and denials have been growing, reflecting the significant amount of fraud and misrepresentation that occurred on the late ’05, the entire ’06 and ’07 books of business. Rescission denials totaled $85 million in the fourth quarter and $171 million for the year, approximating 15% of claims resolved in the fourth quarter versus 8% last quarter. By way of comparison there, rescissions denials totaled $7 million in the fourth quarter a year ago and $28 million for the year. So it is a growing number for us.

So as you can see, the claims paid forecast for 2009 is difficult to assess. The one thing I can tell you with conviction is that it will be higher than the $1.4 billion we paid in 2008. How much higher is subject with so many moving parts, that we think it’s best not to try and quantify at this time until we have more transparency.

Regarding the remainder of the outlook for 2009, originations should approximate $1.7 to $2 trillion and with an 8% MI penetration rate, in 23 to 24% market share, our NIW should approximate $35 billion.

Expenses should be as I discussed earlier with claims paid and delinquencies being difficult to assess accurately at this time. While we think delinquencies will peak in the third quarter of this year, the key will be to what level will they grow, especially with the growth of unemployment we are experiencing, until they do finally peak. This has significant capital implications for us. As we talked about last quarter, we’re not sure if our capital level in the second half of 2009 will be sufficient to meet new insurance written demands, especially if the economy continues to weaken.

As a result, we initiated discussions with U.S. treasury late in October of last year, to determine our eligibility for TARP capital. And while available, TARP funds were used for other purposes, given the new administrations focus on preventing avoidable foreclosures and the importance of supporting real estate values through new lending activity, which will require continued access to affordable and sustainable low-down payment mortgage alternatives for first-time home buyers. I would hope our case, as well as that of our industry will be looked at favorably.

With that Mary, let’s take questions.

Question-and-Answer Session

Operator

(Operator’s Instructions) Our first question comes from Donna Halverstadt.

Donna Halverstadt – Goldman Sachs

Good morning gentlemen.

Curt S. Culver

Good morning.

Donna Halverstadt – Goldman Sachs

I had a couple of questions; one I wanted to ask about was what level of tax and lost bonds you left to year-end ’08. And just more generally as a follow-on, if you could talk about the use and such as a source of OPCO liquidity? And if you could also talk about the quantum and timing of cash recovery from captive. And in turn, I’m just trying to get a better feel for how much of your investment portfolio you may need to sell this year to cover claims payments.

Curt S. Culver

There’s a lot of stuff there. Donna, the tax and loss bonds, we had about 400 million left at year-end to redeem, and I believe we redeemed those this last week, so that we won’t have any further redemptions. And I think last year we redeemed somewhere over almost close to $700 million. So that’s part of the cash-flow increase for the year. You see, we wound up at about $82 billion in cash and investments.

A significant part of our portfolio has been shorter in duration, as you can tell from the lower yields. So we’ve already planned for that, this year to have more than enough cash available to pay claims. And of course we also have premiums and investment income, obviously. So, I don’t see any significant change in the portfolio during the year, we planned for that already.

You had another question, I think on captives?

Donna Halverstadt – Goldman Sachs

Just the timing and amount of cash recoveries. But also on captives, your (inaudible 00:04:39) points out when treaties can be terminated, and looks like some have been. I was curious if you can give us any color on the amount of reinsurance that you now won’t get from those arrangements that you would have otherwise been entitled to, for the ones that you’ve terminated.

Michael Zimmerman

Well, let me try to answer that question. The captives are required to maintain a minimum level of capital in order for us to include new business. If they drop below that level, they’re put into run-off, meaning past business continues seeding and is still funded by the trust account, but there would be no new business.

And then I guess there’s another trigger, which I think you’re alluding to here as of late. To degree, the loss reserves, the seeded loss reserves equal or exceed the trust account assets than typically the agreements call for a termination, so there would be no new premiums being seeded. We would seize the trust account and pay the claims ourselves out of the funds in that trust account. And that’s what’s been happening as of late. The seeded loss reserves in a few cases have consumed or totaled the trust accounts, so the trust account assets passed to us, so we got the cash, and now we’ll just being paying those.

Now, on an accounting basis going forward, we won’t conclude those paids for those agreements in the captive recovery lines, because we have the cash, they gave us the cash for those claims.

Curt S. Culver

Let me just clarify something, Donna. In the fourth quarter, we did have a number of treaties that were cancelled. That’s why you see the adjustment, we made a footnote, I think it’s footnote number six, relating to the paids, you see a $260 million credit. So that’s $260 million that we received in actual cash or securities, increasing our cash, decreasing seeded premiums, and there was a corresponding decrease in the reinsurance recoverable assets there.

Donna Halverstadt – Goldman Sachs

Right, the way I read the disclosure and tell me if I’m wrong; when you terminate– when the seeded losses exceed the trust account balance, wouldn’t that delta represent an amount of reinsurance that you had expected that you won’t be getting?

J. Michael Lauer

Donna, this is Mike Lauer. We thought through off-line, but I think the schedule, maybe you want to look at it, is compared to the third quarter in the portfolio supplement to the fourth quarter, as far as by book year what risk is at force. And you can kind of see the change, but the fact that your other statement is not incorrect, wanted you to think of it that way.

Donna Halverstadt – Goldman Sachs

Okay.

J. Michael Lauer

That’s what triggered the events, not necessarily what the losses would be.

Donna Halverstadt – Goldman Sachs

Okay. And then, you also had some new disclosure on that if you’re unsuccessful in selling Australia in one Q ’09, you may place that book into run-off. Are you able to give any color on the probability of such a sale happening? And alternatively, if you do end up placing it at run-off, would you be able to bring back any of that capital to USMI operations immediately? Or is that something that would happen over time as the book runs off?

Michael Zimmerman

We’re in the midst of discussions relative to Australia, so we can’t comment further on that process. And we’ll be evaluating bids on that in the near future, relative to if we go into run-off, we’re not able to bring the cash back at that point in time.

Donna Halverstadt – Goldman Sachs

Alright. And then one last quick question and then I’ll get back in line. Can you update us on your conversations with the GSEs in terms of just ongoing eligibility and the role of MIs in the GSE food chain, generally? And I know there’s a lot of uncertainty there, but if there’s any new color there; that would be helpful.

Michael Zimmerman

There really hasn’t been relative to the GSEs on a company basis. There has been discussions on an industry basis, which I would say are positive, both their support of– very supportive on our industry. And I’d also say that is also the case from the regulator at FHFA has been in meetings that I’ve attended with Jim Lockhart (ph 00:09:09), they’re very supportive of our industry and the role we play relative to assisting the GSEs and making home ownership more affordable.

Donna Halverstadt – Goldman Sachs

Okay, great thanks. I’ll get back in line for a couple clean-ups.

Operator

Our next questions comes from Dave Katz.

Dave Katz – JPMorgan

Hi, I had a couple of questions. First off, with regard to additional capital raises, which you said could be done through sales equity or debt securities and/or reinsurance, you guys have been saying that for a couple of quarters now. I was curious, what progress you’ve made on that and given that the market’s not necessarily getting any easier for you to do that when the plans come to market is?

Michael Zimmerman

Well, it would be a very difficult time more to my TARP comments than going to the private markets relative to a capital raise.

Donna Halverstadt – Goldman Sachs

So that mean that pending the TARP decision then capital raises off the books?

Curt S. Culver

I think it would be very difficult to accomplish. It doesn’t mean anything’s off the books. I’m just reflecting on the current market place as you well can see. It would be very difficult to accomplish. Now we continue to do things in reinsurance, but raising a new capital in the private markets would be very difficult I think at this time.

Donna Halverstadt – Goldman Sachs

Okay. And then, you have mentioned before that you expect delinquencies to peak in the third quarter. I was hoping that you could explain why you thought that might happen in that quarter, specifically?

Michael Zimmerman

Well, let me try to answer that. In the fourth quarter here the delinquency inventory was up 30,000 from September to December; 24,000 of that was on the flow side and about 12,000 of the 30,000 was the’07 flow book of business. So it’s a newer book, it’s a larger book and it’s in some difficult economic times. So, a large part of the variance in the forecast and the timing is when actually does that flow’07 book peak in terms of new delinquencies and most of the other books are flagged maybe up slightly. Some of the older books are down, but it’s really that flow’07 book that it’s hard with all the moving parts in the economy unemployment to exactly call the peak and the height of the peak (ph 00:21:48) are current set of assumptions looking at the latest forecast for home prices and unemployment suggest third quarter of ’09.

Donna Halverstadt – Goldman Sachs

Okay and with your view on the economy, does that rely on any particular forecast?

Michael Zimmerman

Well, we have, as we said in the past, we typically use the Moody’s economy.com forecast. Nationally, I think they’re common for home prices would be an (inaudible 00:22:22) home price, which we think ties to our business better. Home price declined in’09 of 6.7 nationally, and they’re calling for employment or unemployment, I think peaking around 9% to subside early 2010. So those are kind of the numbers we’re using.

Donna Halverstadt – Goldman Sachs

Okay. And then finally, you’ve said that your view on potential losses for the books has increased since even the third quarter of the time when you prepared the 10-Q. During your prepared comments I didn’t get a good feeling for exactly how much it’s increased. Would you be able to quantify that?

Michael Zimmerman

Well, some of these just mathematically that you saw the increase in delinquencies in the fourth quarter, and then it’s where you said earlier. Probably the impact on unemployment has affected some of the older books so what we would have expected an earlier decrease in the older books, maybe now that line is straightened out if you will for another quarter. So, we’re looking at higher delinquency levels and that’s putting the pressure on the incurred loss line.

Donna Halverstadt – Goldman Sachs

Okay. Well I guess in the absence of a specific number there, given that you’ve identified that you might violate the Consolidated Net Worth Convenant, but yet you have enough cash at the holding company stales the revolver.

Michael Zimmerman

That’s correct.

Donna Halverstadt – Goldman Sachs

What was the decision be there? Would it just be if you were on the threshold of violating the Covenant, you would use the cash to pay down the revolver?

Michael Zimmerman

Yes, and we said earlier, I mean, with respect to the revolver, it’s got some covenants, network covenants and risk to capital. And in the event that we were gonna violate that one of those covenants and then there’ll be across to falls to other debt, we certainly wouldn’t do that. But the alternative would be to pay down the debt.

Donna Halverstadt – Goldman Sachs

Okay. I know that the cash of the holding company as of October 31st was $391 million. What’s the current balance?

Curt S. Culver

Very close to that $300, it’s around $389, I think or $393 something like, it’s in the $390 area.

Donna Halverstadt – Goldman Sachs

Okay. Thank you very much.

Curt S. Culver

Thank you.

Operator

Our next question comes from Jordan Hymowitz.

Jordan Hymowitz – Philadelphia Financial

Hey, guys.

Michael Zimmerman

Hi Jordan.

Jordan Hymowitz – Philadelphia Financial

I have a question for you. The actual severity of average claim payment went down for the first time in many quarters, from 53.9 to 50.6. Can you state how much of that was related to, I mean, were there really has been any (inaudible 00:25:20) modification or other things in other words? Are you paying less on modifications or negotiations than normal? Is it because of state variances or help me understand the decline here.

Michael Zimmerman

Within a geography, within each of the states, the average claim pay that we’ve been paying in quarter in, quarter out has been relatively stable through the past year or so. The average claim has gone up in overall because we started seeing more claim activity from the higher cross state, California, Florida, in particular and a large part of those of claims were on the bulk side. What’s driving the average severity down here in the fourth quarter once again within the states, each of the state, the average is very flat, some on the prior quarters. What was trying to decline here is the fewer page from the high cost dollars (ph 00:26:18), California and Florida in particular and a large part of that is being driven by the rescission activity. The rescission rate that Curt mentioned was about 15% in the quarter, higher on the bulk business and acting in particular in fact to California and Florida, more so than other parts of the country. So, as result of the increased rescission activity in California and Florida, California and Florida claims were down as a percent of the population driving the overall severity down.

Curt S. Culver

And Jordan (inaudible 00:26:54) looking at the flow of average pay went actually went up, sequentially from 39.1 to 41.6 while bulk went down from 73.4 to just over, took under 67. The (inaudible 00:27:05) went where it is indicated.

Jordan Hymowitz – Philadelphia Financial

Am I understanding correctly that both California, I think California is much above Florida, but I think they’re about to be under a foreclosure memorandum at this point?

Michael Zimmerman

The moratoriums?

Jordan Hymowitz – Philadelphia Financial

Moratoriums, I’m sorry.

Michael Zimmerman

Well, the GSEs have moratoriums through the end of January and then there’s various state and local moratorium, even they’re down to the county level.

Jordan Hymowitz – Philadelphia Financial

But California has a statewide one now going on to three months, don’t they?

Michael Zimmerman

I don’t know that all to top my (inaudible 00:27:35). I know there’s a number of large counties in California that do. I don’t think the state has done so.

Jordan Hymowitz – Philadelphia Financial

Okay. That’s it. Thank you.

Michael Zimmerman

Yes, thanks Jordan.

Operator

Our next question comes from Mike Randall (ph 00:27:49).

[Mike Randall]

Hey, guys.

Michael Zimmerman

Hi, Mike.

[Mike Randall]

Just two questions. First off, the year-end cash investment balance of 8.1 billion was up from 7.7 billion. You guys have mentioned some captive reinsurance and some potential tax and loss bond sales, could you just kind of, I guess again reiterate what the increase was or what that balance would look like today?

Michael Zimmerman

Say it again, what it is today, as of today?

[Mike Randall]

Yes.

Michael Zimmerman

I got to accept we received another 400 million from tax and loss funds this week. So it’s up, give or take $400 million.

[Mike Randall]

Okay.

Michael Zimmerman

Not withstanding maybe of some payments we made.

Curt S. Culver

Mike, that come back (ph 00:28:33) on the captive, is reflective already in the year-end numbers.

Michael Zimmerman

Yes, the 260 million that was recovered from captives at year-end, that is in cash.

[Mike Randall]

That is in there, okay. With just the 400 from the tax and loss funds, okay.

Michael Zimmerman

That’s correct.

[Mike Randall]

And then secondly, you guys have a calculation risk to capital that I think is 16.1 now, or 16 to 1, that was up from about 13.9 to 1 at the end of the third quarter?

Curt S. Culver

Correct.

[Mike Randall]

Did you use the same formula to calculate both of those numbers?

Curt S. Culver

Yes.

[Mike Randall]

Okay. Thank you, guys.

Curt S. Culver

Thanks, Mike.

Operator

Our next question comes from Mike Grasher.

Mike Grasher - Piper Jaffray

Hi, good morning. Mike, I believe you mentioned the’07 book at 12,000 delinquencies; can you give us some numbers around the’06 vintage? Were the numbers up or down or ?

Michael Zimmerman

Mike, this (inaudible 00:29:31) in the supplemental information we give you that on the flow book anyway those delinquencies by vintage. Though it composed the third quarter on a comparison, but you can do that comparison quarter to quarter by total delinquencies in the flow book. The flow of (inaudible 00:29:48) book just as of today is about up 4,000 in the quarter. Flow’06 up about 4, flow’07 up about 12.

Mike Grasher - Piper Jaffray

Okay. And then on the accounting Mike, which regard to the loan modifications, the delays in that, when you are, I think, the number was 63 million in 4Q’08, that Curt had mentioned. Are you releasing reserves with these or what sort of the accounting around that?

Michael Zimmerman

Well, first of all, with respect to the reserving, the reserve rates, claim rates we’re using are experienced rates and not projected some of the benefits that Curt is talking about. Therefore you see the building of reserves because we’ve not seen that much experience benefit yet and that’s the unknown relative to predicting claim rates and paid in’09. And so, I think that’s important to understand. Now, the second part to your question dealt with what?

Mike Grasher - Piper Jaffray

These are in terms of how much it would have been impacted by that.

Michael Zimmerman

Yes, I think to the extent that the things that Curt talked about where we actually have a rescission that is a denial of a claim and the notice has been eliminated from the reserve, that’s correct, where there’s an actual rescission. The extent to which those rescissions increased and some of the items that Curt talked that are possibilities, those items have not been built in the reserve factors.

Mike Grasher - Piper Jaffray

Okay. Alright, thank you.

Michael Zimmerman

Thanks.

Operator

Our next question comes from Scott Frost.

Scott Frost – HSBC

Could you talk about the FHA taking share? Could you give us some estimate of what the increase in share has been over the year or over the quarter for FHA versus the industry? It seems like you’re saying that they haven’t taken much share from you, is that right? If it’s not, could you tell us what sort of the decline in premium that you’ve seen or enforced that you’ve seen represent a share being taken by FHA versus just an overall decline in originations (ph 00:32:08)?

Curt S. Culver

Yes. Isaid just the average that they’ve taken a great deal of share from the industry and Mike you have a (inaudible 00:32:14).

Scott Frost – HSBC

Yes. But I may use specifically. Let me taking it for you as well, as well the industry or ?

Curt S. Culver

They’re taking it from the industry, so, yes, we’re giving up 24% of it because that’s our market share.

Scott Frost – HSBC

Okay.

Curt S. Culver

And Michael giving the quantification of it, but it is business that given the capital position of the industry, it’s concentrated on much higher FICO scores and so what we’re losing the business is on the 680s and below FICO scores to the FHA. But there’s a lot of that business that’s very profitable also in relative to how much we’ve lost year-over-year, Mike?

Michael Zimmerman

Yes, I mean, taking it from the industry’s penetration rates we’re about 15 to 20% in the third quarter of last year and it’s down now. Currently it’s about 8 or 9%.

Scott Frost – HSBC

Okay.

Michael Zimmerman

So, (inaudible 00:33:04) of the industry share of demand, you can clearly see our market share, you know from the published numbers there as well.

Curt S. Culver

So it’s not being lost in any individual company. It’s being lost collectively by our industry and then you proportion of that on a market share basis.

Scott Frost – HSBC

Right, right, okay, thank you.

Michael Zimmerman

Yes.

Operator

Our next question comes from Ron Bobbin.

Ron Bobbin – Capital Returns

Hi , you guys. There are two questions and they might be a little bit off centered. But I’ve a question about earthquake insurance, and whether particularly in California and the homes that the industry insures. My understanding is that the earthquake coverage is not a requirement, is that true or it’s already changed?

Michael Zimmerman

Well, on our mortgage insurance policy and this is the industry, we have special hazard protection such that if an earthquake or major fire or hurricane whatever the case may be, a natural catastrophe will happen, the insurance, you have to restore the home to its normal condition where (inaudible 00:34:09) for that point in time. So you can’t submit a claim if there’s an earthquake unless you restore the home to what it was prior. So that’s not a condition that those catastrophes don’t impact our industry per se. The point where they impact us however is that employers are wiped out through one of these natural catastrophes and the workers at those lose their jobs because of the (inaudible 00:34:32) and their mortgages. But the actual event itself doesn’t have an impact on our insurance.

Ron Bobbin – Capital Returns

I’m sorry. If the home is total and the homeowners sort of walks away from it, cause they don’t have the insurance to (inaudible 00:34:49) the repairs. What happens then?

Michael Zimmerman

Well then the lending institution if they hadn’t required, I mean insurance on that, they will be start or the investor wouldn’t have a total loss.

Ron Bobbin – Capital Returns

Okay, but if they can’t submit a claim, the lender could not submit a claim to (inaudible 00:35:07).

Curt S. Culver

Oh, that’s excluded from our coverage, they have to restore the property before we pay a claim on it.

Ron Bobbin – Capital Returns

I see. Okay, that’s my first question. Thanks. The other the question, if I remember correctly last year, I think this call, you had the call then a day or two later, you came out with sort of the compensation, I think it was sort of bonuses and other sort of comp levels that people were paid for, I guess the preceding period. And so I was curious to know given the rough year that we’ve all been through, what is the current plan for sort of discretionary comp, discretionary bonuses for this prior fiscal year. Thanks.

Michael Zimmerman

Yes, there will be no bonuses or salary increases for the executive officers.

Ron Bobbin – Capital Returns

Okay.

Michael Zimmerman

Also to the entire organization, there’ll be no salary increases either.

Ron Bobbin – Capital Returns

Okay. Thanks for this closure and best of luck.

Michael Zimmerman

Yes, thank you.

Operator

(Operator instructions). Our next question comes from Donna Halverstadt.

Donna Halverstadt – Goldman Sachs

Hi Mike, just one thing, if you could just detail for us both the required and actual MPT as of your end’08?

Michael Zimmerman

Donna it’s preliminary but it’s, I think we’re about the 1.1 excess of the MPT. We were about one, five, or six, or seven at the third quarter.

Donna Halverstadt – Goldman Sachs

And then last question, any industry chatter you’re hearing on any potential new entrants?

Michael Zimmerman

Yes, we’ve heard that one company in particular is interested in writing reinsurance and then was also was thinking about the opportunity to be a direst rider and I think they’re still reviewing that process, but yes.

Donna Halverstadt – Goldman Sachs

And that’s the company that’s already active in the business?

Michael Zimmerman

Not as a direct rider, I know there are soliciting companies relative to reinsurance.

Donna Halverstadt – Goldman Sachs

Okay. Alright, thank you.

Michael Zimmerman

You bet.

Operator

(Operator instructions). Our next question comes from Mike Randall.

[Mike Randall]

Yes, just a couple of follow-up guys. You talked about the rescissions driven by fraud being 15% of claims during the fourth quarter.

Michael Zimmerman

Claims resolved, (inaudible 00:37:31).

[Mike Randall]

Claims resolved. Could you break that out between bulk and flow and then kind of let us know, is it rising or has it peaked?

Michael Zimmerman

I can tell you it’s rising. In the, well the break-out between bulk and flows, so the overall was about 15% bulk was about 24% and the in flow was about 8%. In the prior quarter of Q3, the overall was about 8, bulk was 13 and the in flow was five. So you can see the trend there and we think it’ll continue to rise a bit more because the fraud generally is more prevalent on a newer books of business, ’06, ’07 and we expect more of the claims over the next year to be ’06, ’07 thus leading to potentially an increase in the rescission activity from Q3 and Q4.

[Mike Randall]

Okay. And then secondly, you got, obviously there’s been some loan modification programs in (inaudible 00:38:48) Bank of America, the GSEs, what they are doing, JP Morgan. Can you give us an update on how you are processing through those or trying to at least identify your delinquent inventory, how it would map up with some of those programs?

Michael Zimmerman

Sure, I’m Michael Zimmerman. That’s exactly a bit juicy criteria (inaudible 00:39:04) that came out December 15th and it’s really just being kicked off. The wild card is the, adjusted the current market value of the property, what is called the current loan-to-value and the borrower’s current income, until you really can’t map that information, cause we don’t have good, you know, data at the loan level there on a current information. The other programs, you know be it the Citi or HSBC and all the others, there’s varying in criteria but it’s along the same line which is the LPV in housing ratios are the key elements. So that’s what makes it difficult to try to quantify. We have tried to do that, but because of that lack of information, we’re not highly confident of the eligible population.

Curt S. Culver

Yes, I would say Mike, I mean we’ve got a dramatic increase in modifications year-over-year, but that really doesn’t reflect any of the new programs that are in the market place that was just the opportunities presented because of the increase in paids that we had, or the increase in claims received. So all of these programs that are being talked about right relative to loan modifications, you really have not seen the benefit within our company or industry yet.

[Mike Randall]

Do you think on the next call in April we’ll begin to see some of that, or you’ll have more to report?

Curt S. Culver

I would sure hope so. I mean, there’s been so much talk given to it between the FDIC programs and things of that sort. So I would certainly hope we’d have more clarity and start to see the benefits of getting some of this stuff done. But it is a process where it’s done loan by loan by loan by loan, so it is also time consumptive. So clearly, I think, each quarter you’re going to see an increase relative to loan modification activity, I just don’t know how to quantify it yet.

[Mike Randall]

Okay.

Curt S. Culver

I just know it’ll be positive for us.

[Mike Randall]

Thank you.

Curt S. Culver

Thanks, Mike.

Operator

(Operator instructions) Our next question comes from Brian Long.

[Brian Long]

No question.

Curt S. Culver

Good. Thanks, Brian.

Operator

We do have a question from Jordan Hunley (ph).

Jordan Hymowitz – Philadelphia Financial

Yes, one more follow up. You have $282,000 delinquent loans as we sit here today. I mean, first of all what percent of them today are eligible for some sort of modification program?

Curt S. Culver

Jordan, this is by debt source and we can’t estimate that out of the $180,000 we said 60% are Freddie/Fannie delinquencies, 40% are other investors by the label, but because of the variables of loan-to-value and HTI’s we don’t know exactly how many are eligible.

Jordan Hymowitz – Philadelphia Financial

So would it be reasonable to guesstimate that whatever that percentage is, whether it be 60 or some higher number and at max half goes into default and then you run that through with the rescission rate for claims and try and figure out what a loss number is. Is that a reasonable thought process?

Curt S. Culver

That's the right algorithm, but the assumptions we’d have to leave to you – but that’s the right algorithm.

Jordan Hymowitz – Philadelphia Financial

Yes, okay, I just wanted to make sure we were thinking about it that way.

Curt S. Culver

Yes.

Jordan Hymowitz – Philadelphia Financial

Okay. Thank you.

Curt S. Culver

Thanks, Jordan.

Operator

I am not showing any questions at this time.

Curt S. Culver

Well with that then, Mary and investors thank you for your interest in our company and have a great day. Thank you all.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect and have a wonderful day.

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Source: MGIC Investment Corp. Q4 2008 Earnings Call Transcript
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