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MGIC Investment Corporation (MTG)
Q4 2007 Earnings Call
February 13, 2008 9:00 am ET
Mike Zimmerman - SVP, Investor Relations
Curt Culver - Chairman and CEO
Mike Lauer - EVP and CFO
Larry Pierzchalski - EVP Risk Management
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
Previous Statements by MTG
» MGIC Investment Corp. Q4 2008 Earnings Call Transcript
» MGIC Investment Corp.Q2 2008 Earnings Call Transcript
» MGIC Investment Corporation Q1 2008 Earnings Call Transcript
I'd now like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, you may begin.
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.
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.