MGIC Investment Corp (MTG) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to MGIC Investment Corporation's third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll 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 hand the conference over to Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Sir, you may begin.

Great, 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 results for the third quarter of 2013 are Chairman and CEO, Curt Culver; President and COO, Pat Sinks; Executive Vice President and CFO, Mike Lauer; Executive Vice President of Risk Management Larry Pierzchalski; and Senior Vice President and Controller, Tim Mattke.

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 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 and new insurance written, which we think you'll 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 Form 8-K that was filed earlier this morning.

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 Form 8-K.

With that, let me turn the call over to Curt.

Thanks, Mike, good morning. After the last several years of reporting difficult financial results, I'm pleased to report that the third quarter was another profitable quarter for us with net income of $12.1 million or $0.04 a share.

The home price appreciation we've been experiencing over the last several quarters as well as modest improvements in the employment picture continued to positively impact our financial results during the third quarter. And, as we discussed last quarter, we have seen improvements in the cure rate of more recently received notices.

This is to be expected as the country continues to recover from the effects of the recession and cure rates begin to return to their pre-recession norms. The hard part, of course, is predicting the continuing pace of this recovery.

I'm also encouraged by the progress we've made this year regarding new business growth. While 30-year rates have come down from the highs we saw in June and July, they're still at a level that has material reduced refinance activity, which impacts total origination volume.

The decline in our monthly new business writings during the quarter was almost entirely related to fewer refinance transactions us the purchase market remained relatively strong. The good news on fewer refinances means that we have fewer cancellations of insurance. During the quarter, refinanced volume fell as expected and totaled 18% of our new writings versus 30% in the second quarter and comprises approximately 15% of our current application pipeline.

Meanwhile, purchase application volume remains strong and is approximately 30% to 40% higher year-over-year.

In the quarter, we wrote $8.6 billion of new business, up 7% from last quarter and 23% from the same period last year. Year to date, our volume was $23.1 billion, up 35% from the first nine months of 2012. New business writings typically slow in the fourth quarter, and we expect that to happen again this year, but we view this as a seasonal effect versus a fundamental shift in demand for housing. The in-force book increased in the quarter for the first time since 2008 as a result of fewer cancellations and strong new writings. , yet another important milestone our Company has reached this year.

Even though the rapid rise in interest rates earlier this year has caused a shock to prospective homeowners, the current interest rate environment has stabilized and is positive for us as purchase loans are still affordable but rates are high enough to lower the refinance incentive of recent vintages, which helps our in-force book grow.

Also keep in mind the level of pent-up demand that has been created over the last several years. Household formations are returning to their historical levels, and once we get through the current political squabbles that are causing some short-term disruption, we would expect the economy to continue to improve, which in turn provides consumers more confidence in their future employment and, importantly, their ability to purchase a home.

As a result, I remain encouraged that the demand for home purchases will continue to recover. And, since the majority of purchases that need a mortgage do not have a 20% down payment, we have a wonderful opportunity in front of us.

In addition, our industry continues to regain share of the low down payment market, reflecting the FHA's financial woes. While the third-quarter numbers are not yet available, we estimate that our industry's market share in the third quarter was approximately 13% of the overall market as compared to 10% in the second quarter. We believe that within our industry, MGIC's market share has stabilized in the 16.5% to 17% range.

Losses incurred in the third quarter were $180 million, down 63% from last year and down 8% from last quarter. During the quarter, we saw the typical seasonal pattern of new notices increasing from second-quarter levels and exceeding the number of cures reported. However, as I mentioned earlier, we have continued to experience some benefit from positive housing trends. Specifically, the cure rate of recently reported notices continued to show improvement and, when combined with modest, favorable development and severity this quarter, resulted in losses incurred being lower than we would've otherwise expected at this time of the year.

In October, we received consents from the GSEs regarding the previously executed settlement agreement with Countrywide regarding rescission of coverage on GSE loans. As a result, during the fourth quarter, we will begin to implement the operational components of this agreement.

As a reminder, this means that we will process as claims the rescissions on GSE loans that we have been holding. This will impact our operating statistics we publish monthly, but will not impact our incurred losses as we had previously recorded a charge a year ago. The activity associated with the agreement will be broken out when we release our operating statistics each month.

Paid claims in the third quarter were $414 million, down 29% from last year and down 4% from last quarter. Claims received which can serve as proxy for foreclosure or short sale completions continued to decline and were down 21% from the same period last year and down 7% quarter to quarter.

The delinquent inventory ended the quarter at 111,587, which is down 25% year over year and down nearly 5% sequentially. After considering claim paids, we expect the inventory to decline in the fourth quarter.

At quarter end, cash and investments totaled $5.5 billion, including $594 million of cash and investments at the holding company. Our annual interest expense is approximately $67 million and our next scheduled debt maturity is $83 million due in November 2015.

Let me now take a couple of minutes to discuss the regulatory environment we are currently dealing with. First, earlier this year, the CFPB issued and then subsequently reissued its final qualified mortgage, or QM rule, and appears to line up fairly well with the type lending that is taking place today in the marketplace. We estimate that 99% of our new risk written in the last several quarters would have met the QM definition, including the temporary category from mortgages satisfying the general product features of QM that meets the GSE's underwriting requirements.

In August, the long-awaited revised risk retention rule was released, and generally it defines a QRM, or qualified residential mortgage, as a mortgage meeting the requirements of a QM under which the regulators call a preferred approach. Importantly, the preferred approach has no down payment requirement.

In addition, the regulators also requested comments on an alternative QRM definition which utilizes certain QM criteria but also includes a maximum loan-to-value ratio of 70%. The comment period for this proposal ends at the end of the month, and we will be commenting on this proposal. Since the original proposal from 2011 contained a 20% down payment requirement that was for the most part universally rejected as being too onerous, we think that the preferred approach of no down payment by the regulators is the more likely outcome. This, of course, would be good for MGIC and our industry.

Additionally, the FHFA and the GSEs continue to discuss and develop mortgage insurer eligibility standards, including new capital requirements. These revised eligibility requirements and capital standards are expected to be released sometime in 2013; however, the specifics of what is included and the timing of their implementation remain unknown at this time.

So while we do not have any specifics to share, we remain confident that MGIC has a number of options available to comply once they are published and effective. The NAIC review of capital standards, which the Wisconsin insurance regulator is leading, also continues to move forward and there is no time frame for implementation that we are aware of.

The debate over the rule of the FHA and the GSEs in the housing market continued during the quarter with a number of congressional hearings taken place. Given the current state of affairs in Washington and with elections looming in 2014, we do not expect that a definitive action on either of these fronts this year or even next year.

We continue to see and hear that in the various scenarios we are aware of that there is a role for private mortgage insurance. Exactly what that role is, however, has not been defined, but it seems positive for the industry.

In closing, while it was a positive quarter for us financially, we also made good progress in three other areas; first, by increasing the amount of new business written while maintaining our industry-leading cost advantage; and, second by putting a significant rescission dispute behind us; and, finally, by maintaining options to be in compliance with the upcoming changes in the capital standards. We will continue to focus on these objectives as we feel our Company is in an excellent position to take advantage of the housing recovery and we are committed to maximizing that opportunity.

With that operator, let's take questions.

(Operator Instructions) Steve Stelmach, FBR.

Can you expand a little bit more on the macro opportunity? There is an industry that I think had over $20 billion of capital per year pre-crisis now, depending on how you count it, call it $6 billion, $7 billion, $8 billion today. You have new entrants coming, raising capital. How much capital do you think this industry needs ultimately to satisfy demand over the cycle? Are we still swapping (multiple speakers) anything in that process?

It's too early in the process. We have to get through what capital standards may come out of this, and then as well look at the opportunity that will be presented both by FHA being rehabilitated and the GSEs and whatever may happen there, Steve.

But I think the real positive thing is the new capital that has entered the business, both through the capital raises by the legacy companies as well as the new entrants. The capital has been raised there and showing a wonderful sign to Washington that we can play this role, and we can play an important role in housing finance going forward. If the opportunity is presented there, the market will raise the capital necessary to meet that opportunity.

So, the opportunity is very good relative to looking at just basic demographics relative to, as I mentioned, household formations returning -- should double from where they've been over the last four or five years annually. As I mentioned, the opportunity presented by FHA's problems certainly is a wonderful opportunity.

So here at MGIC and I'm sure throughout our industry, we're all excited about the future.

Okay and sort of dovetailing into that average premiums, how should we think about average premiums as LTVs at the GSEs will a little bit higher, like it was a little bit lower. Are average premiums -- do you suspect the buys sort of stable, improving layered on with sort of additional competition? How should we think about that trend?

Steve, this is Mike Zimmerman. So, if you're referring to the pricing, obviously that -- those cards are out there. We have that public. But if you're talking about the effective yield for us, as with the reinsurance transaction we have with the new business, you're going to see a modest drift lower over time, but we are at 58 basis points this quarter. We should be in that range, again, drifting down over time, but in that range.

What pricing will be in the future really is going to be dictated by the credit quality and the opportunities in the products that are being originated and being insured.

Yes, and as I've mentioned a number of times, I'm very excited relative to credit quality. Certainly going through always just gone through helps reinforce that, but by the same token, one of the few good things done by Dodd-Frank was to legislate quality through the QM definition. It's a role that I always felt the GSE should have played a bigger role in the marketplace on and, for competitive reasons, I don't think they did as well there is they could have. But with the impact of QM, I really think you won't be competing in the loss line.

Great, thanks guys. Just one more housekeeping. On 4Q numbers, it doesn't sound like the rescission settlement with Countrywide is going to impact the 4Q results. Any other one-timers that we need to think about that could cause some noise there? Is the 90-day notice going to hit the P&L or any other one-timers, we are just going to chalk up as one-timers?

Everything that we're aware about we've disclosed in the risk factors with it. So you're right; the Countrywide implementation won't affect our current losses in the quarter. It will affect operating statistics.

We're not aware of any other things that could happen in the quarter at this time. Obviously, we are at the beginning of the quarter.

Great, all right, thanks guys.

Thank you.

Douglas Harter, Credit Suisse.

Thanks, I was hoping you could give us a little clarity or outlook as to how you think monthly volumes are shaping up for October; whether we think we've kind of stabilized at the level that we saw in September or you expect further declines.

We'll let Pat Sinks, who runs our business development group, answer that, Doug.

What we've been seeing here over the course of the third quarter and into the fourth quarter is just a gradual decline. As Curt mentioned, we've seen refi activity drop quite dramatically, but that's kind of settled in, in that 15% range. So we've seen a slow decline in the purchase market side, but that's to be expected at this time of the year.

Got it. And then just, your 12-plus payment defaults, that percentage declined nicely in the quarter. Do you have a view as to how that rolls forward in the next one, two quarters, how that outlook is shaping up?

Doug, this is Mike Zimmerman again. That's been, right, the mystery we've all been trying to solve for the last couple of years, is how long do these things take to get through the foreclosure pipeline. In Florida, claims coming to us are over almost four years delinquent. On nationwide, they are two years delinquent.

Things seem to have been stabilized little bit, I guess, with the processing of those, but how long it takes to play out, how bankruptcies interact with all that; that's causing some of the uncertainty when we're looking at these things and the pace of this recovery. That's why we say, that's the difficult part in predicting it.

So I know a non-answer with it, but that's what we keep watching each quarter to see how those -- and each month and see how those things are developing and keep talking with our servicers to make sure that they are working through those processes as quickly and as efficiently as they can.

Great, thank you.

Geoffrey Dunn, Dowling & Partners.

A couple of questions on the incurred loss this quarter. First, can you break the incurred result down between the current period provision and prior-year -- or prior-period development?

I guess I would say -- this is Mike Lauer -- the most significant adjustment during the quarter related to severity on the older buckets. And I would say that was in the range of $40 million to $60 million in the quarter. So that was the benefit, really more of a catch-up, as we looked at trends over the last three quarters on average severity.

There were some modest changes in the cure rates, especially on current cures, but the significant adjustment related to severity on the older buckets.

Okay, and that actually leads into my second question. With respect to claim rate on the new notices, last quarter you indicated it dropped to 1 in 5 incidence expectations. Even if just fractional, did you reduce or improve that view again this quarter?

Yes, we did.

Can you quantify that to any extent?

Geoff, this is Mike. Last quarter, what we said we owe is about 1 in 5. So if you think about it maybe from this perspective is that we were maybe on the higher end of 1 in 5, and now we're on the -- we were at the lower end of 1 in 5, now we're on the higher end of that. So if we were in the 20%, 21%, maybe now we're in the 18% to 20% range going forward.

That changes as you look -- the inter-quarter, cures were higher this quarter, so that influenced it, but there was a modest point or so improvement in the claim rate.

Okay, and in terms of severity, we see obviously just the overall average. I think this is the second quarter in a row you were down in that 45,000; 46,000 range. Is that the kind of level you expect to run at and the type of delta versus say 1Q at 48,000 that you've adjusted for?

As of now, I would say yes. Obviously, we'll look at it again at year-end. I wouldn't anticipate much change. This was a significant adjustment, I think, in the quarter. We'll look at it again every quarter, but we tend to look at it more than one quarter adjustment. So we'll look at some trends as we get to year end, I wouldn't think a major change going into the fourth quarter.

Yes, Jeff, the way I'd phrase it, too, is sometimes we see that number jump around, so we like to see it trend downward and then stay down for more than just more than just one quarter. So seeing it two quarters stay in that 45,000 level obviously wanted to look at severity closer. If it continues to stay down in that range and/or trend lower, we'll obviously take an even harder look at it.

Okay, great, thank you guys.

Thank you, Jeff.

Bose George, KBW.

Actually, the first question was on the quota share. The 30% quota share, is that something that you guys could revisit just going forward?

Well, in what sense?

Keeping more, or ceding less of that.

We have an agreement in place for 30% quota share, and that has a term through 2018, but we do have an early termination provision in 2016 that would allow us to terminate early. But we couldn't before that time change the 30% quota share to 20% or whatever.

Okay, and then (multiple speakers).

And again, I think that's an important part. As we look at new capital standards, it will play an important role for us.

Okay, great. Actually switching to the converts, the 2% converts, are they in the money now ? Like how does -- is that going to show up in the fourth quarter share count?

Bose, this is Mike. I mean, you've got to -- it gets -- first, it has to be a year from the issuance of those, so you've got some tactical accounting issues there. But it's really more to make sure that they are anti-dilutive or not. So when you look at all of the different structures that are in place, because you have to add -- when you add back the interest, if it becomes a positive to earnings, then it won't be included. So it has to be anti-dilutive to be included. Whether or not it's in the -- if we make money, then you have to look to see if it's dilutive or anti-dilutive, and that will determine whether it's included or not.

Okay, great. And then just one last thing on pricing. Have you guys seen any pickup in price competition in the industry?

No change from what we've seen prior. Single premiums still remain important, but no changes relative to other aspects of the business.

Okay, great, thanks.

Mark DeVries, Barclays.

First question, Curt, I think you mentioned that you estimate private MI's share of the market went to 13% from 10%. Where do you think that could get? Is the FHA still capturing almost as much of the market as private MI? And as that goes higher, could you see the total market of private MI reach 20% or higher?

I don't know how to characterize that. Let me put it in a little different terms. Historically, we've been 2/3 of the market of the private mortgage insurance industry, and FHA has been 1/3. I think given the issues that FHA has to deal with and all, so I think even the Congressional mandate coming out of Washington, I think will exceed that 2/3 at some point in time in the future. So that will be about 2/3 of the industry in the private mortgage insurance on the low down payment loans.

So where that translates into actual or origination percentage, I don't know, but I think will exceed the historical norm over time given the pricing, the draw that they've had on treasury and just the mood in Washington relative to dealing with FHA and its problems. That all bodes very well for our industry.

Okay, but is the combined credit-enhanced market share of private MI and FHA, it's well over 20% right now, right, between the two of the total (multiple speakers)?

Sure, yes. And also, don't forget, VA has become -- mainly on refinances, the VA is about a 20 -- if you look at the credit enhancement market, the VA is about 20%, 22% of that share of the high LTV market, but that's dominated a lot by refi's. So that plays a role into it too. But, yes, I mean between private MI and FHA, clearly it's over 20%.

Okay. Could you talk about your expectations for the share of the market that singles capture as we move towards more of a purchase market and whether if those decline what that might do for your market share of the whole private MI industry?

This is Pat. Our estimate right now is that the single premium piece of the insured business is about 25% of the volume. That is comprised of both and LPMI execution and BPMI. The distinction there is that we expect that QM which will be effective in January will have an impact on the borrower paid side, but it probably won't be material.

So we would expect, as we sit here today, that the market to continue to be in the 20%, 25% range. We've heard some talk that higher interest rates will diminish the use of single premiums, but we've yet to see that actually in the numbers.

Okay, got it. And just last quick question -- where does holding company cash stand right now?

$594 million.

$594 million.

Okay, thanks.

Jack Micenko, SIG.

Hey, thanks for taking the question. Actually, the first one point of clarification, in talking about the severity assumption change in the quarter on the heels of last quarter, am I interpreting it correctly to say this is a -- the adjustments made this quarter, it's unlikely to see another third consecutive quarter of adjustments, sort of a true-up? Is that the right way to think about --

Yes, I think what I said is we've had some trends here for the last 2.5 quarters, really, at lower severity. We've made some adjustment. Whether or not that continues in the fourth quarter we'll have to look at again. I wouldn't anticipate it, but we'll look at it, obviously, and adjust if it's there. But I wouldn't anticipated, I guess. My first catch would be that it wouldn't change that much in one quarter, and we generally wouldn't make that kind of adjustment in a quarter unless some significant trends would continue.

Okay, that's exactly what I was looking for. And then looking at the 2010, 2011, I guess on the 2010's for sure, we're sort of getting to a seasoned portfolio there, 50 to 100 BPS of delinquencies. I guess, A, is that the right number you see in the portfolio? And, B, could you argue that maybe standards are a little too tight based on where underwriting is at now, in terms of could that number come up at the expense of maybe more top-line business?

Jack, just to make sure we were hearing you right, you're talking about the delinquency rate on the 2009 and 2010 books of business?

Yes.

Yes, I think the launch ratio on those books are, what, 13% on the 2009's and about 6% on the 2010's. That would reflect the fact that, yes, there's more opportunity to do more business. And I think as the FHA, as more of that business frees up to our sector, it's still a great business, obviously. But that will raise loss ratios on the newer books of business, but still well below probably historical numbers.

So, we do have an opportunity to do more, and that's reflective of what's going on in the FHA, and also what the GSEs will accept. So I think the whole housing market will settle into more standardized numbers over the next couple of years as we figure out what's going to happen in Washington.

Okay, and then just real quick, I'm not going to ask you about RTC numbers that I'm not going to ask you about timing, because I know would be a waste of your time (laughter). But when we talk about risk weighting sort of becoming more of a discussion in the marketplace amongst investors, what do you think the right risk weighting is? Is it just a top-line number for pre-2009, post-2009? Is it a default-driven assumption? How would you like to see the risk weighting rules come out that would make the most sense?

I think on a on a general basis, and I'll let Larry talk on it further, but just from my perspective, we like to see the risk rules come out that are reflective of the risk we insure. And what I mean by that is that, if you will, loans that have 800 FICO should have less capital required against it versus 600, and so let's just use that as an example.

In the same on premium rates that that's reflected relative to the capital charges also so that you get a true risk weight capital ratio rather than just hard capital ratios. I mean, if you look at what we went through over the last cycle when we pretty much gave everything back, I mean we were running what, 6, 7, 8 to 1 on risk-to-capital ratio, and yet you saw the results of that over the last number of years.

So that -- what truly have to happen is that the capital charge is reflective of the risk that's insured. And the current model, the hard risk to capital, if it's 25 to 1; 20, 18, 50, whatever it might be, is not reflective of that.

Larry, I don't --

Yes, and I guess with regard to how much capital, it should be your starting capital plus your premium stream from the business ought to provide the funds to pay losses in a given stress scenario, i.e. 30% price declines like we came down through from 2006, 2007. So that's kind of the context.

As Curt was saying, you know, some of the higher FICO business given the premium rate would require risk to capitals above -- less than 20 to 1; 25 to 1, for instance, whereas other segments would require something more than the 15 or 18 to 1 that's been thrown in the marketplace. Our current mix, given the FICO distribution and whatnot, would suggest something of risk -- less capital required than what seems to be talked about 18 to 1 because the credit profile is so strong plus the premium stream. We wouldn't need much capital to weather a 30% price decline.

All right great, that's helpful, thank you.

Sean Dargan, Macquarie.

Just when I think about this quarter's results in the context of normalized earnings going forward, I think it was said that the $40 million to $60 million of favorable development in the older bucket helped results. I know you don't want to talk about a per-share number, but do you have a pre-tax earnings number in mind which is possible when we think about normalized earnings? Because presumably, you won't have the (multiple speakers).

We're not going there. What's your next question? (laughter)

Okay, but I mean the correct way to think about it is you wouldn't get these -- this aid from (multiple speakers).

Sean, that's right. When you get to a steady-state period of normalized performance and normalized delinquencies and writings coming in, clearly, you're going to have -- you won't have favorable or adverse development. You'll just have it rolling along as it would be. You can look back, in our history pre-2007, and see that. So, yes, that's right, but along the way, there's going to be adjustments that have to be made before you get back to that norm.

Okay, got it. When we think about options you have available, when the FHFA does come out with the eligibility requirements, you mentioned reinsurance. And it seems that there is willing capacity and Bermuda given that the Bermuda reinsurers are getting squeezed in some other lines of business. Is there any appetite to reinsure legacy business?

Yes, there is.

And do you think that would be -- you'd be given credit for that under a likely scenario?

I think the only way we would do it is if you get credit for it. If you're not going to get credit on the capital standards, it wouldn't make sense to enter into a transaction.

And we think it's likely that you would get credit for it. So that is certainly one of the options we're pursuing as we look forward to our future.

Great, thank you.

Seth Glasser, Millennium Partners.

Hey, guys, thanks for taking the call. I also won't ask you about timing of risk to capital, but I did have a couple of philosophical questions for you. The first being, whatever the new standard is, assuming, say, it's 18 times, how do you think about where you would want to manage the level to? If it's 18 times, do you want to manage it to 15 or 16 times? Or are you going to be comfortable sort of managing it much closer to that 18 times type number?

Well, I think the issue is going to be, as Curt talked about earlier, it probably won't be a hard number. There's going to be some other issues around it about how you measure it and when it's effective and probably maybe cuts on capital for different asset investments and everything. So it's going to be more complex than just a pure number.

That's why we kind of qualified it and said we think were comfortable where we're at with respect to alternatives we have to meet the capital standards and then work around them as they change. I think there's going to be some early calls on how the capital standards will be set up, but then they'll evolve over time to be maybe more specific as we talked about. They may be even tighter relative to, as Curt and Larry mentioned, it may be more refined later on as we look at real products and risk associated with them and premiums, etc., and the life of the product.

So I think we'd encourage that and I think the whole capital process is going to evolve over time. And we think that we are in a good position relative to cash on hand and at the holding company, as well as our existing capital position and alternatives relative to reinsurance going forward to meeting the initial standards and then longer-term what it involves.

Yes, but from a practical matter, you would not operate right at the 18-to-1 line. You'd have some distance because, from a practical matter, any given quarter you might get some gyration on the loss line or write more new business than you think and then you're over the line, and that's not a good spot. So we'd probably operate somewhat below that line. How far I guess depends on how comfortable we are with the environment.

Right, okay, that's fair. I guess the other question with regards to this issue is we've gotten confirmation I guess through a couple of different sources around the FHFA looking at haircutting capital credit that is received for subsidiaries, and there's been some question about whether that would include both MI and non-MI subsidiaries. I know, this is obviously a much bigger issue for your friends in Philadelphia, but just any thoughts or updates around what you're hearing with regard to subsidiary capital haircuts?

We haven't heard anything to that effect.

Seth, this is Mike Zimmerman. When our conversation was part of -- it's in the hands of the FHFA. So we are waiting as you are and as they are as to what those would be. So we are hearing the same rumors that you are with it, but exactly how they would be applied to our knowledge has not been determined.

Right, but I guess has there been any color as to whether that is something that still being considered?

It hasn't been provided to us, so if it is, that's really their call, not ours.

Okay, understood. My final question is just with regard to the IRS issue, that it seems like it sort of sprung back onto the radar here a little bit. So you will be actually receiving essentially a bill for the remaining IRS liability in the fourth quarter? And I know in the past, you've said that if necessary, you'd be likely to take this to full litigation if that had to be the past.

How are you thinking about that now? Is it possible that you might need to make a pretty significant cash payment for this issue at some stage soon?

No, all we're doing is updating you we think eventually. We thought we'd hear something sometime this year because year end is coming up. We anticipate we'll hear something in the fourth quarter. And if that's the case, then we would have a choice to make, either A, to make the payment; or B, litigate, and we'd litigate.

And if we made the payment -- it's make the payment and then sue for refund with it, in fact. So we're just kind of describing -- the update in the risk factors was really just clarifying the choices that we would have to make once we receive the letter. So that's what we're trying to do with those factors, is really, I would say, any update as to where we are headed with it or what our thoughts are around it.

Yes, nothing new happened.

Got it, okay, thank you, gentlemen. Congrats on your second straight green quarter.

Thank you.

Craig Rothman, Millennium Partners.

This is Chris Gamaitoni for Craig. I just wanted your perspective on what you thought the future of the insurance in-force book would look like, kind of in mix between persistency and originations as we go into the slower refi environment and whether we can see consistent growth in that book.

I think persistency on the newer books of business as rates rise will exceed 80% on those books of business. So they'll be very profitable books of business, not only from the quality standpoint, but the fact that we'll have them for longer term then historic averages have been. So I think there'll be a return to old relative to persistency somewhere between 80% and 90%.

No, you won't see that show up in the reported number -- that consolidated number on an annual basis for few quarters yet as the refi activity of the prior year burns off with it. And the purchase volume we would expect to be -- continue. It's forecasted to be higher and we have better penetration rates as an industry with that. So that would bode positive for book growth in the future.

Yes, I think the next couple of years, even though originations are looking at being down, it's all reflective of refinance volume. The purchase market in both 2014 and 2015 should be higher than the preceding year. As we've talked about, with a pickup that we'll get as an industry from FHA business continuing to migrate to our industry, I mean it should be a very healthy purchase money market for us moving forward.

Do you have any sense of the -- how much kind of the IRR on capital deployed increases as those very clean recent originations extend? You know, I assume -- I don't know what the average life you were assuming when you price those relative to credit risk, but if they extend longer as right rates rise, how much more of an IRR do you think does that increase?

Well, corporately, we try to target return overall of around 15%. These newer books are doing better than that. Even with some of the burn-off caused by the rate drop on 2009 and 2010, we lose some revenue, but the capital is released, so your IRR is benefited there. But we're probably well above 15 on these newer books.

All right, thank you so much, and congratulations again.

Scott Frost, Bank of America.

I know you've been over -- you're unclear on the timing of the new rules, but have you communicated to regulators what you think the length of the adjustment period would need to be once levels are determined? And I have a follow-up.

No, we're basically waiting for this information. We thought maybe by now, we would've heard it. So, we're waiting for whatever they're going to come out with and then we'll have discussions with them. They really haven't shared any information with us with respect to their thought process about -- other than they thought they would have something by the fourth quarter this year of some new capital rates.

We have expressed our desire to have an implementation period. An immediate -- to publish them day one and be effective day two is not an appropriate manner, that there's got to be some implementation period and time line for them to become effective. So we have told them that, but given specifics, no. But we've told them that, clearly, you need to have an implementation path in order to be logical about the whole process that's going on.

Have you given them an idea of what that -- how long that implementation path would need to be?

Well, no. If it was up to us, we would say extend it for 10 years. But they're not going to go with that, right, because organic growth and so on with it. So it's really up to them.

Yes, I think a more likely approach is that they will give a number of months of comment after they do release them to our industry, and I would think then for implementation in 2015. But that's practical thinking. So I'm not sure if it'll be taken.

And a follow-up, for the -- you mentioned the reinsurance possibilities for legacy business. Is that -- would you say that the interest in reinsuring that is coming from third-party capital more or less, or more or less than traditional reinsurers with rated balance sheets? How do you find the mix in terms of interest in reinsuring reinjuring legacy positions?

Traditional reinsurers with strong balance sheets.

Okay, thank you.

[Anan] (inaudible), Hudson Capital.

A quick question, can you talk about the uses of holding company cash, please?

As we mentioned in the call, we're at about $594 million, and the principal use of that is interest payment. Annually, it's about $63 million, I think, and we've got an $84 million note due in November 2015. So that's the principal use.

And then as we mentioned in the event that we (multiple speakers).

I meant more for the quarter itself.

No, none; really effectively none. We didn't have any interest payments. So during the quarter there wasn't much activity.

So you guys -- (multiple speakers)

It grew actually a couple of million dollars.

So your ending balance as of second quarter was how much again?

It was $594 million. The beginning balance was $592 million, it's up a couple of million.

Which includes any mark-to-market adjustments, investment income -- all of that would be included in that delta.

Are you with us?

Yes, I'm still with you. All right, those are all of my questions, thank you.

[Jeffrey Johnson], Dowling & Partners.

Just a couple of follow-ups. First, are you able to give any detail with respect to the profit commission on your quota deal and if that's benefiting your expenses at all yet?

No detail on that; I guess just a couple of things. We have talked about the ceding commission, and that is 20%, and that is benefiting our operating expenses. The profit commission will -- runs through the premium line, so that will benefit the premium line coming back through there. So that's part of the blend of the premium yield that you see right now.

Okay. So it isn't on a lag basis or anything like that; it builds with the cede?

It builds with the cede, correct.

Okay.

And Jeff, as that becomes material in size, that will be broken out in the future. But it's, at this point, not a material number to report.

Sure. And then with respect to the Countrywide, I think there's, what, 2100 loans associated with that settlement?

For the GSE, it's [one] (inaudible).

Yes, so is that something we should expect -- does your capacity allow for processing of all 2100 the fourth quarter, or is that something that's going to be bled in over 3, 4 or 5 months?

The goal is to try and get them processed in the next -- in November, starting in the fourth quarter.

Okay so we should be (multiple speakers).

On the loans effective -- the GSE loans when we process those, our goal will be to get them done this quarter.

So the lion's share, if not all, will be done in the fourth quarter, Jeff.

So the right way to think about the fourth quarter is kind of maybe a declining run rate off of this quarter's claimants, then it's plus 2100 loans?

Jeff, are you talking about for the delinquent inventory or what?

Yes, basically you did about -- just under 8700 claims this quarter. I'm wondering if we should be thinking that's going to spike up to 9500 or whatever.

Yes, definitely, the number of claims payable will definitely spike up this quarter, and what we plan to do in our monthly operating statistics we'll put out, we will give you that specific line item as to what the, if you will, extraordinary activity was during the month that was associated with the implementation of the agreement. But it absolutely will increase, materially increase, during the quarter on a processing basis, paid basis.

Okay great, thank you.

Thank you, I'm showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.

Thank you. I'd like to compliment my management team and remind them that it's bosses day. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program, you may all disconnect and have a wonderful day.