MGIC Investment Corporation (MTG)

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MGIC Investment Corporation (MTG)

Q1 2008 Earnings Call

April 17 2008 10:00 am ET


Mike Zimmerman - SVP, Investor Relations

Curt Culver - Chairman and CEO

Mike Lauer - EVP and CFO

Larry Pierzchalski - EVP Risk Management


Steve Stelmach - Friedman, Billings, Ramsey & Co

Donna Halverstadt- Goldman Sachs

Ken Posner - Morgan Stanley

Howard Shapiro - Fox-Pitt Kelton

Scott Frost - HSBC

Jordan Hymowitz - Philadelphia Financial

David Hochstim - Bear Steams

Nick Solano

Joshua Smith

Eric Wasserstrom - UBS

Jason Regero

Michael Grasher - Piper Jaffray

Matt Ulrich

Peter Herran

Ron Bobin



Good day, ladies and gentlemen and welcome to MGIC Investment Corporation first 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 being recorded.

I would now like to turn the conference over to Mr. Mike Zimmerman. Sir, you may begin.

Mike Zimmerman

Thanks, Dave. 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 first 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 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 also posted on our website supplemental information pertaining to the characteristics of our primary risk in force, which we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release as well as prior SEC filings.

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

Now with that, let's turn the call over to Curt.

Curt Culver

Thanks Mike and good morning. For the quarter, we reported a net loss of $34 million with a diluted loss per share of $0.41. Claims paid in the quarter totaled $371 million and losses incurred were $692 million reflecting the increase of 6500 loans and the delinquency inventory as well as the increase in loss severity.

In addition during the quarter, the premium deficiency reserve declined by $264 million from $1.2 billion to $947 million. Now, we are worth $19.1 billion of new insurance in the quarter up 50% from last year of which $18 billion was flow and $1.1 billion was bulk. The bulk (inaudible) of misnomer, however is approximately 85% of the $1.1 billion was one lender paid MI transaction of high quality prime business and the remaining 15% was GSE related business again on high quality.

The loan characteristics of the bulk transactions as well as the flow business loan characteristics are shown in our portfolio supplement and indicate the high quality of loans insured in the bulk sector as well as the significant improvement made in the mix of our flow business. Please note that most of the flow underwriting guideline changes were just implemented in March and as a result you will see even more dramatic improvement in mix characteristics of the flow business as the year progresses.

Market penetration of our Mortgage Insurance products continue at high levels although on a commitment and volume bases as our loan quality improves anecdotally we are hearing of the growth of FHA. The persistency continues at elevated levels totaling 82.2% on a quarterly run basis and 83% for the flow quarterly run rate.

On an annual basis, persistency grew to 77.5%. The average premium yield in the quarter fell to 63.8 basis points from 65.8 basis points last quarter reflecting the elimination of new Wall Street Bulk business and the fact that we are insuring fewer loans above 95% LTV, Alt-A loans and loans classified as A minus.

Our expense performance in the quarter was positive with underwriting expenses totaling $79 million with $3.3 million of that resulting from onetime fees associated with our capital raise. By way of comparison, we spent $76 million a year ago to underwrite 50% less volume of new insurance written. Relative to the remaining year with significant changes made in underwriting guidelines, we expect NIW to slow with the total for the year to approximate $50 billion and while the S&P action taken recently has not reduced our writings of GSE business.

It will reduce our new insurance written with various state housing finance authorities by approximately $1 billion. It will also impact our ability to do business in Australia and get licensed in Canada and we are actively looking at our business alternatives in both countries.

Relative to the GSE business, we have been in constant communication with both Fannie Mae and Freddie Mac and we will meet with the GSEs in the near future to discuss our capital adequacy to meet their needs going forward.

We feel good about these discussions given our strong existing capital base coupled with the addition of $840 million from our capital raise, our underwriting and pricing changes, our discontinuance of insuring Wall Street Bulk business, our negotiations to sell our remaining interest in Sherman back to them as well as our discussions to possibly reinsure a portion of our new writings going forward.

The changes in captive reinsurance that have been announced by the GSEs from the premium sessions to 25% will also be positive for our company as an added benefit in growing our revenues is approximately 29% of our flow business is in excess of 40% premium seeds and 10% is in 50% quota share transactions.

Finally, let me reiterate our claim paid guidance for the year remains at $1.8 billion to$ 2 billion. Our quarterly performance would certainly total to a lower annualized number, but our expectations for continued weakness and high dollars states and the resulting growth in loss severities is what should drive the quarterly numbers higher for the reminder of the year.

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