MGIC Investment Corporation (MTG) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation Second Quarter Earning Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Mr. Zimmerman, you may begin your conference.

Thanks, Sandy. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2012 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 mtg.mgic.com, under Investor Information, includes additional information about the company's quarterly results that we will refer to during this call and includes certain non-GAAP financial measures. As we have indicated in this morning's press release, we have posted on our website the supplemental information containing the characteristics of our primary risk in force and flow new insurance written, as well as other information that 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 the 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 party 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 turn the call over to Curt.

Thank you, Mike, and good morning. As reflected by the net loss for the second quarter of $273.9 million or $1.36 a share, our company's capital position on financial results continued to be adversely affected by the lackluster economic recovery the country continues to experience and particularly the lack of meaningful job creation. The bottom line is that the economy has not progressed as much we would've expected over the past year and at a pace that promotes sustained growth in the accompanying improvement in consumer credit performance. For our company, that means that new notices as a percent of the in force continued to decline albeit slowly. But unfortunately, the cure rate is not recovering as fast as anticipated. This has caused us to extend the time frame of when we expect long-term cure rates to return to historic levels. So while we continue to monitor the macroeconomic environment, engaging conversations on the housing policy front, we spent most of our time on those variables that we can have more control over, those being credit quality, allocation of capital, maximizing the profitability of the new business, prudently and thoughtfully mitigating losses and minimizing operating expenses to maintain our cost advantage. As of June 30, the combined insurance company's preliminary risk to capital ratio was a little over 30:1, and MGIC was 27.8:1. This means that beginning in the third quarter, we will begin to use MIC, which has approximately $440 million of capital where MGIC is not able to ultimately obtain a waiver of regulatory capital requirements. The plan to utilize MIC, which has been in place since 2009, is designed to allow MGIC to manage through the risk-to-capital issue it faces. There is no liquidity issue at the insurance operations as we believe we have sufficient claim-paying resources to meet all obligations to policyholders even under stress-loss scenarios. We are pleased to report that Freddie Mac has recently expanded the use of MIC to include 7 additional states. The states are California, Florida, New Jersey, North Carolina, Ohio, Oregon and Texas and account for 33% of our new insurance written in 2012. In addition, we’ll be using MIC for Idaho, New York and Puerto Rico, which were previously approved by Freddie Mac and account for about 5% of our business. Freddie's expanded approval provides that by September 30, the holding company will contribute $200 million of cash to MGIC; that by October 31, MGIC and Freddie Mac reached agreement on substantially all terms regarding the pool insurance dispute; and that by December 31, 2012, the OCI will provide Freddie Mac written confirmation that mix of capital will be available to pay MGIC's claims in full and on an uninterrupted basis. As does the MIC approval given earlier this year, the approval for the additional states may be withdrawn at any time and ends December 31, 2012. Freddie Mac's letter is an exhibit to our 8-K filed earlier today, and you should read it in full for the complete terms. As a reminder, Fannie Mae's approval of MIC, which expires at the end of 2013, previously approved MIC to write in all states that have capital requirements in which MGIC does not get a waiver. New insurance written in the first quarter was $5.9 billion, nearly double the amount written in the second quarter of last year and up 40% from last quarter. More recently in July, we wrote $2.4 billion of new insurance, our largest amount written since March 2009. The new business written since mid-2008 now accounts for approximately 28% of our risk in force. And as I have discussed on past calls, this business generates a significant amount of capital, which augments our existing claim paying resources as each $20 billion of insurance we write adds approximately $400 million of incremental capital over the estimated life of the book. Reflecting the changes on HARP that went into effect earlier this year, an additional $2.7 billion of HARP refinanced transactions were also completed during the quarter, bringing the total to $4 billion for the year and $11 billion since the inception of the program. Over the last several months, we have seen a significant increase in the level of HARP activity, which should be positive for our credit performance, as the average payment savings for a borrower is just over $2,000 per year. Our industry continues to regain market share from the FHA, however the pace of the recovery is slower than we would like as the combination of underwriting guideline differences between the conventional and government-insured loans, loan level price adjustment charged by the GSEs and the secondary market gains associated with Ginnie Mae securities continue to exist in the market. It remains difficult to get a good handle on our industry's market share on a monthly basis as 2 companies only report this data quarterly. But we estimate the private MI industry's market share at approximately 6.5% to 7%. Within our industry, we believe that our market share has stabilized at 20%. Losses incurred in the second quarter were $551 million versus $459 million last year. The level of incurred losses resulted primarily from the number of new delinquent notices received, which remain at elevated levels compared to historic levels, indicative of the impact that the sluggish economy is having on the 2008 and prior books, and as the data disclosed this morning shows, a continued decrease in the level of cures for loans that are 12 months or more delinquent. The claim rate assumption for new notices is approximately 1 in 4 going to claim. And while we are still processing July notice and cure activity that we received from servicers, which we will release next week, as we typically do, I can tell you we expect that the overall delinquent inventory will decline modestly in July. Paid claims declined in the quarter to $636 million, down 5% from last quarter and 22% from 1 year ago. The average claim payment continues to hold relatively steady at $49,300. We expect that the current claim filing patterns we are experiencing will continue and will result in claim payments trending modestly lower for the balance of 2012. Recently, we disclosed that we executed a settlement agreement pertaining to rescissions and denials with one lender, covering loans owned by private investors and one GSE. The terms of this agreement did not materially impact the quarterly results as they were already included in the loss reserves, but it did result in 150 previously rescinded claims being reversed and paid during June. As we have anticipated and disclosed in prior quarters, overall rescissions and denials continued to slow as an increasing percentage of claims. We have continued to voluntarily suspended rescissions related to loans that we believe could be covered by potential resolutions of various settlement discussions that are taking place with certain lenders, assuming we can get all parties to agree. At June 30, approximately 1,600 rescissions remained in our delinquent and unpaid claims inventory due to our decision to suspend such rescissions. As a reminder, we have not established an accrual because we have not determined that a loss is both probable and can be reasonably estimated at this time. During the quarter, we repurchased $71 million of par value of the 2015 senior notes, reducing future debt service by saving interest payments on the debt repurchase. In addition, the discount to prior resulted in a gain of $18 million during the quarter. As of June 30, the remaining outstanding balance of these notes was $100 million with over 3 years to maturity. The other senior debt at the holding company matures in November 2017. Cash and investments totaled $6 billion at the end of the quarter, including cash and investments at the holding company of $411 million. Our thought process regarding the holding company's cash resources considers a number of factors, including the holding company's debt service obligations and the need to contribute additional funds to MGIC. We realized gains of $26 million that were embedded in the investment portfolio and have realized a total of $104 million year to date. So to summarize, while we expect effects of the sluggish economy to continue to challenge the company's financial results and capital, we are encouraged by the continued outstanding quality of the new insurance written and the growing opportunity to regain share from the FHA. Regarding Washington, at the moment, it appears that any meaningful housing policy is going to come after the November elections. Currently, we expect that the CFPB will issue a rule for qualified mortgages in January 2013, and the long-awaited and delayed QRM definition will follow that, although the exact timing is unclear. Also, the Basel III comments are due in September, and MGIC will be submitting a response, as we did with QRM post-rule, demonstrating that private MI is a viable credit enhancement solution. Finally, there are number of bills at various stages regarding the role of the GSEs and FHA, but we do not expect any imminent action on those. Of course, we remain actively engaged in those discussions. So in closing, our company and our industry will continue to deal with the difficult but slowly stabilizing housing market, a less than robust economy and emerging housing policy regulations. We will continue to actively engage policymakers regarding the benefits of private capital and the operating efficiency of the private sector. And as I said upfront, we will also keep focused on those areas we can control, mainly allocation of capital, underwriting criteria, returns on new business, loss mitigation and operating expenses. With that, operator, let's take questions.

[Operator Instructions] Your first question is from Randy Raisman [ph].

I just want to kind of understand sort of the thought process on the HoldCo liquidity from here. If you have $411 million of cash, and if I'm reading the language around Freddie Mac right, you're going to have to put $200 million down into the insurance stubs, and you're going to have to fund interest expense going forward. It doesn't leave a lot of cash for recovery for unsecured notes. And if I kind of listen to your guidance, it sounds like you're kind of saying that the losses paid are going to kind of stay at these levels and maybe get a little bit better, but that would imply they're going to continue to lose money and risk to capital can go much, much higher from here. So I just kind want to understand that from the perspective of how you think about that in relation to your senior unsecured bonds.

Well, first let's talk about the risk to capital. And this is Mike Lauer. And the issue there was that we have projected it as early as '09, that there might be -- 2009, that there would be issues with respect to MGIC's risk to capital. So we dedicated the sub MIC, and if you will, put in some $440 million. So with respect to the risk to capital issue on MGIC, what our plan would be is where we don't get waivers, we would write business in MIC and continue to write business in MIC, and that really has been the strategy as of recent. We've got Freddie Mac to agree on certain states where we can't get the waiver, which were not included in the original waiver. So we're still under that plan with respect to risk to capital. I guess regarding any other issue with respect to holding company cash, we'll look at the availability we have and the resources we have and what alternatives we would have. So we continue to look at that, obviously, on a monthly basis.

I mean, regarding the $200 million that Freddie approval requires, we received that Freddie approval at the end of the day yesterday. And only our board has the authority to make that commitment. So on that, the only thing I could say at this point to answer your question regarding the $200 million is that we'll be discussing it with the board.

Your next question comes from Conor Ryan.

I was just curious, does the Wisconsin regulator even have the authority to grant stipulation 3 in the letter that Freddie Mac sent over yesterday?

I mean, it's a negotiation. Certainly, they have -- it's a 3-way, obviously, negotiation with the company, the commissioner, as well as the GSEs. And the issue there, and always has been, and the ability of getting any dividends out of MIC relative to needs of MGIC. Our position going in has been that there is excess capital where it won't be needed. Freddie Mac wants to discuss some type of agreement with the commissioner about some formula where it would come up, and we've agreed to negotiate that with them and have meetings with the OCI on that subject.

[Operator Instructions] Next question comes from Mr. Shawn Faurot.

It seemed like in the release, you guys talked about late-stage delinquencies, and it sounds like the cure rate did drop or-- did drop based on what you disclosed. But then in the prepared remarks, you guys were talking a little bit more about new delinquencies and cure rates potentially being lower on that. I mean, should we be thinking about these incurred loss numbers as being kind of a onetime catch-ups trying to get your reserve to delinquent loan up? Or how should we really be thinking about the implied cure ratio on a go-forward basis?

Well, I think that's the key question. On a go-forward basis, it's going to be what would the development be. We saw a negative development in the second quarter. Will we continue to see negative development in 3 and 4 or will it abate? So I think that's going to be the issue. One of the things that we've continued to see, and we've discussed on all the earlier calls, is that across all the books, we continue -- albeit lower delinquencies, they continue to come. And even in the '04 and older books, that still represents about 30% of the notices coming in. So it's a reflection of the economy and the fact that kind of on a quarterly basis, even on the older books, we're getting 30% of the notices are coming in on those books. '04 and older. So there hasn't been a change on that trend in the last 4, 5, 6 quarters. So that's not encouraging. But again, we'll look at that each quarter and make adjustments accordingly.

So was this an adjustment? I mean, should we be thinking about this as an adjustment or, I mean, if things stay the same, we should be looking at this trend continuing?

I would say this is -- that was an adjustment. They obviously raised the claim rate based on what we saw. If there's no change with respect to that, then obviously, we'll be at a lower level. However, if there was an adjustment the other way, there could be. But for the most part, you're correct. There was an adjustment in the quarter for what we saw was increased assumptions on claim rates. Now whether or not we need to make another one in the third quarter or fourth quarter will depend, again, on development on a monthly basis.

Okay. And I think one of your competitors has started to disclose the breakdown of incurs on new defaults versus existing. I think that's been helpful. And obviously, given this adjustment that you guys have put through this quarter, I think it would be helpful for people to kind of see something similar for you guys so we kind of track what the impact of new delinquencies has been relative to the existing delinquencies. So if you guys can think about that, that would be great. One other question on...

Just to interrupt, it's Mike Zimmerman, I just want to point out to you and the rest of the listeners that we do disclose that in our Q. It's on a cumulative basis, so it's really taken under consideration and we're doing that a little bit differently.

Okay. That's helpful. Interest on the subs, is that something you guys are considering turning off based on the current liquidity position at the holding company?

Say it again.

The interest expense on the subordinated notes -- on the subordinated numbers.

Let me just say that you're talking about the juniors. And the only thing I had commented on is that the Junior feature -- have that feature of deferability. And we used that in the past, but I won't comment any further. And we're entitled to use it in the future, but that's the only thing I can say.

Okay. And do you guys think -- this relates to -- I mean, everyone that's been following you guys understand that you guys are focused on using MIC to write new business. Just trying to get an -- and kind of ask the question about where the OCI stands relative to their ability to kind of grant, I guess, #3 on their list of requirements for the waiver. I mean, where do you think things stand as it relates to the regulator with your business overall at MGIC, not necessarily at your ability to write out of MIC? It seems like they're putting some substantial pressure on you guys to get MGIC into a better position. I mean, has that been contentious with them? Or is it something that you guys feel like you're seeing eye to eye and things are kind of working there?

Well, I guess -- you were asking about the OCI notes, correct?

Yes.

And I would say that they've been in agreement with our capital plan and our activity since day 1 with respect to -- as I mentioned, we went to them with this plan as early as '09 saying that these catastrophic losses and the failed features of them could drag on in the event we had potential problems with risk to capital. So they have agreed to this plan. And as early as-- if you remember, our early discussions with respect to MIC, we had planned to put MGIC in runoff with the commissioner and drop down excess capital, and he agreed to that plan. And ultimately, the GSEs had different plans, and we had to adopt that plan, which we've got to now MIC, which had $400 million of capital. And so the commissioner agrees with our plan. He agrees with us that there is excess capital at MGIC. And he wants us to have uninterrupted capability of writing business with our customers, and that really is the focal point of this plan. And I would say he's in agreement with everything we're doing. Now with respect to the last comment, and that is this item in the Freddie Mac letter, we have to discuss that with him. We've discussed issues like that with them in the past. So we will -- that will be a major issue for us as we move towards the end of this quarter.

Okay, that's helpful. I mean, I guess -- and just one last question of timing. So it sounds like you still need to discuss it with -- at least the Freddie Mac requirements with...

Yes. We just got them.

Of course, yes. I guess that wasn't the question. It's more around the regulatory. Have you discussed your latest results with the regulator?

Yes, yes. Yes. I was there a couple of weeks ago.

Your next question comes from Douglas Harter. Douglas Harter - Crédit Suisse AG, Research Division: I was wondering if you could help sort of frame the possible outcomes of the settlement with Freddie, just sort of-- what's the magnitude.

This is Mike Zimmerman. And no, we can't comment on any litigation. That's going to be a discussion that will take place in the future.

Our next question, Mr. Jasper Burch.

A couple of questions here. In the opening remarks, you mentioned that you expect the delinquent inventory to decline modestly in July. I just want to make sure that's based on paid claims really driving that, and you're not expecting a cure ratio above 100%?

That's correct.

All right. And then second, on MIC, if the third stipulation in the Freddie later were granted and MIC was on the hook for losses on MGIC, what would the incentive be for states that aren't letting you write business above 25:1 now? Why would they allow MIC to write business even if it's liable for MGIC losses?

I mean, you're talking now about the insurance commissioners, regulatory power. The subsidiary is owned by MGIC. And effectively, he'd be control of both of those entities in some kind of situation. The point is that he believes, as we do, that there's more than enough resources at MGIC to pay claims, okay? So the issue that Freddie Mac has, obviously, is a theoretical issue that if it weren't, what are the capabilities of getting money out of MIC. And the only way that you would get money out of MIC in that type of situation was if there was excess capital in MIC. And in the near term, I would say that we're not using much of the capital, obviously, and it's got a significant amount of capital in it to write business for the next 5 years. So it really doesn't have a capital issue going forward no matter how much business we write in it in the next 4 years.

And then the other piece of that puzzle, too, is the new business is very profitable. So you wouldn't want to turn that off, especially given the fact that MGIC has a risk to capital issue, not a liquidity issue, and the sub MIC is compliant with the risk to capital requirements.

But I guess, my question is, I mean, if MIC is ultimately on the hook for MGIC's losses, could the California or North Carolina, say, regulators like not allow MIC to write new business even though on a stand-alone basis, MIC would have a really good risk-to-capital ratio?

I don't know. I could conceive under what conditions that would happen. I mean...

Okay. And then I guess just lastly, I just want to double check. You don't have any reserves set aside against a possible Freddie settlement?

Correct.

Our next question comes from Jackie Earle [ph].

I was wondering if there's anything that would change your expectations as it relates to seasonality of mortgage credit for 3Q and 4Q, and if you could maybe comment further on how it relates more specifically to cure rates and their notices of default.

Okay. Let me try to answer that question. The cure rate is probably the main driver, and that has been improving since 2009. And it's kind of lost some steam here in the second quarter, probably reacting to the slower employment growth in the economy. So for the rest of this year, we're assuming that the cure rate is not declining on new notices but just kind of status quo. And hopefully -- and maybe we're starting to see the signs of it the last 2 months. The home price this year has been positive. And maybe the employment is picking up here. But the game plan for this year, at least the forecast, is flat home prices for the next 12 months with normal seasonality. So in the middle of the year here, it's kind of a seasonally unfriendly period, and that's kind of why, as Curt alluded to earlier, the delinquency inventory here in July should just be down modestly, and that's pretty much in line with expectation.

Our next question comes from Scott Frost.

Just to make sure, you're saying that as far as the incurred loss goes, we're not going to be able to see how much of it is attributable to initial 3 months or less, repeat 3 months or less and later stage delinquencies? Is that what I heard? [indiscernible] now, right?

I guess what I said is that relative to the third and fourth quarter, if things haven't changed, there would be an incurred trend maybe slightly -- may be less than what the current trend was for the second quarter. However, if there is another continuation of some adjustments, there might be one. But normally, we would see a slowing of the cures in this, the second half of the year. We've seen that earlier. And now does that continue or does that -- as Larry said, it might just flatten out. So we're looking at that monthly and adjusting accordingly.

Okay. All right. One of your competitors recently released a risk metric that shows risk in force on defaulted loans. Can you provide that metric anywhere? And if not, would you start doing that?

Scott, it's Mike Zimmerman. We do and we have been for several quarters in our 10-Q. It's in there as far as when we give you the net risk in force. We tell you what the delinquent risk in force is.

Sorry for overlooking that. And I want to just sort of ask, when you're preparing for, I guess, year-end results and audited results for verifying reserves, if you had to characterize the process, is it kind of closer to one where the auditor takes your results and kind of scores what you've given them and then tests for reasonableness and then sort of passes on the adequacy in a way that they had no reason to doubt you? Or do they do it in a more affirmative manner?

Independently. They do it independently. They create their own reserve and compare it to ours actuarially. They have their own, and then the accounts look at their actuary versus ours.

Last question, and I don't know if you guys can answer this or not. But one of your competitors also reports expected cure rates for seriously delinquent loans are close to 50% for a large block of seriously delinquent loans, it appears. In your case, how does your seriously delinquent bucket break down? And I guess the question that is on some people's mind is why are you special like they seem to be?

Well, I'm not sure about the last part of that question, Scott. But I'll tell you as far as the breakdown, if you're talking about the 12 plus and then breaking those out between 12 and 24, 24 to 36 and so on, the profile looks very similar to what was disclosed by the competitor there as far as 8% or 40 years or more, 12%, I think, in the 36-day category. I'm not sure what you meant by...

Okay. I guess that kind of answers it. You have it similarly broken down. It sounds like you're portfolio is just similar and you just seem to disagree about how -- what the cure rate will be, is that fair?

I don't know what their -- it's necessarily assuming, so it's hard to say. But you can see what we...

Our next question comes from Steve Stelmach. Steve Stelmach - FBR Capital Markets & Co., Research Division: Just to follow up on a couple of the questions. Mike Lauer, you mentioned that if its status quo on the cure rates versus second quarter, you expect that it may be possibly a slight improvement on the incurred side in the back half of the year. Can you just kind of explain that dynamic a little bit?

Well, I just said -- someone asked earlier about the second quarter do we have an adjustment now. I said yes. And so on a normal basis, then, would you have that same adjustment in the third quarter? Maybe not if there is no need for it. I mean, we obviously we have to look at the next 3 months, July, August, September, and look at the cure activity and the new noise activity, whether or not there needs to be another adjustment. But... Steve Stelmach - FBR Capital Markets & Co., Research Division: What was dollar amount of that adjustment?

What's that? Steve Stelmach - FBR Capital Markets & Co., Research Division: What was dollar amount of that adjustment?

I can't give -- I don't have that exact amount in it. But obviously... Steve Stelmach - FBR Capital Markets & Co., Research Division: Was it a majority of the difference between 1Q and 2Q?

Yes.

And that will be broken out as we finalize the Q, Steve. It will all be in there as well. So you all will be able to see the current period reserves and then in prior period adjustments. Steve Stelmach - FBR Capital Markets & Co., Research Division: Got you. Got you. Okay. And then just on that third condition from Freddie Mac just so I'm clear. It’s not that the OCI necessarily disagrees with that third condition from Freddie, it’s just that given that you've gotten this yesterday, the OCI hadn't had a chance to opine upon it?

I think it's going to be a -- I think it's one thing we agreed to as a concept. It's something else to kind of get the language. And can we get the parties to agree on a language on something like that, that will be my direction for the next 2 months, I guess, get all the parties together and reach some kind of agreement where the concept is there and the agreement on the language. But it's a complicated issue, as you can imagine. Steve Stelmach - FBR Capital Markets & Co., Research Division: Sure. Any -- want to handicap it anyway, if you feel good about it?

I can't do that. Our General Counsel is sitting here. I can't do that.

Our next question comes from Bose George. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: This is Jade Rahmani on for Bose. I just wanted to follow up on the Freddie Mac question. Can you expect just the nature of the disagreement?

What disagreement? Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: With Freddie Mac, I guess, surrounding the aggregate loss limit on pool insurance policies. The disagreements you have with them, we just wanted to better understand the nature of the disagreement.

Sure. I mean, the dispute centers around whether or not there is still coverage on certain pool policies that have been in play for a number of years. We believe that the coverage expired. They believe that the coverage is in place. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And when -- what's the time frame for any resolution to this?

Well, according to the letter we just got yesterday, we're supposed to be really working diligently towards on October 31. Whether we achieve that or not remains to be seen. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then secondly, can you just tell us what happens next in the dispute with the IRS?

Next -- I can't tell you. We're studying our options as to whether or not we can have another meeting with them, if they want to have another meeting and what the alternatives would be. So at this point in time, we're back at square one studying what our options may be.

Our next question comes from Ed Groshans.

I guess, Mike, you mentioned on the subject that MGIC in the past had, I guess, ceased paying, making the interest payments on that. Can you just remind us some of the factors that led to that decision?

I think it had to do with holding company cash and the amounts of capital we were putting down at the time into MIC. And there was a feature on the 63 to -- that you could defer the interest, and if you will, pay it later, and we exercised that. And then after we got some issues resolved with respect to holding company cash, we reinstituted, caught up. We had a catch-up, if you will, on the deferred portion and then began paying it in a current basis again.

And was that catch-up post the capital raise, which is, I guess, is that 2 years ago now, 1 year ago?

Yes, correct, yes. After the April the 10 raise, yes.

That's correct, yes.

Okay, fantastic. And then completely off topic, this whole issue of imminent domain that's now being discussed, I think, in San Bernardino, Sacramento, Chicago and maybe one other municipality [indiscernible]. I guess my take would be-- would that be a positive for your model? I mean, would -- if you had -- with the insurance is in force and someone with the imminent domain to pull mortgage, that's not a credit event, right?

Well, this is Mike Zimmerman. We're reading the same articles that you are, but we don't have any knowledge or details of what's being considered. So it's difficult to say one way or another if it would result in a claim payment. But you're right, generally speaking, transfer of titles to the property is required before a claim can be filed. But specifically for this issue, I mean, there's -- it goes beyond what are the claims. There's a lot of other legal issues before it will probably land on our desk.

Okay. And then maybe you don't have a view yet, but I mean, are you just following it just to be aware of it or are you looking at ways to mitigate impacts. I mean, this is, I guess, going to be a contentious this issue. If anyone will be missed out, it does pull the trigger on this.

And we're watching it.

Our next question comes from David Epstein [ph].

Two things. First of all, can you give anymore color around how Wisconsin sort of determines hazardous condition? And then the second question was -- again, one of your competitors has obviously been winning a lot of new business. And I know some of the factors have been talked about -- driving that have been talked about them. But about can you give a little more color of why you think you're winning less business?

On the business side, I would say it relates to 2 areas. One is single premiums where our pricing is higher. I mean, we have returned hurdles that must be higher because if you look at the single premiums, and given how long policies will be on the books in today's world with today's interest rates, the premium rates that those are being sold at are substandard and the returns are not high at all. I mean, you're getting cash in and no more returns. I would say the other item is the one underwrite whereby the companies have delegated underwriting to the GSEs. That's something that as we looked at the -- how did we get into this mess that we're in for the last 5 years, that was one of the areas [indiscernible] control our underwriting and going forward. We won't delegate it to anyone else regardless of the underwriting engines that -- or purchase engines that they have, which is what they are.

Those 2 areas, in particular. So I'm really pleased with the business [indiscernible] relative to the credit quality and the pricing that we're receiving and the high returns that we are achieving on that business. So we're getting the business we should be getting. You had another question about the OCI and the regulator. And I would say, his analysis, it stems from the company, the writing company. The MGIC has sufficient claims paying resources, and that's where it's focal point is. But since '09, he has had outside advisers and analysts to study the book on a runoff basis and he keeps coming up -- they come up with that conclusion. So as I've said before, he's comfortable with our claims paying resource position with MGIC. And therefore, he's satisfied with our plan, in our MIC plan. That would be his keynote and that would be either insufficient, that would be a benchmark for him, but that's not the case.

Okay. And you guys certainly are still winning plenty of new business even though not as much as the competitor. With the low returns out there, with the delegated underwriting, could you just give a little more detail of what are the major -- what is the major business that you are winning that is meeting your standards?

Well, I mean, our market share is approximately 20%. We have, obviously, a nice dispersion relative to customers and states. I think the state breakdown is in our detailed information. It's generally monthly premiums, fixed-rate loans, FICO scores above 760, very high-quality business, excess of probably in line with our excess of 20% occurrence. I think the '09 book has an incurred loss ratio of 11%. The '10, 2010 booked 4%; and '11, 1%. So it gives you an idea of the credit quality that we're writing and the premium rates that accompany that. And as we said, at 20% market share, that's a nice business. And that's one of the things that's so important relative to looking at what's going on with the company and as we deal with the risk-to-capital ratio issue. Again, as we said earlier, we don't have liquidity issue at all at this company. What we have is a risk to capital issue, and we're trying to eventually get all business written through MIC. It makes sense for everyone. The GSEs, as I mentioned earlier, $20 billion. That's $400 million of capital to our legacy capital support. And so it's in everyone's interest that MGIC continues to write business, that being the GSEs, the insurance, the OCI, and obviously, our shareholders. So while we have a difficult quarter, there's lots going on, the bottom line story of what we're doing here is the right thing.

And the competition can't really undercut you on that business that you are winning? Or they're choosing not to?

I mean, you can always price differently. But again, there is some rationality in the world we've been through so much as an industry, and I think everyone is cognizant of that. Some may have a need to get more business than others at certain times relative to their own operations, and they price in the short term to achieve that. I can't speculate on why people do what they do. In my opinion, to get some standard returns. But that can always happen. But we need to run the company, as we said earlier, the way we do relative to underwriting, quality, pricing, allocation of capital, our expenses that make sense for MGIC. So all in all, we are in a terrific industry. I mean, I think in the long term, as you look over the next 5 to 10 years, this is going to be a golden period relative to mortgage lending and those involved with it. And our movement to MIC is very important part of making that happen.

Our next question comes from Jack Micenko.

This is John Benda on for Jack. Just had a couple of questions for you. Just back to Freddie real quick because -- so it seems like the size of the disagreement is $535 million, as disclosed your Q, if I'm reading that right. And I know you can't comment on this negotiation, but have you had favorable settlements with them on prior negotiations, if there were any at all?

We haven't had it in the past, John.

Okay. So more of paid perspective, we should be assuming that the-- 100% of that $535 million is what comes out of that capital service?

You've got to make your own assumptions at this time.

Okay. And then on the 2015 note repurchases, I mean, I guess that kind of speaks to that there isn't a liquidity problem. But if we look at the $200 million that's going to be downstream, that basically cuts capital in half. I mean, if you turn the interest off on the subs, are you allowed to try to issue a new note? Or are the [indiscernible] that restrict that from happening, should you push this just off of those notes?

I mean, it's kind of independent. I mean, if that interest, as it was in the past, deferred, we have to use -- there's an alternative payment mechanism that's described in the indenture that would have to be utilized to bring it current. But that doesn't preclude any other type of activities.

Okay. And then I you guys mentioned this earlier on the call. Maybe I just didn't pick it up. What was the percentage of risk in force for the book breaking post 2008?

Well, about that '09 forward is 25%. Mid-'08 forward is about 28%.

Right.

25%, 28%. Okay. And when you guys speak to insurance regulators looking at the claims paying ability of the entity, we're basically talking cash and investment portfolio to loss reserve. I mean, now when you...

It's cash premiums, investments offset by losses.

But now as we look at the loss reserve, I mean, will you give them a go-forward projection? So is that just at today's current reserve level? I mean, did that...

It's not reserves. I'll make sure you understand it. It's cash on a runoff. So they take the pool, and they run it off through to premium premiums, through to losses, plus the beginning cash.

Okay. And could you guys offer an ultimate claim rate on the late-stage default book? If you had to put it in perspective, a percentage?

We haven't broken out the claim rate. We look at it in totality. I mean, as far as the claim rate on [indiscernible] going to an inventory, not necessarily by category. But you can deal with the data we disclose. You can see what trends have been and use that for modeling purposes.

Our next question from Ethan Auerbach.

I was just going to ask, if you can't come to an agreement with Freddie Mac, whether you'd still consider downstreaming the capital from the holding company to MGIC.

Well, again, as I said earlier, the downstream is a question we haven't discussed with the board given the lateness of receiving that. And so we're not in a position even to say we're going to downstream the capital. So lots to be discussed yet.

Have you considered other alternatives for using that?

Using?

I mean, what else are you going to do with the cash with the holding company?

Well, we have debt outstanding, interest payments.

To what extent do you think that the OCI actually cares about the risk to capital? And to what extent will their decision making be impacted if MGIC has incremental $100 million or $200 million of capital? Or is this more of an issue with Freddie Mac and not really with the MIC?

This is an issue with Freddie Mac. The insurance commission was comfortable where we were. And so going forward, we requested a meeting with the commissioner to bring him up to speed on this new issue now. So we're in the process of that. But really, he was comfortable where we were before, didn't require any more capital. And now we need to discuss with him the Freddie Mac proposal, which has a number of things in it, and we need to do that.

Our next question comes from Jordan Bloom [ph].

It's actually Dan Vasquez [ph]. Just to follow up on your comments, on your solvency comments, the sufficient claims being resources under stress scenarios. Wondering if you could tell us how recently the analysis was done and if you could comment if there were any external advisors involved in that.

Yes, Dan, this is Mike Zimmerman. If you'll recall, back in April 2010 was the last time we published the estimate of the assets remaining after the completion on the runoff. Then we estimated, which was as of March 31, 2010, that the consolidated insurance operations had excess claims paying resources of approximately $2.1 billion. Using a similar methodology but clearly with updated assumptions, we would estimate that as of June 30, the excess claims paying resources were approximately $1.9 billion. Now that $1.9 billion amount makes no provisions for any adverse contingency development that could arise from disputes with Countrywide, Freddie Mac or the addressing [ph] is not is a stress scenario. It's kind of a baseline scenario. I do need to point out that the April 2010 estimate was, and the current estimate is, the forward-looking statement and the actual results of the runoff might differ materially from those forward-looking statements. Actual results regarding premiums and losses in April 2010 have materially -- have been materially different from those estimated at this time. And all that information concerning factors that could cause actual results to be different from what we're assuming in the $1.9 billion in the forward-looking statements are in the risk factors. And as usual, we're not going to update that and undertake any obligation to update the forward-looking statements even though these statements may be affected by events or circumstances in the future. And you shouldn't rely upon this estimate and the fact that we're making the statement at any time other than the time that we have given the statement right now.

I think the key is that the insurance commissioner does this independently with his outside advisors and actuaries. So I mean, that's the point.

So you're just on -- just to understand what you're saying, and I do appreciate the disclosure, but the excess of $1.9 billion, that's a MGIC number and the OCI is running its own analysis?

That's correct.

Okay. Is that currently ongoing right now? Was there a recent one? Or is there any kind of sense of timing on what's going on at the OCI?

The OCI runs that at least annually.

Semi.

Semiannually.

Semiannually. So was the 2012 analysis at least the first one already done? Is that a fit assumption?

The last OCI analysis have not yet been finalized. We haven't seen the final result as of the end of 2011. And we've submitted the information as of June 30. So that will take -- they take a little bit of time to complete that. So we haven't seen the final one, but the last one that they have basically completed as of 12/31/2011.

Got you. One more question, please. If you can -- can you comment at all if there's any expectation that any additional funds will come out of the holding company to satisfy any of the potential settlements that are potentially in the works with Freddie and/or Countrywide?

We're not going to comment on any potential settlements with the other -- with all the disputes at this time.

But the part in which you're initially looking to is the operating -- or which the counterparties are looking to is that of the operating company, correct?

That's correct.

And we have a follow-up question from Shawn Faurot.

Just wondered, I don't know if you guys talked much about it. I know the last question was on Countrywide, but where does that stand? It sounded like you guys had pushed off the arbitration for 60 days. Is there any update as to where that stands?

Shawn, as we described in the risk factors, we continue to hold the mediation discussions with hope of being able to reach terms that all parties involved can agree upon.

So there's no arbitration panel that's been scheduled at this point?

Same schedule that we have done, which I think is set for March or April of next year.

Our next question comes from Geoffrey Dunn. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: I wanted to understand the claim rate adjustment a little bit more. It hasn't been new for several quarters that the cure levels have been running well below what is implied by the reserve provision levels. So what changed versus first quarter? Or is it something that's just a subjective adjustment? And if that's the case going forward, how do we think about when can that be further adjusted? Is it a couple more quarters where cures don't materialize, we could be facing another claim rate shift? I mean, how do we think about that? And again, what triggered it this quarter, particularly?

Well, I guess, if you look at it, the cures have declined in the first and second quarter. And whether or not that's going to continue, as someone said earlier, we look at the adjustments every month and on a quarterly basis. If we have to make an adjustment because of something that continues to deteriorate, we would. We made an adjustment in the second quarter. Whether or not we'll have to make an adjustment in the third and fourth is going to be dependent on what happens in the next 3 months again. So the -- unfortunately, we have not got the cures that we would have anticipated, especially in May and June. And if that trend continues, we'll have to look at the adjustments and see if we need to make another adjustment. I'm thinking maybe not, but we'll have to wait to see. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: A lot of where it seems the -- obviously, the implied roll rates seem well below their current performance and a lot is predicated on what happens in the future with respect to natural cures and the economy turning. So when you make this adjustment based on a lot of it is on future projections, how do you determine a certain amount versus a higher amount? How do you get the confidence, given the lagging economy, to not making a more significant adjustment there?

Well, I mean, once again, we're looking at data, various data sets, not only geography and book years but also a little bit more specifically and looking at rates given monthly, quarterly and multi-quarterly basis. So the only thing I can tell you is that as we get into the third quarter and the fourth quarter, we'll look again at the trends and are the trend lines changing or are they pretty much on track again, and that's where you get the changes. I mean, we clearly saw a trend change in May and June and made adjustment accordingly. Now if it doesn't change much off that line, as Larry said, he thought maybe it would be flat, that would indicate there would be no significant change for trends. If, in fact, there's a trend line change, then you'll make adjustments to everything again. That's where the adjustment comes in. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: And Curt, as you and the board think about Freddie's terms and the decision to put down capital, when you weigh the long-term debt obligations of the HoldCo versus the near-term capital needs of the operating company, does it just boil down to that excess claims paying ability and the expectation that you could get money out of the operating company down the road to satisfy those longer-term debt obligations?

Yes, exactly, Geoff.

Our next question comes from Mark DeVries.

When did you agree to suspend rescissions with them?

I believe it was in November of last year, Mark.

Okay. So that $97 million impact you cite, and that's about half of the year level...

Let me go back and -- for the most part, yes. If I go back a little bit more, the decision was there. I mean, we were obviously in discussions about that leading up to the actual agreement to suspend those. But I think that's approximately right.

Okay. And did that have somewhat of an effect on the adjustment you had to make for prior year's reserves where you're now having to revise your assumptions, at least for now, for rescission levels that you would expect on incoming claims?

No.

No?

Mark, we don't know if we're going to be able to reach terms with them and whether or not done the GSEs. So again, it's a complicated transaction, so we haven't made any of those adjustments. So we're still assuming they'll be rescinded.

We have David Epstein [ph] with a follow-up question.

Two quick follow-ups. First one, can you tell us what the capital ratio would have been if you were allowed to keep pertaining the deferred tax assets in the calculation?

I think it’s 25.2.

25.3, yes.

25, yes. 25.2 or 25.3.

Okay. And 2 questions to go. Someone asked, is it the excess claims paying resources that sort of influences whether you have downstream cash. I think that's what they said. And you sort of said exactly. But could you put a little bit more color around that? Because it's sort of a complicated sort of philosophy. If you have excess claims-paying resources, that could be -- you could argue about either way. You don't need to send cash down or you don't mind to sending it down if you have to because everybody's still solvent. So I honestly don't know if you'd more or less likely to send it down if you have excess claims paying resources or if you don't.

Well, in the past, our argument was we had it and we want to send the capital down directly to MIC and into MGIC and then down into MIC. Particular conversation we're having right now [indiscernible] says at minimum whether or not we can reach agreement that we want to write it in MIC and put it further down in MIC. So I don't know where that will be. But for now, this letter, they've asked us to put $200 million down. The question about the -- I don't know if that answers your question.

Right. So you're saying in the past, the regulator has bought those excess paying resources, so you've been able to send it directly to MIC. Now Freddie's sort of indirectly, maybe, questioning whether there is excess paying resources in MGIC, and therefore, asking you to send it directly to MGIC.

I don't know if they're saying that. I don't know -- they're not really saying that right now. We haven't had that discussion. They've just said with respect to this request that we have for waivers of these states that they like to cover these 3 things. Between now and September 30, we'll get that resolved as to whether or not they agree with the insurance commissioner and whether or not we need to put the -- the Catch-22 on the MIC capital is that we've got $440 million there, and none of it's being used yet. So their argument is that you don't need it now. So that's the issue, that they could send it later.

And can you remind me, MGIC, how much credit, if any, does it get for the existence of that capital in MIC?

100%. It's stacks with 100%.

Our next question comes from Timothy Moline [ph].

Regarding the holding company, are there any other expenses at that level other than the interest expense?

Primarily just that, nothing of any consequence. There is no staff rating. There's nothing there, just interest expense.

Right. Okay. And now have you guys had to hire advisors? It seems like you have a very tricky combination of issues there. And have you had to hire financial and legal guys for all that?

Yes. We've got a team of them, yes.

You do? I mean, it's very similar to some of the big California thrift in the early '90s. You had similar tensions between where the fiduciary duties lay, the downstream, the money to their possibly insolvent subsidiaries. they take of bondholders, shareholders. You've got that same list of issues, which sound very tricky.

Welcome to our world.

Our final question comes from Mr. Ed Groshans.

I guess through this conversation, it seems like the legal issues are focused on the operating company. And it does seem like you have excess claims paying ability. So if there was a judgment, how does the insurance commissioner look at where -- which capital can be used to pay that adjustment? I would -- it seems to me that you can't take out of that excess claims paying. Or can you?

Well, back to your point, the judgments relate to MGIC. So it's MGIC's obligation.

So that's the parent company then?

No.

No.

The operating company, right. Okay. yes.

Yes.

So let's say there's a settlement and this payment is going to be made. I mean, is that part of the reason that you're looking to push the $200 million down? Or would some [indiscernible] that?

No. We're not looking to push the $200 million down. Freddie Mac would like us to push it down. And we have to discuss that and a solution with the OCI. It has to do with writing in MIC again.

Right. Okay. But still, I guess -- I'm still unclear if there was a settlement where that...

This is Mike. We're not going to speculate as to what they want, if there is going to be the settlement, what the amount would be and then what the commissioner's reaction would be. It's just not appropriate to do that. I mean, it's all hypothetical. And...

Mike, I'm not asking that. I'm just wondering, when you look at the operating company and you look at the capital stack, what's available for us and what's not.

It's at the writing company, yes. As I said, the obligation is at the writing company, MGIC, mortgage and the insurance.

Sure. One other question. I would guess that the parent company, if it was going to put the capital down, I guess the cash we would acknowledge that the parent company is going to remain solvent even after putting that capital down, would that be a fair comment?

Yes.

Yes.

Since there are no more questions, thank you all for your interest in the company through what has been a difficult quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. And everyone, please have a great day.