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Executives

Mike Zimmerman - IR

Curt Culver - Chairman and CEO

Larry Pierzchalski - EVP of Risk Management

Analysts

Dave Katz - JPMorgan

Donna Halverstadt - Goldman Sachs

David Hoxton - Buckingham Research

Howard Shapiro - Fox-Pitt

Eric Wasserstrom - UBS

John Ferro - Deutsche Bank

James Gilligan - Equity Group

David Steadman - Winetrub Capital

Otis Nath - KBW

Dan Johnson - Citadel

Mike Grasher - Piper Jaffray

Jim Delisle - Cambridge Place Investments

Al Copersino - Madoff Investments

Bruce Harting - Lehman Brothers

Amanda Lyman - Goldman Sachs

Jeffery Dunn - Dowing & Partners

MGIC Investment Corp. (MTG) Q2 2008 Earnings Call July 17, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions). As a reminder this conference call is been recorded. I would now like to introduce to your host for today's conference, Mr. Mike Zimmerman. Mr. Zimmerman, you may begin.

Mike Zimmerman

Thank you. 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 second quarter of 2008 results are Chairman and CEO, Curt Culver; Executive Vice-President and CFO, Mike Lauer; and Executive Vice-President of Risk Management, Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning which may be accessed on MGIC's website which is located at http://mtg.mgic.com under Investor Information, includes additional information about the Company's quarterly results that we will refer to during the call, and includes certain non-GAAP financial measures.

As we have indicated in this morning's press release, we have posted on our website, supplemental information containing characteristics of our primary risk in force, loans and new insurance written as well of their information, we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the 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 investor 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 now I would like to introduce Curt.

Curt Culver

Thanks, Mike and good morning. For the quarter, we reported a net loss of $97.9 million with a diluted loss per share of $0.79. During the quarter we insured $14 billion of new business down 27% from last quarter, $13.4 billion of the business was flow with $600 million of bulk and like last quarter the bulk business was a large transaction of GSE eligible business that was insured on the back end basis by a large lender. For the first half of the year, flow business was up 14% versus last year while bulk is down 60% from last year. Persistency improved during the quarter to 79.7% with flow at 80.7% and bulk at 75.9% versus 74% and 72.5% respectively last quarter. The quarterly persistency run-rate for the combined portfolio was 83.8% which was up from 82% last quarter and 75% a year ago of that flow was 84% and bulk was 81.8%. As a result of the strength of the persistency growth in our flow business insurance in force grew to $226.4 billion which is up 22% from a year ago. Our flow insurance in force is up 30% from last to our bulk insurance in forces down 10%.

The average premium yield on insurance portfolio fell slightly to 62.6 basis points as compared to 63.8 basis points last quarter, the decline reflects the continued movement of our portfolio to launch with lower LTV's, improved FICOs and full documentation. The details of this business mix improvement are contained within the supplement to the earnings release. Losses incurred in the quarter were $688 million, down slightly from last quarter and up from $235 million a year ago; claims paid in the quarter was $385 million up slightly from $371 million last quarter and through the first half of the year, totaled $756 million.

While we will stick to our year end claims paid guidance of $1.8 billion to $2 billion, it now looks like we will be at the lower end of the range. The reality is that the change has been slowed due to the various state and lender foreclosure moratoriums, servicing delays, fraud investigations, mitigation opportunities and a lack of capacity of our court system.

The delinquency inventory increased in the quarter by 14,641 cases to 128,231 the quarterly increase is somewhat overstated however as 4400 new cases or 30% in the quarter were due to a reporting change by one large servicer who changed their reporting methodology and were already reflected in our reserves.

During the quarter we made further changes to improve our operating flexibility and underwriting profitability, including amending the revolving credit facility, making additional underwriting changes, increasing premiums on all our products and entering a reinsurance contract with the HCC which provides us with loss protection on new books of business as well as a $150 million to $200 million annually of Credit Agency stress capital. Our discussions with the GSEs relative to our remediation plans have been positive with Freddie Mac announcing their approval of our plan while Fannie has not yet completed their review. Competitively, we continue to be in a strong market share position with a share of $23.6% in May, and as an industry while we are losing share to FHA, I would add that I believe a large majority of the business we are losing reflects significant changes we have made in our underwriting guidelines to return to profitability.

And finally, with the influx of delinquencies in claims we continue to be very active in our loss mitigation efforts. Our efforts from loan workouts, including loan modifications and presales resulted in mitigation of $69 million, which is up 39% from last quarter. Our mitigation from recessions and denials for misrepresentation in eligibility and policy exclusions was $24.4 million compared to $17.8 million in the first quarter.

So in closing, there is no question that it's been a very difficult quarter for our company and our shareholders. However, I do believe our company is well positioned once we see stabilization of the real estate markets.

With that operator, let's take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Dave Katz of J.P. Morgan.

Dave Katz - JPMorgan

Hi. We were curious what trends you expect for losses incurred going forward, given that as a percentage of delinquent loans, it looks like it is ticked down to about 2.15% from around 2.45% in 1Q '08 and around 5% in 4Q '08?

Larry Pierzchalski

I think as we talked over the last several quarters, we've indicated that the incurred number is going to be directly related to what happens in delinquencies. Historically, we would see an increase in delinquencies in the third and fourth quarter. So, I think the trend would be if that continues, we would anticipate seeing higher encourage in the third and fourth quarter, relative to changes in delinquencies and of course rate severity.

We haven't seen much change in claimed rates this quarter except for a couple of markets, maybe California and Florida, and even not withstanding the fact that overall severity is up, I think you can see that California and Florida would drive that. For example, in the month, I mean in the quarter we paid $92 million in claims in California versus $8.5 million a year ago. Florida, we paid $36 million versus $5 million a year ago. So, California, Florida, Arizona $12.5 million versus $1 million a year ago, those states are driving some of the average changes, but we haven't seen a lot of change in some of the other major markets especially in the Midwest. However, I think more importantly, incorrigible will be greater than the paids, and a lot of it will depend upon the level of delinquencies in the third and fourth quarter.

Dave Katz - JPMorgan

Okay. Specifically with regard to those delinquencies, do you have any sort of view on when you expect to see the delinquency rates peak?

Larry Pierzchalski

We would think, historically, what we've been saying is we thought they would peak this year, but now whether or not that happens a quarter later or not, but we think technically they will peak this year, it may be a quarter later, but relative to the size of the books and some of the books running down, we would anticipate the delinquencies to peak possibly this year or maybe into the first quarter next year.

Dave Katz - JPMorgan

So, no change from where your view was a quarter ago on that?

Larry Pierzchalski

That is correct.

Dave Katz - JPMorgan

Okay. Then, with regard to severity, do you have an outlook on that going forward?

Larry Pierzchalski

As I mentioned, a lot of it is being driven right now by some of those larger markets that have deteriorated so much this past year. If that starts to flatten out, we would not anticipate much more change, but I think we need to see another quarter development to make a better call on that.

Dave Katz - JPMorgan

Okay. Then, you had mentioned some clogging of the court system. Do you have any soft of view as to when that might work its way through?

Curt Culver

That is hard to say. We went through this in Ohio last year. It is just a matter of adding staff and whether they do that, probably the more relevant. That is probably the least relevant of all those points. The moratoriums, I think the servicing delays and as we work on mitigation opportunities, those were the most relevant.

Dave Katz - JPMorgan

Okay. Then finally, would you be able to clarify what cash flows at the whole co level?

Larry Pierzchalski

Cash of the holding company at the end of the quarter was $482 million.

Dave Katz - JPMorgan

Okay. Thank you very much.

Curt Culver

Thank you.

Operator

Thank you. Our next question comes from the Donna Halverstadt of Goldman Sachs.

Donna Halverstadt - Goldman Sachs

Good morning gentlemen. I have a couple of questions for you. You had mentioned recessions and denials, and I was wondering if you could give us some order of magnitude as to what you think the amount of recessions might ultimately aggregate up to? Secondly, if you could also tell us to the extent that becomes a very large number, how you would think about the trade-off between the financial benefit of such versus potentially alienating long-term customers?

Curt Culver

I cannot give you where it is going. MGIC, what we were doing is not online with what we've always done. We've always enforced the policy, and so to give you a perspective on that, last year, if the look at the second quarter and rescissions and denials, we had a 123 for $7.1 million, this year we had 294 for $23 million. So it is whatever that percentage would work out to be. However, it is not as we are looking for these in more detail and we always have. The reality is we had a number of loans that were done with reduced documentation that have just opened themselves up for more investigation. So when that ultimately releases, I do not know but we are going to enforce our policy as we've always done and work with vendors to provide a fair solution.

Donna Halverstadt - Goldman Sachs

Okay. Then when you think about the potential of profitability of business underwritten in '08, '09, how do you think that will compare with the profitability of business written earlier in this decade. Do you think it will be similar a little bit less; how do you think about that?

Mike Zimmerman

Well I think if you look at our business in '08, the first quarter will be the least profitable the business will do in '08, because you still had an overhang of the '07 guidelines that we committed on. I mean, as the company and as an industry, I think you will see this in every company and our business. With the last half of '08, probably running at about 4.5 per 100 or so we think as far as looking at claim rates in the first quarter being around 6 per 100. So that will be a profitable book of business. The '09 I think will be an outstanding vintage for the industry and that we will have all the changes implemented. We will have at least 20% price increases on all of that business some higher than that and we will have a borrower mind set in which the values were still falling they realized that by their most cases I think they are going to stable to increasing so I think the '08 will be marginally profitable but the '09 will be extremely profitable and can even more so.

Curt Culver

The other aspect of the profitability of the '09 book versus the early 2000's would be either the revenue. The early 2008 books had low claim incidents but the persistency had ran off quite quickly and what is happening now is with the guideline changes the '09 incidences of come down quite appreciably from '06-'07 I do not know if it gets to a little low levels 1 or 2 but the revenue will be substantially more. So I think ultimately the absolute dollars of profitability on the '09 would be better than some of the early books 2000 because of the revenues side of the equation and the other thing down on that is that we wont have captives at the 40% layer or be in a maximum of 25% on which was half of our flow business or 27% was actually the 40s but so you got that also adding to the bottom-line of the all the companies in the industry.

Donna Halverstadt - Goldman Sachs

I also had a question on the average claim payments which if you look at that sequentially it increased only about $2100 versus if you look at Q1 over Q4 was about $7400. Was there anything interesting to know in terms of that rate of increase declining and where do you expect the average claim payment, do you expect that to stabilize soon? Do you expect it to keep growing? How should we think about that?

Mike Zimmerman

Well I think I mentioned before the waiting changed a little bit because of California, Florida, Arizona etcetera. So California was a significant contributor to the average this quarter again. Obviously, there is a higher loan size as California more coverage, I think we continue to see that the delinquency developments, the newer delinquencies obviously acquiring higher loan amounts despite some of those markets that are changing rapidly.

So I would anticipate seeing a continued increase in that for at least another quarter or two until it equals out if you were quarter-to-quarter.

Donna Halverstadt - Goldman Sachs

Okay, and one of the things on the paid claims guidance, are you willing to break out the contribution to the aggregate number by vintage bucket?

Curt Culver

Is that in there?

Mike Zimmerman

Donna you are asking for what sense of --

Donna Halverstadt - Goldman Sachs

Like the $2 billion, what portion the $2 billion comes from '05 product versus '06 product, versus if any '07 product?

Curt Culver

I think the answer is no.

Donna Halverstadt - Goldman Sachs

No, okay.

Mike Zimmerman

Yes, we take it under consideration.

Curt Culver

Yes.

Donna Halverstadt - Goldman Sachs

However, when do you expect to start giving pay claims guidance for '09?

Mike Zimmerman

Late in the year. I think will, as I mentioned earlier, key development obviously our loss forecasting is what happens at third and fourth quarter when we get a good fix on notices at year-end we will have a better idea on paid loss forecast. Clearly paids are higher next year than this year. We said that all year. The question is to, to what level?

Donna Halverstadt - Goldman Sachs

Okay. I have just one last question. I think in the past you said that the assumption you have used in your last forecasting is unemployment between 5, 5.5; and given that we are already out 5.5 and a lot of people expect we are going a lot higher, have you incorporated or you are thinking about incorporating higher unemployment assumptions in your loss forecast?

Larry Pierzchalski

I believe the unemployment in the past was close to 6%, 5.5% to 6%, not the 5%, 5.5%.

Donna Halverstadt

Okay.

Mike Zimmerman

However, aside from exactly the number, we see a little bit of deterioration in employment but not a significant employment event here.

Donna Halverstadt

Okay, great.

Curt Culver

Okay. Thanks, Donna.

Donna Halverstadt

Thanks.

Operator

Thank you. Our next question comes from [David Hoxton] of Buckingham Research.

David Hoxton - Buckingham Research

Hi.

Curt Culver

Hi David.

David Hoxton - Buckingham Research

Hi. I was just wondering if you could provide some more color on the pertains in delinquencies? You said that 30%, I think, of the increase in number was attributable to a service of reclassifying or retaining reporting. Then, if you look at the supplemental disclosure, the sequential increase in the percentage of delinquent by vintage, pretty sharp increases including in '08, and yet the rate of change does not seem so bad and you have suggested that there are some slowing in other numbers? I wonder if you can try and make sense.

Mike Zimmerman

David, this is Mike Zimmerman. Putting aside the 30% increase was number one. Service or if you think about from the geography perspective, California and Florida accounted for 38% of the increase, 26% Florida, 12% California, and Michigan, Illinois and Ohio accounted for another 10%. Half the increase is coming from those five states which are in the forefront of the housing issues.

David Hoxton - Buckingham Research

Okay. On claims paid or to the breakdown there?

Larry Pierzchalski

I do not have the same percentages. However, again, as I mentioned, David, the increase, are you talking increase quarter-to-quarter or year-to-year?

David Hoxton - Buckingham Research

Well, the same thing you were just addressing before, the sequential increase its load and did you had indicated there is some mix change and the idea even with the bigger increase in California, the average has not gone up as fast.

Mike Zimmerman

Well, California quarter-to-quarter sequentially was up $10 million, and 92 over 82. Some of the other changes that were significant quarter-to-quarter would not have been that much. I mean there for the most part, just on a gradual basis. However, California would be the biggest change. Florida is up $6 million, 36 over 30 and this will be disclosed in our Q.

David Hoxton - Buckingham Research

Okay.

Mike Zimmerman

However, those are the big changes again for the sequential.

David Hoxton - Buckingham Research

Or what everybody wonders about is, at what point can we actually see some deceleration in the rate of deteriorations. I mean clearly you were talking about some slowing, but I am wondering is it just a slowing and it is just shifting more into…

Curt Culver

Into next year.

David Hoxton - Buckingham Research

Into next year or is it actually slowing?

Mike Zimmerman

Well, I think the key will be, David, what happens in noticed development in the third and fourth quarter. That will be an early indicator to you. I mean the pager is going to work their way through the system and whether or not, we've slowed the acceleration of delinquencies will be an event that we will see in the third and fourth quarter.

David Hoxton - Buckingham Research

Yes, another variant to the same question is when you look at the increases and delinquencies for the various categories of time, it seems like subprime is more stable now than prime. Although, you look at the number of delinquent loans, is that just again more California or something?

Larry Pierzchalski

That is California

David Hoxton - Buckingham Research

Okay.

Larry Pierzchalski

Yes, California delinquencies, again as Mike said earlier, California delinquencies went up for the change 1200 or 1700 for the quarter. Florida was up 3800.

David Hoxton - Buckingham Research

Okay. Just in terms of average, did you say what the average claim is done in California in the last couple of quarters?

Larry Pierzchalski

We are looking at it right now Dave.

David Hoxton - Buckingham Research

Okay.

Mike Zimmerman

Sector (inaudible) was up marginally on the bulk from 118 to 123 average claim band in the flow, it went from 88 to about 82. So I mean, put them together, it is flattish if you will there.

David Hoxton - Buckingham Research

That is sequentially from the...

Mike Zimmerman

Yes, sequentially Q1 '08 to Q2 '08.

David Hoxton - Buckingham Research

Okay. Then other markets, are they are basically even more flat as always? I mean if you go to states where you have not seen that bubbles, and not in the Midwest. So take this…

Larry Pierzchalski

David, I think state-to-state that in a quarter-over-quarter at a state level at this point we are flat. Keep in mind, we pay off certain percentages of UPB. So if prices fall, we are limited basically on how much our claim payment will be, because if we insure a bunch of $200,000 homes, and we got 25 covered up to $50,000 claim, and then once we hit that $50,000 we may get more California's at $50,000 and Michigan's at $30,000 and that is causing the average to creep up each quarter and that will continue to happen in a couple of more quarters although at a slowing rate. However, within the state as this point we are pretty much paying our percent option of coverage. The mitigation opportunities, pre sales in that are quite small. So state-to-state at this point is pretty flat. The average creeps up because we are still getting a little more California and Florida than in prior quarters but that should be slowing as well.

David Hoxton - Buckingham Research

Then just finally just looking again at the change in flow delinquencies by vintage the number of units was up from the 26 basis points in the March quarter they were 111 on the 2008 book. Can you talk about that, is that sign what you were about before Larry that the 2008 book is marginally profitable because you are already seeing high delinquencies or?

Larry Pierzchalski

Well the `08 book if you look at it is delinquency past versus the `07 book it is much lower but it is still upward because a new book starts off at zero delinquency activity and then the natural aging cycle is delinquencies will ramp up peak three years out or whatever and start coming down and beyond that point so that is the upward leg of the `08 even though it is better it is on that upward leg. Some of the older book's in `06 we believe is at that top or close to it and that gets back to Mike's point if we can get some confirmation that in fact some of those older books are at their peaks then we can get a better handle on exactly when the default inventory here peaks whether at the end of this year or early into next year.

David Hoxton - Buckingham Research

Can you say that if you think that the `05, the `06 and `07 books look like you are going to peak a lot earlier than normal or are they just going to have higher peaks?

Larry Pierzchalski

Definitely have higher peaks but we need another quarter or two to determine exactly if `06 has peaked and how far behind `07 is.

David Hoxton - Buckingham Research

Okay thanks.

Curt Culver

Thanks Dave.

Operator

Thank you our next question comes from Howard Shapiro of Fox-Pitt.

Howard Shapiro - Fox-Pitt

Hi just a couple of questions. Can you talk about what balances you have currently in the captives and what you would expect that to grow to by year end and then can you just talk about some of the pricing increases you put through?

Curt Culver

The captive balance rate is 700.

Mike Zimmerman

The caps have cut down $731 million at the end of the quarter.

Larry Pierzchalski

Mike as it included that captive reinsurance attachment I think within the supplement goes through our, what is attaching and various numbers that flows through that. What was the rest of that Howard.

Mike Zimmerman

The question, the price in increases I mean our remains through products are 90 LTVs and 95 LTVs and essentially and the vast majority of our products were up about a 20% premium rate increase on a go forward basis. I think it's effective early August in most states.

Curt Culver

Yes, August 4.

Howard Shapiro - Fox-Pitt

That would include even your standard flow product.

Mike Zimmerman

That is what I am talking about. The organic flow, at 90 LTV we were as 52 basis points per annum, now its 62, so 10 on 50 to 20% and we went from 78 to 94 on a 95 so that is 20% there.

Howard Shapiro - Fox-Pitt

Okay and just in terms of your discussions with Freddie and Fannie on the remediation plan I know, Fannie has not responded but did Freddie Mac put any limitations in terms of your ability to underwrite business or anything like that or could you just talk about it.

Larry Pierzchalski

That came out with their release and we are continuing on as we always have. There are no conditions to Freddie Mac's approval of MGIC. We continue to meet with Fannie Mae and government, they have been very positive at meetings.

Howard Shapiro - Fox-Pitt

Okay thank you.

Curt Culver

You bet.

Operator

Thank you. Our next question comes from Eric Wasserstrom of UBS

Eric Wasserstrom - UBS

Thanks, I just want to follow-up on Howard's last question on the GSE plan. The first is, can you help me understand what it is actually meant to accomplish, because it seems that is it strictly around capital levels, is it meant to address profitability or what is the focus of the plan?

Larry Pierzchalski

Relative to that, I think you are best off talking to them. All-and-all I mean, I would summarize this as our ability to pay the claims relative to doing business with each one of them ultimately. That is the important part. That is what we do for them. So, everything that leads up to that is, what their interest did in and for more details it is really their call rather than us.

Eric Wasserstrom - UBS

Okay. I mean, it seems basically that there is three issues, right there. There is the profitability of the go-forward books. There is the existing statutory capital and there is the ability to generate capital. I mean is there more to it than that?

Larry Pierzchalski

Again I come back to, what they are looking for as ability to pay their claims on an ongoing basis. That is what the insurance is for and that is what they really ultimately looking for and the details of that are really their call.

Eric Wasserstrom - UBS

Okay. Can we just, maybe circle back to one of the topic which is there, I am still confused about why your classifying the profitability of the '08 book as marginal is it on. Is that more under?

Larry Pierzchalski

I would say, in the first quarter, it is an overhang of the '07 book of business that that will not probably be a like of breakeven quarter and every quarter is going to improve from that. Sorry, I do not know were that ultimately and maybe it is like a conservative nature and what we've been through. I know it is good, I mean I am looking at the business mix here in June of this year relative to June of last year, and this is on a commitment volume. A full doc A business in this year in June was 99.3% of what we insured a year ago was 73.9%. Full doc A minus is 0.6% last year, in this month it was 16.9%. Reduced stock was 0.1%, last year was 9.2%. 100s is 0.3%, last year was 38.9%. So, the mix is very good. We are going to have a price increase on top of that kicking in August. We got the captive limitations. So I know the second half is going to be very good for us, I just do not know how to classify it, it will be profitable.

Eric Wasserstrom - UBS

Thanks very much.

Operator

Thank you. Our next question comes from [John Ferro] of Deutsche Bank.

John Ferro - Deutsche Bank

Hey , thanks for taking the questions. First question just following up on the unemployment question earlier, do you have a view on 2009 unemployment when you are looking out towards that year coming up?

Larry Pierzchalski

We are keeping things stable to the 5.5 to 6 or at the end of this year is basically what we are carrying into '09.

John Ferro - Deutsche Bank

Okay. Then, Sherman update. Do you have any update on Sherman? I know you said in the last question on the last call that you expected to get that done by the end of this quarter. Any update on that? By the end of last quarter I should say, end of 2Q.

Curt Culver

We are close. We are in, I would say the final stages of documentation between Sherman and MGIC, and we would expect the transaction to close early in the third quarter.

John Ferro - Deutsche Bank

Okay, that is very helpful. From my understanding that is the fourth remediation item on Freddie's list that you provided them, is that correct?

Larry Pierzchalski

I do not think we classify items in that manner. That was part of what we talked about with both, that was something that we were working to get done.

John Ferro - Deutsche Bank

Okay. Then a couple of just quick house keeping things. Are you still targeting $50 billion of new insurance written this year? I know you had mentioned that on the previous call.

Larry Pierzchalski

Yes, I mean we are looking at that or marginally higher.

John Ferro - Deutsche Bank

Okay. Then on, I would expect your premium yields to be higher going forward. I mean, I know you had given guidance of around 60 bips. I assume that is getting higher just given the pricing increases that you are implementing in August.

Curt Culver

Yes, be cautious with that. Because of the mix change that I talked about relative to. We were at 100s and now we are 95s and things of that sort. I do not even know if we've guidance on the basis points. We've the price increase on all the business going in, but I decided the mix is changing to much more risk products, and lower LTVs. That will have an impact also.

John Ferro - Deutsche Bank

Yes. I see the over 97s dropping pretty significantly on the '08 book, 1Q to 2Q. I assume that that is going to continue going forward. I think it was the drop from, I think 30% to 15%, I mean you…

Curt Culver

As I just mentioned in June, loans over 97% were 0.3% of our business for versus 38% to 39% a year ago. So yes, they have dropped pretty rapidly.

John Ferro - Deutsche Bank

You expect that to continue, I would assume then.

Curt Culver

Well, we do not insure loans of a 100% and loans over 97% anymore. So that will be zero.

John Ferro - Deutsche Bank

Okay. Just one follow-up on the '06 book. So you expect that book, I mean I know we've heard comments that, that book is starting to at least turn the corner on delinquencies, potentially plateauing and you said that it is going to be maybe another quarter out until you really start to see that happening?

Mike Zimmerman

Yes, we are.

Curt Culver

Yes.

John Ferro - Deutsche Bank

Okay. Thank you very much.

Curt Culver

Thank you.

Operator

Thank you. Our next question comes from James Gilligan of Equity Group Investment.

James Gilligan - Equity Group

Hi, good morning.

Curt Culver

Good morning.

James Gilligan - Equity Group

I had a question on the Wall Street bulk, but I thought just as a refresher, can you just remind me the definition of Wall Street bulk?

Mike Zimmerman

Yes. So there are the, basically the private label mortgage-backed securities, sometimes we are doing home equity securitization, first lien business and the private label RMBS.

James Gilligan - Equity Group

Okay. Then, just going through the numbers in the release, and correct me if I am wrong here, risk in force $6.5 billion, you have got the premium deficiency reserve which has come down, and now it is about $788 million, and then the loss reserve of about $1.65 million?

Larry Pierzchalski

Yes.

James Gilligan - Equity Group

So that kind leaves a net, let's say unreserved risk in force of about $4 billion. Is that the right way to think about it?

Larry Pierzchalski

Yes.

James Gilligan - Equity Group

Okay. Then the present value of that as what you mentioned as, I am sorry might be off here, the 3.2?

Curt Culver

No.

Mike Zimmerman

No, the 3.2 is the present value of the Wall Street risk in force as of the end of June, we've a present value of losses and expenses of $3.26 billion. We've got reserves already 1.6 of that in the loss in separate known delinquencies, there was an additional $1.6 billion for expected, but not yet reported delinquencies due.

James Gilligan - Equity Group

Okay.

Mike Zimmerman

Then there is the further offsetting by the present value of the revenue of around 800 or a million to get to the 788.

Unidentified Analyst

Okay. Alright, that helped. Thanks for the clarification.

Operator

Thank you. Our next question comes from David Steadman of Winetrub Capital.

David Steadman - Winetrub Capital

Yes, that was not my question the one that you just answered.

Mike Zimmerman

Okay.

David Steadman - Winetrub Capital

However, the premium deficiency reserves you are saying is an offset to…

Mike Zimmerman

David, we can barely hear you.

David Steadman - Winetrub Capital

The premium deficiency reserve is an offset to the reserves. I was not clear…

Mike Zimmerman

It's in addition to the reserve.

David Steadman - Winetrub Capital

Okay, it is in addition to the reserves. Then can you just clarify the 150 odd million that was..

Mike Zimmerman

Released?

David Steadman - Winetrub Capital

Yes. What is the cause of that being released, can you just start with that?

Larry Pierzchalski

Well, again we go through the same calculation every quarter and estimate the net present value of the future premiums which was about 829. The net present value of the future of losses which was about $3.2 million or $3.3million, and the net difference of that is a negative two four offset again by the already existing reserves and delinquencies of a $1.6 billion gets you to $788 net, versus $947 the previous quarter or reduction of $159. So, it should be running down.

David Steadman - Winetrub Capital

Okay.

Larry Pierzchalski

We estimated earlier in the year that we thought that reserve would reduce by $500 million to $700 million, we are probably on around the $700 million number now, as an estimate. So we would think that in the third and fourth quarter, the number would be slightly less than this quarter, but around $700 million for the year.

David Steadman - Winetrub Capital

This is on a total risk enforced of $6.2 billion. Is that correct?

Larry Pierzchalski

That is correct.

David Steadman - Winetrub Capital

Okay, and…

Larry Pierzchalski

It is on a runoff book of business. You understand that is a runoff book?

David Steadman - Winetrub Capital

Yes.

Larry Pierzchalski

Okay.

David Steadman - Winetrub Capital

What was your market share earlier in the year? You said it was 23% in May.

Larry Pierzchalski

23.6% in May. In the first quarter we were 25.6%. There is a lot of noise that goes on a monthly market share so I could give that as a caveat. So the point was our image, we continue to do well, quiet nicely even with all the pricing increases that we are implementing and have implemented in the underwriting changes that we put in place.

David Steadman - Winetrub Capital

In terms of reinsurance recoverable what happens if you have exposure to an IndyMac situation?

Larry Pierzchalski

Well IndyMac is about 1% of our risk in force. So it is quite small. It has been in service according to Freddie and Fanny requirements and we monitor the servicing as well but on the captive reinsurance we've separate agreements with them that are separate from whatever happens to IndyMac so those dollars are not impacted at all by whatever happens to IndyMac; those are separated in a separate cost fund.

David Steadman - Winetrub Capital

Okay great thank you.

Operator

Thank you. Our next question comes from Otis Nath of KBW.

Otis Nath - KBW

Hi good morning gentlemen. Most questions have been answered. Just one quick one and I do not know if you have already provided it, just a referring to the breakdown of that 4400 pie segment. Do you happen to have that?

Mike Zimmerman

Nath is that up 4400 loans that just increased in delinquencies?

Otis Nath - KBW

Yes, exactly.

Mike Zimmerman

No, that is just from the aggregate from that one service or at the end of the quarter.

Otis Nath - KBW

Right but you do not have it by actual product segment breakdown. Are you just…

Mike Zimmerman

Not the table here, no. I mean it is embedded within that but there are a large national servicer so it is quite pretty representative of the mix of business over the last couple of years.

Otis Nath - KBW

Okay yes, that is it. Thank you.

Mike Zimmerman

Yes.

Operator

Thank you, our next question comes from Dan Johnson of Citadel.

Dan Johnson - Citadel

Great thank you very much. Question pertaining to captives again what data can you point us to help us understand the risks of coming out the back side or the top side of the captive is that can we frame that in terms of what you think the flow business for 2006 or 2007 will look like on a loss rate per 100 and where that would line up versus the top side of the captive programs, that would be helpful or any other way you can help us get a visual of the risks there? Thank you.

Larry Pierzchalski

There are two major forms of captives. 55, 25 captive where we pay the first 5 per 100, the captive is responsible for 5 to 10 per 100 so incidences above 10 would come through. The other one is a 4, 10 so we cover the first four they cover from 4 to 14 the `04 and prior books given where they are in that, we do not believe many or any attaching there might be some small one but by in large '04 and prior not attaching; `05 border line it is really `06, `07 books that the focus is on the captives and so those I think we've indicated in the past that the `06, `07 we believe 7,8,9 per 100 thereabouts subject to what happens through house prices in the economy going forward. So, at that level 7, 8, 9, none of the five 5s, or four 10's would get breached. However, some lenders performed better than average, some performed a little worse. So, those marginally worst lenders you could see a 10, 11, 12 maybe, and thus those would breached the five 5s. Does that answer your question?

Larry Pierzchalski

I think as we looked at it though, just star analysis of it, I think we've made possibly one customer that we might breach, I mean and that is possibly breached, as it looks now, I think on the books of business we think we are comfortable with all other than possibly just going out of one layer marginally with one lender.

Dan Johnson - Citadel

If we are just trying to put parameters around this, if we said, just looking at the '06 and '07 years and just looking at the 5, 5, 25 captives, means for every point that went out the backside, which I do realize and appreciate is a relatively low probability. However, what does mean in terms of net income for every point that goes through the top side of those programs?

Mike Zimmerman

Right now, I mean there is withstanding the supplement we gave you as we brought up the current risk in force, for example, for the '05 book that is covered by both five 5s and four 10s, We do not break them out there as $1.1 billion. So, you can take it as that is rather that is going to be associated with that, but its just one point of loss and $1.1 billion as of today than net out the revenue that would come associated with that as well.

Dan Johnson - Citadel

That was for the '05 year?

Mike Zimmerman

Right. There is $3 billion for the '06 and $6 billion on the '07 as it stands as of the end of June. The current risk in force covered by an excess of loss treaty.

Dan Johnson - Citadel

Good. Got it. Obviously the five 5, 25s are a portion, a subset of that?

Mike Zimmerman

Yes.

Dan Johnson - Citadel

A minority subset of that?

Larry Pierzchalski

I think there are about 11% or 12% of --

Mike Zimmerman

Yes, of the '06, '07.

Larry Pierzchalski

Of the '06 and '07 books with the four 10, 40s at about 26% to 27% and 50% quarters at about 8% of the flow business.

Dan Johnson - Citadel

The remainder has no captive?

Curt Culver

Right.

Larry Pierzchalski

Well, actually, yes.

Curt Culver

Right. About half of it does not have captive, and the half would be the 27, 11 or 12 and that 8. However, still about more 50s would be not be in cash registers.

Dan Johnson - Citadel

Got it. Great. Thank you very much.

Curt Culver

Yes.

Operator

Thank you. Our next question comes from Mike Grasher of Piper Jaffray.

Mike Grasher - Piper Jaffray

Thank you. Good morning gentlemen.

Curt Culver

Good morning.

Mike Grasher - Piper Jaffray

A question on the run rate Mike, for operating expenses, or other expenses I should say. Is this a fair run rate what we saw this quarter? Can you talk about maybe what is happening in there?

Mike Zimmerman

Yes. I would say, probably at about this level for the balance of the year. Obviously, we've reduce some underwriting volumes lower, some other staff reductions, we've increased some staff and mitigation efforts obviously, but this is a reasonable run rate.

Mike Grasher - Piper Jaffray

Okay. Most of my other questions have been address. However, Curt, I did want to come back to you one more time on the Freddie-Fannie commentary. Basically, when Fannie finishes, you are not expecting any change there in their opinion despite the scrutiny that they themselves are under right now?

Curt Culver

I am not expecting any change. Again, the meetings have been very positive. It is just the manner of comparing numbers and we remain actively in discussions with them and looking at forecast and things of that sort, but again the meetings have been very positive, and I do not expect anything relative to our operating performance changes from that.

Mike Grasher - Piper Jaffray

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Jim Delisle of Cambridge Place Investments.

Jim Delisle - Cambridge Place Investments

Hi, I apologize if this question has been asked. I had to jump off for a moment. Earlier today on the J.P. Morgan call, Jamie was talking about prime losses going assumptions at their place, going from 90 basis points to 270 and the effects it might have on their earnings in their balance sheet. Is that outside the stress range you had for your prime mortgages?

Curt Culver

I do not know what that relates to. I mean it is hard to even relate that to us.

Jim Delisle - Cambridge Place Investments

Well, actually if you would maybe just take a listen to the conference call a little bit later. I can touch things with Mike.

Curt Culver

Sure.

Jim Delisle - Cambridge Place Investments

Alright, thank you.

Operator

Thank you. Our next question comes from Al Copersino of Madoff Investments.

Al Copersino - Madoff Investments

Hi, thank you very much. You commented briefly on this in the opening comments, the FHA. Could you give a little bit more color on your views as to, on the one hand how much you are hiding the prices and I expect your underwriting is the cause of some of the business going to FHA versus on the other hand, FHA just taking some business that you also would find attractive right now. Can you just give me a sense for how that is playing out, those two factors?

Curt Culver

Yes, I would, I mean if I had to classify it, I would probably say 90% is related to underwriting changes and 10% is on the margin that we would love to get and yet because of our prices are not able to; so most of the changes that were related to the changes that we've made in our underwriting guidelines. I think there will be an issue longer term for the industry as we look at competing with FHA Although I do expect FHA to raise pricing given the significant loses that they are going to incur this year, I think in excess of $5 billion. So, that story is yet to play out. Right now what is happening is business that our industry cannot insure is finding a home elsewhere whether it'd be FHA or somewhere else. Again its business we cannot insure.

Al Copersino - Madoff Investments

It is helpful. Thank you.

Operator

Thank you. Our next question comes from Bruce Harting of Lehman Brothers.

Bruce Harting - Lehman Brothers

Hey, good morning. What is the status of captives today? I mean how may have pulled away? You made a comment on that already I just do not remember.

Larry Pierzchalski

Is this marginal number that have pulled away Bruce, we haven't commented on it. we will have some capital calls here relative to them adding capital to their treaties going forward and then we make others beside not to do so and pull our captives. We are hearing some discussions of that. So right now it's just a marginal number, although they have been significant players and going forward we will see how it plays out.

Bruce Harting - Lehman Brothers

The competitive outlook in your page, there is another page number. However, in your press release, you know when you talk about your competitors I do not see triad there anymore. So they have completely stopped writing business?

Larry Pierzchalski

Yes.

Bruce Harting - Lehman Brothers

Okay. What is your role in jumbo's are you working with the GSEs on any specific programs or you are seeing much flow there?

Larry Pierzchalski

Well I am sure the jumbo's up to their confirming loan limits at a higher loan limit now but by and large that is 90 LTVs with 700 plus FICOs and we really have not seen much of that yet I will have to monitor to see how much of that buying actually happens.

Bruce Harting - Lehman Brothers

Is that just because they have not really rolled out their protocols and policies yet or?

Larry Pierzchalski

I think that part of it I do not know exactly the effective date but it was not that long ago.

Bruce Harting - Lehman Brothers

So…

Curt Culver

It were not a big plan to jumbo market anywhere Bruce.

Bruce Harting - Lehman Brothers

Okay.

Mike Zimmerman

Right now we are in under 1.5% of our flow of risk in force is pretty much unchanged from last quarter.

Bruce Harting - Lehman Brothers

Okay. Then most economists are still going for 5 million home sales which is not a bad number given all the headlines you think…

Larry Pierzchalski

Yes.

Bruce Harting - Lehman Brothers

…that number would be a lot lower and but in some states like California there is a higher percentage of foreclosure sales, do you treat those when a home was a foreclosure do you treat those any differently or in your underwriting and in terms of how you view the collateral and appraisal. Then on the other hand, for borrowers, sorry the separate question who have been foreclosed on. Do you have to follow the GSE rules I think Fannie just said they will not take loans that somebody has had a foreclosure event within the last five years or do you have your own guidelines for that?

Larry Pierzchalski

We would not be insured but then in past due we would not insure it. So in essence the same foreclosure rules would apply to us. As you acme us too directly and we saw a recent foreclosure where our underwriters would not approve it either.

Mike Zimmerman

On our foreclosed property Bruce, I mean that is just a case of getting a wherever the appraisal is on the new property. I mean it is not the property that generally caused the problem.

Bruce Harting - Lehman Brothers

Okay. I mean I was just in the higher market last week somebody was telling me a story where somebody was willing to pay $1 million for a house and the appraisal came in from the bank at seven 50 and the buyer was all upset with the appraisal and everybody was mad at each other and but the buyer was ready to pay $1 million and because the appraisal was so low the person walked away. I mean that was a true story from a broker. I assume it was a true story. Are you seeing much of that kind of thing, I mean there is huge gap.

Mike Zimmerman

There is been an investment banker that is paying that much. However, relative to the appraisal, everything is back to underwriting one-on-one. So everything as the appraisal is more serious, the underwriting is more serious etcetera. So, that is why the environment is so good to be insuring properties today.

Larry Pierzchalski

The LTV is set off of the lower of the purchase price or the appraisal.

Bruce Harting - Lehman Brothers

Okay. Then just in terms of California, are you, I know you are underweight California, relative to California as a percentage of loan mortgages but are you keeping it that way? Are you like more underweight in terms of your NIW?

Larry Pierzchalski

You know prior to middle of '07, 3%, 4% of our business was California. A lot of that business ended up into capital markets. When the capital markets shut down the middle of last year, some of that business started moving to the conventional Freddie- Fannie and mortgage insurance side of things. So it is crept up to 9% or 10%, but with some of the latest rounds of the guideline changes, California is maxed 90% effective August 4. So, I think that will reduce that 9%, 10% downward.

Curt Culver

Again California is 20% of the mortgage market. So, even with that we were a much smaller part before these guideline changes.

Bruce Harting - Lehman Brothers

Okay, thank you.

Curt Culver

Yes, thanks Bruce.

Operator

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

Howard Shapiro - Fox-Pitt

Yes, Curt, just a question for you. We are another half year into this housing crisis. You have another half year of prospective. As you look out into the remainder of '08 and what you at least tentatively or preliminarily expect in 2009, are you still comfortable with your capital position or are you thinking you may need to raise more capital?

Curt Culver

We are comfortable with our capital position.

Howard Shapiro - Fox-Pitt

Okay. Just one other question. You talked about what you expect the claims rates to be on the '06-'07 flow business. Can you tell us right now what you would expect on the '06-'07 Wall Street bulk business? What do you think those claim rates will be?

Curt Culver

Well, on that point, if you go back to 12/31/07 when we set up the premium deficiency reserve, in essence we rolled off half of the risk in force. So, think of it that way. I do not know as a percent of original, but the premium deficiency then and on a go forward basis were still in that 50% of the in force being written off due to loss.

Howard Shapiro - Fox-Pitt

Okay. Definitely not higher, but you are not sure if it is lower yet?

Curt Culver

I think that is fair to say, yes.

Howard Shapiro - Fox-Pitt

Okay, thank you.

Operator

Thank you, our next question comes from [John Ferro] of Deutsche Bank.

John Ferro - Deutsche Bank

Hi, I just wanted a follow-up on the bank amendment quickly. You said, I mean I know you gave the balance at the holding company, and you had said with the bank amendment that you were going to pay down a $100 million of that revolver up at the holding company. Has that changed?

Larry Pierzchalski

We did that. Yes, we paid down $100 million a week ago.

John Ferro - Deutsche Bank

Okay. Then, have there been any other talks of paying down more of that revolver with the banks?

Larry Pierzchalski

No. As we stated, the capacity still remains at 300.

John Ferro - Deutsche Bank

Got you.

Larry Pierzchalski

We just reduced it by a 100 in the outstanding.

John Ferro - Deutsche Bank

Why did you pursue that amendment so soon, obviously you still had a pretty significant cushion above the three previous covenants?

Curt Culver

Because of the language in the disclosures about an event that could happen and what it would do to the other debt, I mean it is a pretty significant disclosure event and it makes a lot of people uncomfortable. You following? If we were to miss the covenant and all the other debt would immediately come due across the fall. So it is a pretty significant disclosure, we wanted to get past that if you will.

John Ferro - Deutsche Bank

So you are just trying to be proactive in the…

Curt Culver

Exactly, exactly.

John Ferro - Deutsche Bank

Okay, thank you.

Curt Culver

Long term, we will want to do something else, but we needed some more time.

John Ferro - Deutsche Bank

Okay, thank you.

Operator

Thank you, our next question comes from Amanda Lyman of Goldman Sachs.

Amanda Lyman - Goldman Sachs

Hi, thanks so much. You had previously stated that you plan so seek approval to upstream $60 million of dividend during 2008 from your operating company, and I was just hoping to receive an update on that, if you have taken any of thus far this year and how much you expect to take in the second half? Thanks.

Mike Zimmerman

Yes, we had a $15 million quarterly dividend in the first quarter, we had another 15 million in the second quarter and we anticipate the same quarterly dividend in third and fourth thus streaming from the writing company though owing company.

Amanda Lyman - Goldman Sachs

All right. Thank you.

Operator

Thank you. Our next question comes from Donna Halverstadt of Goldman Sachs

Donna Halverstadt - Goldman Sachs

Thanks all our questions have been answered.

Operator

Thank you.

Mike Zimmerman

Take one more.

Operator

Our final question comes from James Litinsky of JHL Capital Group.

Operator

Mr. Litinsky your line is now open. Please then mute your phone.

Mike Zimmerman

We will take another one.

Larry Pierzchalski

Take another one.

Operator

Our final question comes from Jeffery Dunn of Dowing & Partners.

Jeffery Dunn - Dowing & Partners

Hi good morning.

Mike Zimmerman

Hi Jeff.

Jeffery Dunn - Dowing & Partners

I just want to clarify in terms of how you submitted your remediation plant to the GSEs or how you think about your rest of capital from a stay regular standpoint. Would you already have the capital down at the operating companies to satisfy those plans and I am really just trying to figure out the $485 million of the holding company. Is that something we should expect by plan to be down streams or part of it to be downstream or our subsequent quarters or is that the holding company because you do not necessarily think you need it?

Larry Pierzchalski

I think the plan would be to retain it at the holding company until we would need it if we do.

Jeffery Dunn - Dowing & Partners

Does your current plan suspect that you will need it or you are forecast.

Larry Pierzchalski

No.

Jeffery Dunn - Dowing & Partners

Okay. Thank you.

Curt Culver

With that I would like to thank you all for your interest in our company again as I mentioned it is been a difficult quarter but I think MGIC is positioned well to compete in the future. Thank you.

Operator

Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may all disconnect. Thank you and have a nice day.

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Source: MGIC Investment Corp.Q2 2008 Earnings Call Transcript
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