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MGIC Investment Corporation (NYSE:MTG)

Q4 2007 Earnings Call

February 13, 2008 9:00 am ET

Executives

Mike Zimmerman - SVP, Investor Relations

Curt Culver - Chairman and CEO

Mike Lauer - EVP and CFO

Larry Pierzchalski - EVP Risk Management

Analysts

Phil Marriott - ASB Advisory

Robert Nap - Ironsides

James Gillian - Equity Group Investments

Ron Bobman - Capital Returns

Donna Halverstadt - Goldman Sachs

Kabir Caprihan - JPMorgan

Mike Grasher - Piper Jaffray

Kevin Shield - Deephaven Capital

Josh Smith - CIA CREST

Howard Shapiro - Fox-Pitt

Steve Stelmach - FBR

Si Lund - Morgan Stanley

Michael Menzini - Bear Stearns

Rajeev Patel - SuNOVA

Donna Halverstadt - Goldman Sachs

David Chamberwood - Oppenheimer Capital

Eric Wasserstrom - UBS

David Hochstim - Bear Stearns

Howard Shapiro - Fox-Pitt

Operator

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation's fourth quarter Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, you may begin.

Mike Zimmerman

Thanks, [Lenie] 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 fourth quarter of 2007 and full year 2007 results are Chairman and CEO, Curt Culver; Executive Vice President and CFO, Mike Lauer; and Executive Vice President of Risk Management, Larry Pierzchalski.

As we have indicated in this morning's press release, we have posted on our website some supplemental information pertaining to the characteristics of our primary risk in force which we think you would find valuable.

I'd like to ask all participants to try and limit themselves to one question and a follow-up and then return to the queue to provide as many people as possible the opportunity to ask a question. Finally, I'd like to remind all participants that our earnings release of this morning, which maybe accessed on our website, which is located at www.mgic.com includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures.

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

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

And with that I'd like to introduce Curt Culver.

Curt Culver

Thanks, Mike, good morning. For the fourth quarter, we reported a net loss of $1.47 billion and for the year a loss of $1.67 billion. As mentioned in our earnings release, the quarterly results included two one-time items. The first is a pre-tax premium deficiency of approximately $1.2 billion, as a result of our decision to stop writing Wall Street bulk transactions. Due to the complexity of this issue and the significance to our financial results, Mike Lauer will spend a few minutes discussing the premium deficiency reserve after my comments.

The second one-time item is a $33 million after-tax charge related to the equity losses incurred by C-BASS in the fourth quarter that reduced the carrying value of the $50 million note from C-BASS to zero. Obviously these financial results are unacceptable. So, the question then is what are we doing about it? As we have discussed last quarter, we have made changes to strengthen underwriting quality and pricing.

On November 1 of last year and on January 14 of this year, we implemented underwriting changes on loans, which exhibited multiple high risk factors and in addition pricing increases on loans above 95% LTV, loans categorized as A minus and most categorized as ALT-A.

Even though these changes have already made an improvement in our commitment volumes, for instance flow loans above 95% total 42% of our commitment volume six months ago, while in January of this year they totaled 27.5% and early in February these numbers are even lower.

But while, as I said we have made these improvements in commitment volume, we feel they are not enough to help us to return to profitability in a market where real estate values are declining. As a result, we have made further underwriting changes to require more equity and higher FICO scores in markets that are declining such as California, Florida, Arizona and Nevada and Michigan. While these changes will negatively impact our volume, we feel they are essential to making the 2008 vintage, a profitable one.

With our risk-to-capital ratio at 10 to 1 MGI see a sufficient capital to meet even the more stressed of claim scenarios. Over the current MI business environment is exhibiting some of the strongest business fundamentals I have seen in my many years in the business. As a result, we have hired a financial advisor to assist us in exploiting adding capital to our company to capitalize on the following opportunity.

First, flow MI penetration is at an all time high somewhere between 17% and 20%. This is up from 10% a year ago and somewhere around 8.5%, 18 months ago. As evidence of the significance of the penetration increase, our flow NIW in the fourth quarter was up 108% year-over-year and 75% for the year. Even with the underwriting changes, our industry has introduced, I think, penetration will still run in excess of 15%.

Second persistency has returned big time reflecting the decline or slowing in real estate values. Our flow penetration in the fourth quarter was 78.7% and our flow quarterly run rate was 83.6%. Frankly, as you have heard me discuss before, I don't think we'll ever get 80% again, but now, it looks like we'll exceed it for a number of years. The persistency improvement coupled with the penetration increase that I mentioned earlier helped us grow our insurance and force to $211.7 billion, which is up 20% year-over-year.

Third, as I mentioned earlier, the underwriting in pricing changes we introduced on November 1, January 14 and again last week should return our mix to profitability in the 2008 book with even a better outlook thereafter. While these changes will cost our company some business it will the business better lost than insured and will put us on a path of long-term profitability just as we experienced after the losses of the mid 80s and the subsequent underwriting in pricing changes our company made at that time.

Further company is really well positioned to compete. Our full market share grew to an estimated 25.5% in the fourth quarter up from 24% as a number of lenders move business to MGIC in response to market conditions. And while we may lose share to reflect our on driving changes we'll lose it for the right reasons. More important than our share advantage is our expense advantage especially given the commodity nature of our product.

MGIC's expense ratio is 36% lower than our publicly traded competitors and 31% lower than our industries. I think this will also serve as a deterrent to any private equity money that may look to enter our industry de novo, as they struggle with how they would compete for the business in an efficient manner.

Fifth, while captive reinsurance will help us immensely in dealing with the 2006 and 2007 books of business, which Larry will discuss later, long-term, they are not positive for our business. Interestingly, we have had two lenders recently discontinue their captives going forward and at least one other major customer considering such a move.

Sixth, our international expansion will pay huge dividends long-term not just in driving higher revenue and earnings for our company, but also in providing even greater geographic dispersion to our already strong position. We feel the opportunities in Australia and Canada are huge for us with even greater opportunities longer-term in newly developing markets such as India.

Seventh, our country places a huge value in housing. As indicated by the speed in which the Stimulus Package was put together, as well as the recent discussions to pay some monetary amount for closures to project lifeline and the almost universal [bipartisan] and support of making MI tax deductible. While the Stimulus Package will not be a panacea in our project lifeline, they will create an opportunity for arm resets and weaker credits to refinance into fixed-rate debt insured by FHA or other lenders.

As I have outlined, we have tremendous opportunity in the years ahead. And while 2008 will again be a difficult year as one which we should see many more opportunities emerge. To that end, you have my commitment, and that of my coworkers that we will maximize these opportunities to return our company to profitability as quickly as we can.

With that Mike, could you discuss the brand efficiency?

Mike Lauer

Thank you. As noted in our release, the piece of business we were talking about the Wall Street bulk transaction represents approximately a $145,000 loans, about 25.5 billion of in force, and about 7.6 billion of risk in force at year-end. During the fourth quarter, that particular book of business exhibited significant deterioration with the climbing [interior] rates and escalating severity claims.

As a result, we did make a decision to discontinue that business and calculated on a run-off basis the net present value of the future premiums and losses offset by the reserve, we have established at year end. What's important to understand about that calculation, that 1.2 charge is a GAAP charge to P&L with the offsetting liability, but it's not a stat adjustment. So, we'll have a difference between GAAP and stat each year as we roll through this transaction.

Secondly, what you need to understand is that we will adjust that liability account each month and quarter and so our GAAP financial statement. So next year, as you think about the modeling the $1.2 billion should be a credit to P&L. At this point and time based on our estimate runoff of the book, we would estimate that credit could be in the range of $500 million to $700 million in '08.

And then subsequently in '09 we'll have to get further down to see what the value will be in '09. It may even be some pale in '10. But for modeling purposes, I think you want to think about that liability account coming down back to P&L in the range of $500 million to $700 million. But again we'll update that calculation on a quarterly basis, as we go through reporting in 2008.

The discount factor we used relative to those calculations was 4.7 and pretty much everything else, I think we have outlined in the press release and I think let's open it up for questions.

Mike Zimmerman

Operator, if you can take questions, Denise?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Howard Shapiro of Fox-Pitt.

Howard Shapiro - Fox-Pitt

Hi, I just have a couple of questions if you don't mind and I'll get back in the queue. Mike, I want to make sure I'm understanding the accounting. You say that you'll have a credit of $500 million to $700 million in '08 but won't that be offset by any continued adverse delinquency development in the '08 on the bulk business.

Mike Lauer

I guess it's separated first of all in the normal bulk business that we haven't discontinued. There would be any normal loss provisions provided, okay?

Howard Shapiro - Fox-Pitt

Got it.

Mike Lauer

With respect to the piece of business that we've discontinued, we'll have the normal reserve accounting for those delinquencies as they come up and unpaid claims. However, if its amount equal to, if you will our calculation there would be some relief give or take the adjustment. But what I'm trying to say here is the way the book is -- we've got it forecasted off, so you've some idea about how that liability comes back. We think it's in the range of $500 million to $700 million. Of course, we'll give you updates on that on a quarterly basis.

Howard Shapiro - Fox-Pitt

Okay.

Mike Lauer

But you are correct. The normal loss reserve provisioning and claims goes through the statements they normally would with a [contract] for this run off of this liability.

Howard Shapiro - Fox-Pitt

Okay. And another question just if I think about this you've right now separated out the reserves of $1.4 billion you already have in place for the bulk you have $1.2 billion reserve.

Mike Lauer

Correct.

Howard Shapiro - Fox-Pitt

You are expecting why for vintage losses on the bulk of $3.5 billion and you're expecting low net income in '08 so we could assume that the provision level in '08 is going to be somewhere in excess of your revenues so let's call it $1.2 billion or so. Is it fair to say that you're expecting in aggregate on your current exposure $5 billion to $5.5 billion of actual pay claims over the vintage or I'm looking at this…..

Mike Lauer

Is it overall?

Howard Shapiro - Fox-Pitt

Yeah.

Mike Lauer

Over the life.

Curt Culver

Yeah over the life.

Mike Lauer

Yeah.

Curt Culver

Yeah.

Mike Lauer

We have (inaudible) L011-1:05 going in Howard.

Howard Shapiro - Fox-Pitt

Okay, okay that's very helpful. And I'm going to squeeze one last in and I apologize on the bulk…..

Mike Lauer

Tell him Howard.

Howard Shapiro - Fox-Pitt

I'm sorry last one. On the bulk business when you look at the loan characteristics of the bulk business what in your opinion is driving the change in the significant divergence in behavior in the bulk business and how much is broad a factor do you think?

Curt Culver

Howard I'd say one of the main drivers is the geographic distribution of the bulk business, California is 28% of the bulk, Florida is another 12% 13%. You put those together at 35% 40% and those markets went from let's call it boom and bust rather quickly. In comparison on the flow side California is only 3%, 4% California was never much of a Freddie Fannie conforming market and flow MI wasn't used much. Aside from that you've got the biggest piece in the '06 bulk, so you've a large book at its claim peak, if you will, playing through, we dropped ratings significantly beginning of '07. So, it's that '06 hump, if you'll moving through the normal course of its life.

Mike Lauer

Yeah, I think Howard, as you look at it and I think I've heard Larry mentioned this recently, we think that '06 will be at 150% to 175% loss ratio.

Howard Shapiro - Fox-Pitt

Yeah.

Mike Lauer

The seven bulks following only did what, $7, $8 billion in '07 probably is a breakeven because increased pricing and we got better geographically in that. So, it's kind of a late '05 and '06 that are the issue. And geographic did lack their -- although geographic dispersion the issue.

Howard Shapiro - Fox-Pitt

Okay, great. Thanks so much.

Mike Lauer

You bet.

Operator

Our next question comes from David Hochstim, Bear Stearns.

David Hochstim - Bear Stearns

Thank you. Have you talked to the agencies about this quarter yet, and --

Mike Lauer

Yes.

David Hochstim - Bear Stearns

And how do they feel about this $1.2 billion of --

Mike Lauer

Well, they knew about it. We had talked to them for quite sometime.

David Hochstim - Bear Stearns

Okay. And maybe, I'm kind of still little slow on understanding, the whole thing, why do you have to do it because you just stop writing, because you stopped writing bulk, is this a regulatory requirement?

Mike Lauer

Well, it's an accounting issue with respect to this business that as I said in the fourth quarter, we've recognized that as you test the premium sufficiency with respect to the business that was clearly on a negative path. In other words the premiums expected present a value of the premiums that were going to be less than the paid claims with respect to some of the new forecasts that we prepared. As a result of that you need to recognize that and then subsequently we made the decision to discontinue the business too.

David Hochstim - Bear Stearns

Right, but it sounds like discontinuing of the business prompted you to do this without --

Mike Lauer

No, I think the issue is that the deterioration that we observed, okay?

David Hochstim - Bear Stearns

Yeah, okay.

Mike Lauer

In other words, recognizing that the premiums were not sufficient to cover the losses.

David Hochstim - Bear Stearns

Right.

Mike Lauer

Okay.

David Hochstim - Bear Stearns

Okay, that's fine.

Mike Lauer

In addition to recognizing this accounting position, the deficiency of the premium, we also made a decision to discontinue it.

David Hochstim - Bear Stearns

Right.

Mike Lauer

Okay.

David Hochstim - Bear Stearns

Maybe explain a little better like how you're booking this liability and why is this such a heavy liability if in fact you're expecting some return of this in this year and in '09?

Mike Lauer

I think, you lost me here.

Curt Culver

David, can you say that again? Why is the liability is the net present value of the expected premiums are less than the claims that we're going to pay?

David Hochstim - Bear Stearns

Okay. So….

Curt Culver

The book is going to runoff negative. So, we would recognize that today

Mike Lauer

Today.

Curt Culver

In the fourth quarter.

David Hochstim - Bear Stearns

Okay.

Mike Lauer

And 1.2 was the calculation of those future premiums discounted as well as the future pay losses offset by the existing reserves and the net number is $1.2 billion.

David Hochstim - Bear Stearns

Okay, so when is this 5 to 700 million coming back or is this clearly a positive --

Curt Culver

David, this is a [less], why don't we set up a car and walk you through the mechanics of that. But it's basically the amortization backed out as those books start to work their way through the rest of their lives.

David Hochstim - Bear Stearns

Right, okay.

Mike Lauer

They've been negative next year and we've already recognized that this year.

David Hochstim - Bear Stearns

Right, okay. I kind of understand this more offline.

Mike Lauer

Okay.

David Hochstim - Bear Stearns

Okay. So let me just, okay with regards to the agencies just to follow-up on the last point. I mean, when I see Moody's reaffirm you recently or released say the status of the same and when S&P recently put you on negative watched. I mean, does this include -- had you told them about this before of those actions.

Mike Lauer

Yes, yes.

David Hochstim - Bear Stearns

Okay, thanks a lot.

Mike Lauer

Thank you.

Operator

Our next question comes from Eric Wasserstrom of UBS.

Eric Wasserstrom - UBS

Thanks very much. So, just two points of clarification please, one is so the issue about the capital raise that you are seeking. It sounds like that's entirely to fund new business opportunity and not related to any claims paying capacity issues. Is that correct?

Curt Culver

That is very correct. As I said, we are at tender one and we meet the more stressed of claims scenarios.

Eric Wasserstrom - UBS

Okay, and have you contemplated all with what form that might take?

Curt Culver

There is a variety, I mean, I'll let Mike talk but we are looking at a variety of forms.

Mike Lauer

Yeah, we're looking at everything. There is some reinsurance opportunities, convertible debt, etc cetera and so just about every (inaudible) L014-1:10 you can think of we are looking at relative to cost because the market right now is pretty excessive.

Eric Wasserstrom - UBS

Right. And then can you just touch a little bit on your debt service of the parent company and how you are thinking about that given the..

Mike Lauer

We've got about $290 million at the holding company and our interest cover is about 42, 45 and common stock dividends about $8 million. So, we've got ample 4 or 5 years of cash flow there.

Eric Wasserstrom - UBS

When it comes out the comments [taking] with 8.

Mike Lauer

8.

Curt Culver

Yes.

Eric Wasserstrom - UBS

Great. Well, thanks very much.

Curt Culver

Thank you.

Operator

Our next question comes from David Chamberwood of Oppenheimer Capital.

David Chamberwood - Oppenheimer Capital

Hi, just a follow up on the capital question, when you guys think about the growth opportunity and that your writing is up 100% year-over-year your book growing 20%. I mean if you had -- how you think about capital what you need if you wanted to grow at the current rates is there any that you can give us in terms of the quantity, if not the type of capital that you need to raise?

Mike Lauer

So, I think despite I guess, I was surprised to say that we're looking at a mix and the degree to which they will raise will become a function of economics too. As I mentioned earlier some of the rates right now are pretty excessive. But clearly as we look out, Curt talked about the opportunities in the business even though we had a strong growth here to last year we don't see that same opportunity this year because of some of the underwriting changes we've made. But longer term we think there are some opportunities for further growth and we'd like to be better positioned for that. So, the timing of which the capital maybe initially we may do it later than earlier depending on what the market is and what the costs are.

David Chamberwood - Oppenheimer Capital

Okay. Just a quick follow-up on that it sounds like on a statutory basis which is really in terms of capital raising that this the setup of the bulk contract assets really does not factor into what you need to grow is that correct?

Mike Lauer

That's correct, yeah

David Chamberwood - Oppenheimer Capital

Thank you

Mike Lauer

Okay

Curt Culver

Yeah

Operator

Our next question comes from Amanda Lynam of Goldman Sachs.

Donna Halverstadt - Goldman Sachs

It's Donna Halverstadt. One quick question you had mentioned that two lenders have discontinued the captives going forward and that the third might. Could you give us a feel for what percent of risk in force relates to those two lenders or well just trying to get a better sense for whether these are big lenders or small lenders and whether or not you expect most lenders to move that same direction of discontinuing captives?

Mike Lauer

Actually they are major customers but they haven t done that much with MGIC. Although they have done it with other companies and so it will be significant relative to their impact on the industry.

So, I'd say it's relative to our financials and significant more relevant however is the fact that these are major customers. And again, where in the industry they've done a lot of reinsurance that are discontinuing this going forward which I mean that is a very positive sign for all of us in the industry.

Donna Halverstadt - Goldman Sachs

And do you expect others to file a suit?

Mike Lauer

Well, I know others are reviewing it as the capital required within this in this long-term capital it's difficult to get it out and now they are even though net positive, they are going through probably a couple of years whereby they have [watchers] within it and/or many of their managements at a higher level, let's say at the bank CEO level doesn't want to fool around with that relative to the mortgage group. So, I think it's certainly is something that is being looked at much more closely than what it was a year ago.

Donna Halverstadt - Goldman Sachs

Okay, great. And also like David, we wanted to better understand how or why that $500 million to $700 million comes back, so we will call you offline on that as well.

Mike Lauer

Okay, thanks Donna.

Donna Halverstadt - Goldman Sachs

Thank you.

Operator

Our next question comes from Rajeev Patel of SuNOVA.

Rajeev Patel - SuNOVA

Hey guys, thanks for taking the call. Just a question credits, since the year end we had the rates cuts, we've had a lot of different initiatives being implemented hopefully for the positive in the housing industry. Can you just comment on what you are seeing in your book subsequent to 12.31? And then just kind of provide an update on your claims guidance?

Mike Lauer

Yeah, let me tell you. I mentioned this but on the commitment volume, which is indication of loans that we received applications, but not yet insured. So, this is the volume we received in January, which was a strong month for us.

Just to give an example, as I mentioned 100% loans in July of last year with a 100% LTV with 39% of our volumes in January it was 24.8% and early in February and we haven't had many days we've 19.4. So, we've seen that mix change rather dramatically. [Full dock] which is the world we want to play in we've always wanted to play in but the market took us a little bit elsewhere with 69% of our volume in July of last year and in January it was 75% and February 82%. So that's another wonderful change for the business. FICO is over 700. We're around 46% in July, 53% in both January and February. So, you're seeing the mix change which is very, very positive relative to a very profitable 2008 vintage.

Rajeev Patel - SuNOVA

Right. I mean, I guess just to clarify I was looking more to see the performance of your '05,'06, '07 vintage. Are you seeing any signs of improvement given all the changes that have occurred in January or you know if there is any…

Mike Lauer

That won't have any impact.

Rajeev Patel - SuNOVA

Okay.

Mike Lauer

I mean at least first of all the underwriting changes have no impact on the '05, '06, '07 books

Rajeev Patel - SuNOVA

No, I just mean the more but the capital market changes like the rate cuts and such.

Mike Lauer

Well the interest rates, the fed cuts mean nothing relative to performance. But the stimulus I mean as I talked in my comments should help our whole industry MGIC in particular relative to offering we finance opportunities to people going forward that may have ARMs or have weak credits that they can refinance. But that's way too early, I mean having them find yet.

Rajeev Patel - SuNOVA

Yeah, okay. And then just on the claims guidance?

Mike Lauer

'08 it's still the same we announced a couple of weeks ago, about $1.8 billion to $2 billion.

Rajeev Patel - SuNOVA

Okay, great. Thanks a lot guys.

Mike Lauer

Yeah.

Operator

Our next question comes from Michael [Menzini] of Bear Stearns.

Michael Menzini - Bear Stearns

Hi. So, one question I had was actually do you have the risk to capital ratio at the operating side?

Mike Lauer

That's 10:1.

Curt Culver

That's 10:1.

Michael Menzini - Bear Stearns

Okay. So, what about the holding company then?

Mike Lauer

There is no such thing. I mean, let me say it this way. The MGIC risk to capital is 10:1 on a consolidated basis based with some of its other insurance subsidiaries. It's about close to 11:1.

Michael Menzini - Bear Stearns

Okay.

Mike Lauer

But there is no risk to capital at the holding company.

Michael Menzini - Bear Stearns

Got you. I realized that you gotten already a few questions on this side. I'd like to join that call on the other piece as well?

Mike Lauer

Think about it this way. Think about it this way. If the calculation is perfect and next year obviously there is the deficiency because we calculated that out on a net present value. So the premiums would be less than the paid and let's say it was $500 million. That $500 million would flow back as a credit out of that liability account. Now that can change relative to these calculations. But I was trying to give you some kind of range of where that liability could run out in the next 12 months.

Michael Menzini - Bear Stearns

So, is it basically discontinued operation accounting, so like basically you are saying like, okay, so we basically

Mike Lauer

No.

Michael Menzini - Bear Stearns

It's not.

Mike Lauer

No. It's a premium deficiency. The book next year, the premiums are going to be less than the pays, okay. So we -- that particular delta, that margin we reserve for and we reserve for that on a GAAP basis and if the calculations work perfectly and it was a $500 million change that's $500 million would come back as a credit.

Michael Menzini - Bear Stearns

Okay.

Mike Lauer

With that adjustment.

Curt Culver

And they are subject to some new things that could happen relative to new…

Michael Menzini - Bear Stearns

Sure, sure. I mean, I'm just trying to get my -- I mean…

Mike Lauer

But the magnitude of it is I think in the range of 500 to 700 so at least gives you some guidance.

Michael Menzini - Bear Stearns

Right.

Curt Culver

And I think the piece you might be missing is that as time goes forward they are going to continue to book actual loss development and actual premium development and part of that, the point is we part of that deficiency we've already booked here in the fourth quarter of '07 here.

Michael Menzini - Bear Stearns

All right. I mean, I guess the question is so typically the trigger for recognizing provision or increasing reserve has been delinquency. So this appears to be a kind of a different approach…

Mike Lauer

That's correct, that's correct.

Michael Menzini - Bear Stearns

And so, that I guess what maybe other callers and myself having trouble kind of understanding the new -- the kind of different application more conservative certainly. But understanding how it is first of all that you kind of quarantine there is one piece of the book and said we're going to basically -- we don’t have delinquencies on this yet but we know that the losses on this subside of the book are going to be this.

Mike Lauer

Exactly yeah.

Michael Menzini - Bear Stearns

So is that…

Mike Lauer

The premium deficiency exactly. We calculated that there is a premium deficiency and this piece of the business

Michael Menzini - Bear Stearns

Okay.

Mike Lauer

And we've recognized that

Michael Menzini - Bear Stearns

I see okay. And then the, (inaudible) 019-1:27 of later I'm still little foggy on the recaptured part but maybe that's something you guys maybe put something out later to kind of clarify how it looks from year end?

Mike Lauer

Okay.

Michael Menzini - Bear Stearns

Okay, thank you.

Mike Lauer

Operator?

Operator

Our next question comes from Si Lund of Morgan Stanley.

Si Lund - Morgan Stanley

Good morning guys. Thanks for the call. My first question that relates to the credit facility that I believe is fully drawn right now

Mike Lauer

Right.

Si Lund - Morgan Stanley

And do you have plans to try and adjust the net worth covenant in the facility

Mike Lauer

No, no...

Si Lund - Morgan Stanley

In the facility.

Mike Lauer

No we're.

Curt Culver

I think if we had to have a conversation with them about that and we did recently. It's not a big issue for them. It's a small group of lenders and we've advised them that there may come a time for us to talk about the effort. It's not a significant issue for us.

Si Lund - Morgan Stanley

Okay. And is the accordion feature you mentioned on the last call is still available?

Mike Lauer

Yes.

Si Lund - Morgan Stanley

Okay. And then second on the capital raise that you've mentioned. Could you put some parameters around the magnitude of the size of this, because we've seen other companies (inaudible) L020-0:38 guarantors try and raise capital and it's been a challenging environment to raise capital? So, could you try and put more parameters around what type of instruments you are looking at?

Mike Lauer

Well, as I said before, we're looking at all the things that you would think we would. Reinsurance, some kind of convert debts and other things that boost capital. So the question is for us, is where is the market price for that today, and what's an economic decision for us to make.

So, I mean, branded, we're looking further down the line for uses of capital. So, we've got some time, but right now it's pretty expensive, but we're taking time to look at it and see if there is an economic advantage for us to put some capital on now.

Curt Culver

And while on bias I'd say the opportunities in our industry are so significant that this is clearly a different discussion than you do whenever with the financial guaranty side of the business.

Si Lund - Morgan Stanley

Okay. And then a final question. As far as the statutory results and will there be any dividends you can take out of the operating company in 2008?

Mike Lauer

Yes. They would be with the approval of the commissioner. I mean all of ours we've to have approval.

Si Lund - Morgan Stanley

Okay, but based on the regulatory form as you are able to take out capital on 2008?

Mike Lauer

With approval from the commissioner.

Si Lund - Morgan Stanley

Okay. Thank you.

Mike Lauer

Thank you.

Operator

Our next question comes from the Steve Stelmach of FBR.

Steve Stelmach - FBR

Hi, good morning. I just want to circle back unfortunately real quickly to the capital level. Your capital was down about $1.5 from its peak or at least where you started in 2007. Is that I assume that's not sort of the magnitude you guys are discussing. Is that correct assumption or should we think about something else?

Mike Lauer

No.

Curt Culver

As far as the capital raise.

Steve Stelmach - FBR

In terms of the size the capitals raise.

Curt Culver

I don't think we're thinking in that size.

Steve Stelmach - FBR

Okay.

Curt Culver

It's something lesser but what is available in the marketplace. As I said, there are tremendous opportunities within the marketplace going forward and we have to as Mike said look at the costs, the impact, the dilution all these things and what's available and make a cost.

Steve Stelmach - FBR

Okay. And there is another way to I think about it I guess is I think historically you have said that you feel confident running at the risk to capital ratio of around 12 to 13 to 1. You have been as low as what 7 to 1 at some point.

Mike Lauer

Yeah.

Steve Stelmach - FBR

Is that's where still the range that you guys feel comfortable operating your leverage at?

Mike Lauer

I think we could run at 15.

Steve Stelmach - FBR

15 and in rating you said okay with 15.

Mike Lauer

I think so. But I think a lot will depend on everything else. I think what kind of business we are riding in '08 and margins and capital position etcetera. But I think 15 would be adequate.

Steve Stelmach - FBR

Okay. So, you still have some room to lever, you don't need to fill that $1.5 billion?

Mike Lauer

I mean that's one of the beauties. We don't have a gun to our head to do something now.

Steve Stelmach - FBR

Okay.

Mike Lauer

Also I think impacts were of the financial guarantee companies are slightly different.

Steve Stelmach - FBR

I appreciate that. Thank you.

Operator

Our next question comes from Howard Shapiro of Fox-Pitt.

Howard Shapiro - Fox-Pitt

Okay, I told you I'd get back in line. Can I ask you a question on the accounting relative to project lifeline, if we are to see large scale modifications and cessations of foreclosure activity from an accounting perspective, how does that impact you. Do you change your frequency assumptions and if that one is modified by cutting the balance, are you responsible for that or some other party responsible?

Curt Culver

They just announced that program. So, I mean, I'm going to tell you the relevance of it. I don't think it will be that significant that will be a marginal improvement relative to claims performance. So, as we sit here right now, I don't think, they will change anything on the accounting side. Now, is there an extent we can modify loans that is very beneficial long term as we've done this and we do a lot of this with Fannie Me and Freddie Mac. About half of those loans that we can modify, end up curing long-term for us. So, I mean, it's something very positive. But to put wrap of framework about how positive and how to treat it yet is too early.

Mike Lauer

I think we need more information. But I think, what you are thinking about is, if we get a significant amount of delinquencies that are in that program how will you account for them differently, right?

Howard Shapiro - Fox-Pitt

Right.

Mike Lauer

Yeah and I think if we need to know more information.

Curt Culver

I would say right now, no.

Mike Lauer

So 30 day more, right now…

Curt Culver

(inaudible).

Howard Shapiro - Fox-Pitt

Okay, thank you.

Mike Lauer

Yeah.

Operator

Our next question comes from [Josh Smith] of [CIA CREST].

Josh Smith - CIA CREST

Thanks for taking the question. Let me try one more time in this 1.2 billion if I could. Basically, you've front end loaded this loss for '07 and you expect to get -- you wouldn't if you had done nothing.

Mike Lauer

All right.

Josh Smith - CIA CREST

You hadn't done this premium deficiency. This 1.2 billion would have manifested itself over the next few years. Is that correct?

Mike Lauer

That's correct.

Curt Culver

Perfect.

Josh Smith - CIA CREST

Okay. My second question I've is on the captives. Have you done an analysis, I mean, don't want to tell a lot on this. I know you don't have caps on the book, but you do have benefits from it?

Mike Lauer

Yeah we did…..

Josh Smith - CIA CREST

When you look at the total amount that you could recover from them and then okay that's what actually funded?

Curt Culver

Larry will go into that right now Josh.

Josh Smith - CIA CREST

And I have one more follow-up to that, okay.

Larry Pierzchalski

I'd say the focus would be the '05, '06,'07 books the '04 prior given development to-date and how much is in force largely those excess of loss it's really associated with '04 and prior are not going to be impacted.

With regard to the '05, '06, '07 just to give you a feel for the risk associated with captives from those books about 41% of the '05 is one captive one another, 7% or something is a quarter share, 14% is came to a by 25%, 20% or so is four ten forty. And then '06 it was about 7% to 8% quarter share, 11% [buyback], 25% and 24% or so four ten forties totaling about 43.

In '07about 9% quarter share 10% buyback, 25% and 28% in for ten forty about 47% in total. So, back to the '05 book aside from the 7% tied up in quarter share the excess of loss comes into play at the four per hundred and five per hundred. At this point in time we're forecasting about five per hundred lifetimes on that book. Now some lenders books perform a little better than average some of them worst than average. But the point is aside from quarter shares, I guess if the five per hundred turns out to be correct, the [5525s] on average do not get breached and the [41040s] get in tad.

That would be fully funded, if you will. There is about 600 million collateralized in these trust accounts, and some of that is for the old risk and some of that is for the newer risk. The old risk in '04 and prior is not going to get hit, so that leaves more available to cover the '05, '06, '07.

Each year, we stressed each and every captive, and just to give you a feel, we stressed in the new books to the levels of 12 or so per 100, and the '06 books just a tad less than that. But the point of the story we're stressing the '05, '06, '07 probably 8 to 12 per 100.

And basically everything, every captive is funded enough to cover that liabilities associated related with those books, because there is money in the trust accounts from earlier books that are not going to get hit. That makes sense?

Josh Smith - CIA CREST

Yes, it does.

Larry Pierzchalski

So our forecast, like I said on '05, we're [yielding] at 5 per 100 area, '06, '07 although early, 6, 7 per 100. And as I said before we're stressing these newer books within the captive analysis somewhere between 9 to 12 per 100 and we've got enough to cover that. And so the forecast, we've got some room for further deterioration and still being able to meet these.

Mike Lauer

Yeah, I think what's relevant there Josh is that if you look at the '06 and '07 books about 45% of the flow business is covered under excess of four per hundred or five per hundred. And so people can stress on that, and we stressed them quite entirely as Larry mentioned. And as you stress that's half the flow business is covered by a captive, so it comes out of the lender captive rather than MGIC. So, as I mentioned they are important in '06 and '07 long-term, I don't think they are important. But they will be very helpful and the dollar recoveries, I don't know we've estimated that Larry and…

Josh Smith - CIA CREST

Yeah.

Mike Lauer

That will flow back to us.

Larry Pierzchalski

On a paid basis this year by and large the only recoveries will be vis-à-vis disclosures on a paid basis. Now we are getting close to penetrating some of these excess layers on an incurred basis meaning that there is a delinquency here and the delinquency now given are reserve estimates would take - start taking some of these into the captive layers, this excess captive layers. But on a paid basis it will probably take another 10, 11, 12 months for that delinquency that there has now been reserve penetrating the layer to actually turning to a paid. So, we are starting on a paid basis quarter share mostly this year on an incurred basis we're starting to penetrate some, but on a paid basis excess or loss it will be probably by and large next year.

Josh Smith - CIA CREST

Are you able from an accounting perspective to get the benefit once it's incurred or do you have to wait for the pay?

Larry Pierzchalski

On an incurred basis.

Josh Smith - CIA CREST

Okay, great. And then finally a question on the $1.3 billion loss reserves -- total loss you put up this quarter.

Larry Pierzchalski

Yeah.

Josh Smith - CIA CREST

What were the assumptions regarding cure rates there?

Mike Lauer

Well….

Josh Smith - CIA CREST

And how do you matched out on…

Mike Lauer

No, I guess what I'd say is and Larry can talk a little bit more about it. The cure rates deteriorated, okay in the number of channels and that raised the claim rates, okay. And Larry can talk specifically about some of the markets and the flow book is different than the bulk book relative to geography mix and product mix. But clearly, it was a very difficult quarter with respect to both the number of delinquencies, cure rates declining, claim rates raising and severity and average cover, but Larry, you want to talk specifically about some markets?

Larry Pierzchalski

Well, the California and Florida markets obviously, the cure rates have fallen quite a bit. They used to be well above average and now they are below average, and so that's a big impact. I'd say relative to the losses and the delinquency inventory has been more of a matter of falling cure rates than increasing levels of new notices. They are just not curing out the degree they used to, and in particular from those two markets.

The auto belt is not getting any better, but it was an issue that's been present for a few years. So that's still contributing. But I would say one of the encouraging sign, last few months here, the cure rates in most markets have shown by and large stabilization. So we'll wait to see what happens here in the first few months of this year to see if it continues to hold and may be even and starts improving. That would be a good development.

Josh Smith - CIA CREST

Thank you.

Curt Culver

Thanks Geoff.

Operator

Our next question comes from Kevin Shield of Deephaven Capital.

Kevin Shield - Deephaven Capital

Thank you. Wanted to find out what the statutory book value was at quarter end? That's my first question.

Curt Culver

I don't have the statutory.

Mike Lauer

Book value of the holding company is about 32. But I don't have the stat.

Curt Culver

Do you have it now?

Mike Lauer

No. Kevin, I can give you a call back. This is Mike, I will give you a call back for this.

Kevin Shield - Deephaven Capital

Okay. Thank you. My second question was, when you look at the oil patch experience in the 1992 downturn. Can you talk --

Curt Culver

That was the mid-eighties

Kevin Shield - Deephaven Capital

Yeah, but the two separate. Can you talk about the cure ratio experience for the lesser exposed dates and the more greatly exposed dates as they responded to the interest rates, kind of what the timing was and the differential between?

Curt Culver

I am not quite sure why you're asking. The cure rates and if you will, Texas, Wyoming, Colorado, Alaska, Oklahoma versus the rest of the country in the mid-eighties?

Kevin Shield - Deephaven Capital

Yes

Curt Culver

The reality there is that was driven by employment totally. And so I am just speculating, I don't know the answer, but having lived through it, frankly the rest of the country was doing quite nicely. So there weren't any issues and in the rest of the country, it was those six or seven states, most agree it would be Texas and Alaska where we have probably claims of 30 per 100. So in those five or six states. But, the rest of the country was probably running at four per 100.

Mike Lauer

And because it was employment related, it probably took those markets a longer time to recover than I think the scenario that's going to unfold here; because employment is still relatively good.

Curt Culver

Yeah. We look at this scenario has being relatively a quick hitter, but very painful hitter. From the aspect, I think the market is front end loaded with speculation, with fraud and with very weak underwriting. And that plays our much quicker than in employment where -- those claims are driven by employment.

So we think this thing is pretty front-end loaded relative to pay, and it will blow itself out after next year.

Kevin Shield - Deephaven Capital

Thank you.

Operator

Our next question comes from Mike Grasher of Piper Jaffray.

Mike Grasher - Piper Jaffray

Good morning, gentlemen.

Curt Culver

Good morning.

Mike Grasher - Piper Jaffray

Going back to the premium shortfall here, there is no impact on stat today.

Mike Lauer

That's correct.

Mike Grasher - Piper Jaffray

But as future paid losses come through, that I'm assuming then does begin to impact statutory capital?

Mike Lauer

Well, it's a combination of things that is very difficult to explain it, but we're releasing contingency reserves, all right? And we continue to do that on a stat basis. Do you follow?

Mike Grasher - Piper Jaffray

You're right.

Mike Lauer

So we've setup contingency reserves and they get reversed in these periods of time. So on a stat basis, you have got income.

Mike Grasher - Piper Jaffray

Okay. I guess my question is, as you go through '08, and even through the end of '09, how does this factor alone impact the statutory capital?

Mike Lauer

Well, I think it depends on how long the duration is. But as I said, in '07 we're still generating income on a stat basis and probably in '09, because we're releasing contingency reserve. So I think that's the way the stat statements are set up.

You set up $0.50 on a dollar for a 10-year reserve and use it if you need it in extreme conditions, and we're in that right now. So I think if the duration were longer, I guess I'm saying if you get off the 10 or 11, there were some issues that might be something. But it isn't on a short-term basis as '08 and '09.

Mike Grasher - Piper Jaffray

Okay. And then just an additional question here. If you look at vintage curves and historically it has been, the peak delinquencies have been 18 to 36 months. That being said, are we pretty much complete with 2005 vintage? Has there been an acceleration in the curves that you can, I guess give us some more idea about how '06 is coming along, any updated comments around that?

Larry Pierzchalski

The '05 curve, the first few years kind of normal and then it kind of reached its peak. But because of what's happening in the housing market over the last year, instead of starting to decline, it just kind of held or plateaued. And so to this point here, the inventory curve and I want to stress that, the inventory curve of '05 is flat plateau. The new notice curve has started to come down. But because of the cure rate, the inventory level has not come down yet. Do you follow?

Mike Grasher - Piper Jaffray

Yes, absolutely.

Larry Pierzchalski

Okay. And the '06 is at a higher trajectory than the '05, the default inventory has not yet plateaued that should be happening here sometime this year. Once again that is the '06 default inventory trajectory higher than '05 because the '06 book has seen this lower cure rate environment at an earlier stage in it's life than '05, contributing to the reason why that '06 default inventory trajectory is higher than '05.

'07 is again at this point to '06, may be a little worse once again driven by the lower cure rate environment it is in, at earlier stage in it's life. In the older books, they're not increasing, they are just not declining as rapidly as normal.

Mike Grasher - Piper Jaffray

Okay. In terms new notice on the '06 book does that. I guess it's still growing I am assuming, has there been any noticeable difference in the rate of change?

Larry Pierzchalski

Let me come back to that. I got to look that up.

Mike Grasher - Piper Jaffray

Okay. Fair enough.

Operator

Our next question comes from Kabir Caprihan of JPMorgan.

Kabir Caprihan - JPMorgan

Hey, guys. I wanted to get back to a point that I brought up and I am little confused about this. If I remember correctly, your net worth tax on the bank line is like $2.25 billion and you ended the quarter at $2.5 billion in net worth. Given your outlook for '08, you could come very close to that debt. So I am a little confused as to why you don't think its an issue or if it does become an issue, what the potential outcomes could be?

Mike Lauer

Because we had discussions with the lenders, I said it's a small group, they understand where we are and if it was a matter of us renegotiating that, it wouldn't be a major issue.

Kabir Caprihan - JPMorgan

So are you telling that you are trying to go back and renegotiate?

Mike Lauer

No, we are not doing that. But you asked me a theoretical question, and I said if it got below that, and we had to meet with them, we've already had conversations, it wouldn't be an issue.

Kabir Caprihan - JPMorgan

Okay. And on the raise that you're talking about the capital raise I just want to make sure one thing is clear is this-- it is driven by your thought process and what the business prospects are or have you got any indications from the rating agencies as well?

Mike Lauer

No we haven't got any indications from the rating agencies as Curt and I talked earlier it's about our expectations for the future opportunities and we'd like to be prepared for that.

Kabir Caprihan - JPMorgan

And on the last question on S&P putting on you on a review for a downgrade and Fitch going through or reviewing it's criteria on the MIs how important do you think it is for you to work with them to make sure you at least with S&P to make sure that they took (inaudible)?

Mike Lauer

We meet with them regularly and discuss where we are regularly and their cognizant of what we're doing and we had conversations recently as yesterday so we do that on a normal basis.

Kabir Caprihan - JPMorgan

Okay, thanks.

Operator

Our next question comes from Amanda Lynam of Goldman Sachs.

Donna Halverstadt - Goldman Sachs

It’s Donna again. I just had one quick follow-up to the size of dividend question. Would you quantify for us what amount of up core dividends you'd like to upstream in 08 if any?

Mike Lauer

A lower amount because we're not in a stock repurchase mood obviously so somewhere around $50 million, $60 million I think.

Donna Halverstadt - Goldman Sachs

For the whole year

Mike Lauer

Right just to cover the interest and the common stock dividend.

Donna Halverstadt - Goldman Sachs

Great, thank you.

Curt Culver

Denise, we still have time for one more.

Operator

Okay. Our next question comes from Ron Bobman of Capital Returns.

Ron Bobman - Capital Returns

Yeah I am surprised that you would limit the call to an hour I mean you've lost $4 billion on revenues its $300 million bucks or $400 million bucks. I'd think to be respectful to your shareholders that you spend as much time necessary to feel that answer a reasonable questions.

Curt Culver

Go ahead with your question.

Ron Bobman - Capital Returns

So?

Curt Culver

Just go ahead with your question.

Ron Bobman - Capital Returns

Thanks, I can tell you're really interested in answering it. I had a couple of question are you collecting the claims audit of the originators not claims audit but auditors respect to sort of their underwriting procedures and whether it's complied with the standards that you were expecting to and which presumably obligated to do so?

Mike Lauer

In a normal course of business, we always, we do service our evaluations, we review claims submissions I mean we've been doing that for a decade.

Ron Bobman - Capital Returns

So, no increase in that regard it sounds like?

Mike Lauer

We are doing a lot more in loss mitigation and part of that is looking at how the services are working to assisting their process and that's a big part of what we do is also still the Fannie and Freddie, and Fannie and Freddie are at the forefront also of making sure services are doing good job within that area.

So, we are paying increased attention to servicing loans insured by MGIC to the point that we're adding some of our own people in lenders offices to make sure they are indeed serviced properly and efficiently and quickly.

Ron Bobman - Capital Returns

My next question was on the called the discontinued bulk business that was going into Wall Street what is the gross loss number that you are -- that is comprising this sort of net booking on that segment of your business. And what is sort of on an ultimate basis characterized with respect to a claims ratio.

Curt Culver

Let me try to answer it this way. I think Mike Lauer mentioned earlier on his Wall Street business we've got risk in force of about I think $7.6 billion. And between the reserves and the losses going forward, I think that's about 36, 37 so on basically we're writing off a little more than half of the outstanding risk from that channel.

Ron Bobman - Capital Returns

Okay.

Curt Culver

Does that help you?

Ron Bobman - Capital Returns

Yeah. I think so. I was trying to do --

Curt Culver

So rather than I guess answer to your question as a percent of the original, I try to answer it as about 50% or little more than 50% of the remaining that were written off.

Ron Bobman - Capital Returns

Got you. And in fact if some of those businesses already sort of runoff or paid down refinanced out sort of the original -- I don't know an aggregation of all the issued mortgages being added up. The 50% or greatly more than 50% would be a meaningfully lower number or not really if you look at the to all risk issue that related to that line of business?

Mike Lauer

Well, I think one of the thing that Curt said before was if you think about the '06 bulk book. He said that we estimated that on a lifetime I think that's your questions. On a lifetime year-to-date, on a lifetime basis we would estimate that that book will go on about 150 to 175 loss ratio. I'd say all of the pre '05 books were low expense ratio books, loss ratios in the 50s, 60s and maybe 70. The '05 book might be breakeven to 125. So, to answer your question on the bulk business that the '06 book, which is the largest book. We estimate a lifetime loss ratio of about 150 to 175.

Ron Bobman - Capital Returns

Okay. What's your willingness or at least sort of thought about providing us more fundamental data with respect to different vintages, all showing us sort of delinquency by vintage and how its changing overtime foreclosure rates, cure rates by vintage overtime and how those curves are developing and changing? We are at a sort of a huge information void, and I know there is a lot of moving parts and sort of --

Curt Culver

Had it some things to the website disclosure. Did you look at that this morning?

Ron Bobman - Capital Returns

Not yet.

Curt Culver

The last page?

Mike Lauer

That has, I think a lot of what you are asking for, Ron.

Ron Bobman - Capital Returns

Okay.

Larry Pierzchalski

It doesn't have a curve per se, but it has vintage analysis with delinquencies and some characteristics as well.

Ron Bobman - Capital Returns

Okay. And my last question, you mentioned a lender initiated two of them, 86 in a captive program and a third one considering it. What's your thoughts about you initiating? Can you find cheaper reinsurance so as to capture more of the economics? And you initiating canceling some of the captive deals?

Curt Culver

Again, you may not have a long-term history of our company or our industry. We fought this practice basically in the early 2000s, because we didn't feel the economics. We liked ensuring all the risks, but our customers and our competitors more importantly, actively promoted these programs to our detriment and we lost a lot of business because of our positioning. Thankfully much of that business has come back to us, but it is a practice that for many of our customers of something that works out quite nicely for them.

So it's not as easy as saying no, we'd lose a lot of business because of that and so we think what's going on in the industry of people looking at a couple of -- have already done so and others looking at possibly cancelling those treaties going forward, that's very positive. As I said we would love to have them go away. We like the business. We don't need that reinsurance.

Ron Bobman - Capital Returns

Thank you

Mike Lauer

Thank you. It looks like there just might be one more.

Curt Culver

Yeah there is another one in the loop. So we can take another question.

Operator

Our next question comes from James Gillian of Equity Group Investments.

James Gillian - Equity Group Investments

Hi guys.

Curt Culver

Hi

Ron Bobman - Capital Returns

I was wondering if you could give a little bit of detail on the breakdown of the Wall Street risk enforce that you mentioned as $7.6 billion. Could you breakdown between sort of the prime, subprime.

Mike Lauer

I don't know if we set that out. I don't know whether we have that broken out. Within that supplement, that is now out there on the web site. It shows you the bulk profile, and I guess I'd tell you that 75% of the bulk in force is associated with this Wall Street deals that we're discontinuing. So I think it's largely reflected I don't have specifics for that at hand, but to give you a quick general idea, I'd refer you to this website. But by and large, it would be in line with the overall, because it is 75%.

Curt Culver

If we can, we will add another page later today just to break that up, because there a number of questions on this and break it out by year and we'll add another page to that website data today.

Ron Bobman - Capital Returns

Okay. Yeah, that would be great. And then I think you might have addressed this, I may have missed it before, with respect to the Wallstreet, you've got $7.6 billion risk enforced today. How much Wall Street risk has already lapsed, let's say --

Curt Culver

Quite a bit. (Inaudible). The books, let me just say that remember we were writing almost $20 billion a year in 2001, 2002 and 2003. 2003 in prior book is only a $1.5 billion of that $7.6 billion risk. So all of those books have almost run off.

Mike Lauer

And now we are virtually on all those executions.

Curt Culver

The '04 book has only got 800 million of risk. And '05 about $2 billion, '06 about $2.6 billion, and '07 830 million. Yeah. So the bulk of it is '06 and '05 obviously.

Mike Lauer

Yeah. Through the years in the bulk channel, we have insured about $150 billion, 37 or something is remaining. So you can see from that, we wrote 150 and 30 something is remaining. So there is quite a bit that's runoff. Most of that was Wall Street related.

Larry Pierzchalski

Yeah, a vast majority of the early business was Wall Street. So we had billions that we dealt with.

Ron Bobman - Capital Returns

Okay. And then I think you guys addressed this before, but in your disclosure here, you talked about sort of the PV of the total Wall Street loss to be $3.5 billion. That part of your -- the reserve part you are taking in the fourth quarter and then you've got some offsets to do the premiums. And I think you mentioned, my question is if you were to PV that, will that be materially different from 3.5 or given the sort of life.

Mike Lauer

No, 3.7 was the growth, obviously.

Unidentified Analyst

3.7 okay great.

Mike Lauer

That's not a big number.

Unidentified Analyst

Okay.

Mike Lauer

We use 4 or 7 discount rate.

Unidentified Analyst

All right, thanks guys.

Curt Culver

Thank you. Operator we have time till 10:15, so if there is any other question in the loop?

Operator

Our next question comes from Maya (inaudible) of Principal Global.L037-0:23

Unidentified Analyst

Good morning.

Mike Lauer

Good morning.

Unidentified Analyst

About a few weeks ago that (inaudible) was sitting back and writing the business in the ET market. But I was just wondering if you think such great opportunities what the reason for that might be is that because of the diversification or those markets will deteriorate further or is that, that you don't have the capital right now to support that new business growth?

Mike Lauer

No, I mean the underwriting guideline changes. You may have missed the earlier comments. We've made underwriting changes that we announced that were effective November 1. We made changes effective January 14th and then last week we had an 8-K of further changes and also pricing increases which take effect in March. And the brunt of that was really we are and the November and January changes that was reflective of loans that we sell multiple high risk factors if you will low FICOs, high debt to income ratios, high LTVs.

We changed pricing virtually in all of those type loans and limited what we had insured within that space. The most recent one, the 8-K that you saw last week was more where we look at the decline in real estate values in California, Florida, Arizona, Nevada, Detroit and we said what we need more equity in those markets and we need higher FICO scores, a better credit from those borrowers within those markets to make sure that the 2008 book of business that we're booking is an asset not a liability.

So, we think there is still tremendous opportunity within the business we are going to write and as I said the business we've lose from doing that is business that is better lost than insured by our company.

Mike Lauer

And then I'd add on to that those segments that we are carving out with this new round of guideline changes in these restricted markets. So those are segments, given the price declines in our pricing we are losing money on it and aside from that I'd say if you kind of just take the big picture view, we are still doing business in those even restricted declining markets, but is [full doc/A] with 5 to 10 down in decent credit. So, it's basically back to solid full doc/A kind of business in those market given the market conditions.

Unidentified Analyst

Okay. Thank you.

Curt Culver

And I could add to that our competitors have matched virtually all the November and January changes and one of our major competitors, virtually matched our 8-K filing of last week on the underwriting changes. So, its thing is the whole industry recognizes need to be done. There are cases, where people need to be renters rather than buyers through this market and these changes will encourage that.

Operator

Our next question comes from [Robert Nap] with [Ironsides].

Robert Nap - Ironsides

Hi, gentlemen, thanks. Slight more thematic questions, you sort of addressed my question with the last caller. But you talked about wanting to raise capital and then you've also talked about being happy with your risk-to-capital ratios and your market cap is now below $1 billion. So, it's not really clear to me how a convertible bond is really much of an option unless you're contemplating the dramatic solution to your equity.

So, there is some kind of a disconnect in the conversation because you're sounding very confident, on the other hand you're considering financial options, which are emergency measures really?

Mike Lauer

Well, I mean yet to the understand the -- what we're talking about is the opportunity to write more business and in the event that there is some significant growth elements, we think capital will be needed. So, there is an opportunity for that and obviously we wouldn't be doing it, if we didn’t think it was a good strategy.

Curt Culver

That's how we're looking at a variety of measures.

Robert Nap - Ironsides

Okay. Okay, but you realized the tension between the desire and the …

Mike Lauer

So, obviously but if there wasn't a good decision for the shareholders we wouldn't even think about it. But if the long-term opportunities here clearly I'll weigh that.

Curt Culver

Trust me we are all large shareholders sitting at this table.

Robert Nap - Ironsides

Right. And in term of the share price is acting, as though the market has serious concerns whether you're going to be able to continue to write business periods? That's the only explanation for it. We still have nearly $5 billion in cash on your balance sheet whether or not you have to cap reserves and the confidence your balance sheet and you look incredibly credit worthy and yet the market turns around and that's got the market cap under $1 so you must be frustrated by this.

Mike Lauer

Yeah well that's an understatement. Thank you very much. But the market moves in inefficient ways in the short run and we're going through one of those, I think.

Robert Nap - Ironsides

Okay, all right. Thanks.

Operator

Our next question comes from [Phil Marriott] of ASB Advisory.

Phil Marriott - ASB Advisory

Thanks good morning. I'm just curious you commented that when somebody asked about oil patch. You noted that unemployment was the big driver in that situation. I'm just curious about your thoughts on what's baked into your claims numbers you paid for '08 in terms of unemployment, and what sensitivity to unemployment might be on paid claims? Thanks.

Curt Culver

Well, our '08, $1.8 billion to $2 billion forecast for paids, one is a lot of those delinquencies that will become paids are in inventory, so we've got a good handle on that. In conjunction with that, we're looking at actual trends with regard to cure rate notice activity by book and by geography. And in conjunction with that, if you want to talk economics, we are assuming home price appreciation at the national level, declining 5% to 6%. Although, within that number, we've got some markets declining more or less than that, overlaid that against our portfolio. So you put that all together and -- but I guess to answer your employment question within that, we're seeing a slower growth, but not a material unemployment change.

Phil Marriott - ASB Advisory

And how would we think about sensitivity to unemployment change? To paid claims, have you though about that or --

Curt Culver

Yeah, that's our business. It's hard to quantify. I have seen where some of our competitors, or at least one of our competitors try to capture a 1% change. I wish it was that easy. The reality is that our is word is that flows through, I mean does it impact teachers and policemen and -- or does that impact Wall Street; because it has a totally different impact on our company. We are a first time homebuyer market and our loans are 90%, over $350,000 or less. And so the unemployment is just not a simple answer.

Phil Marriott - ASB Advisory

Yeah.

Curt Culver

Suffice it to say, if it goes up it will negatively impact us somewhat, and if improves, it will probably help us somewhat. We think we are in a continued slow growth market where it will move up marginally and that's the numbers that the impact that you see in our claim forecast that we are utilizing.

Phil Marriott - ASB Advisory

Okay. I'll just work with the assumption that you would prefer it to be Wall Street for employment.

Curt Culver

Yeah.

Phil Marriott - ASB Advisory

Thanks guys.

Curt Culver

Yeah, we do have some other discussions that we need to take and so operator I don't think we have time for any more questions.

Again this has been a very difficult quarter, been a very difficult year and it's hard for me to say look at the brightness that we have going forward. But we really do have tremendous opportunities relative to the fundamentals of the business as I outlined in the front end of my call, and as one of the more recent questions was, are you frustrated? Yeah we are frustrated to the reaction of what's happened. But it is what it is and our company is committed to taking advantage of every opportunity that we see in the marketplace and there are many. Thank you all for your patience.

Operator

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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Source: MGIC Investment Corporation Q4 2007 Earnings Call Transcript
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