MGIC Investment Corp (MTG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your MGIC Investment Corporation first-quarter earnings call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, please begin.

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 first quarter 2015, our CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Larry Pierzchalski. I want to remind all participants that our earnings release of this morning, which can be accessed on our 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've indicated in this morning's press release, we have posted on our website a presentation that contains certain information about our primary risk in force and new insurance written and other information we think you will find valuable. During the course of this call, we may make comments about our expectations of the future, which on this call also include statements regarding the potential impact of the draft GSE, or actually now final GSE, eligibility requirements, or alternatives we may pursue to obtain achievement and compliance with those requirements. 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 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 any time other than time of this call or the issuance of the Form 8-K.

At this time, I'll turn the call over to Pat Sinks. Pat?

Thanks, Mike, and good morning.

I'm pleased to report that in the first quarter, we recorded net income of $133 million or $0.32 per share compared to $0.15 per share in the first quarter of last year. I know most people are anxious to discuss the announcements of last Friday by the GSEs and we will, but first I will recap the quarter financial results and trends.

The year-over-year improvement of the financial results were driven by a lower level of incurred losses, increased realized gains as we rebalance the investment portfolio, a re-estimation of reserves relating to disputes regarding our claims paying practices, and modest growth in net premiums earned. The lower incurred losses in the quarter reflects the fact that we received 19% fewer delinquency notices and those notices had a lower claim rate when compared to the same period last year.

Historically, the first quarter has always been a strong quarter from a credit perspective, as there is a higher cure rate on notices received during the first quarter versus other quarters. Other than for these seasonal factors, there were no material changes to our claim rate severity assumptions from those used in the fourth quarter of 2014. As a reminder, we made changes to our claim rate and severity assumptions based on how we expect our delinquent portfolio to perform in light of these changes, positive or negative, in housing and economic trends.

We expect that the claim rate will modestly improve throughout the remainder of the year, but changes in credit performance typically emerge over time and do not occur suddenly. Incurred losses also have a one-time benefit of approximate $20 million. The majority the benefit resulted from a re-estimation of previously reported reserves related to disputes regarding our claims paying practices, as well as minor changes that involved assumptions regarding IBNR.

The legacy books of 2008 and prior continue to generate approximately roughly 94% of new delinquent notices received during the quarter, while those books now comprise just 45% of the risk in force. The delinquent inventory ended the quarter down 21% year over year and down 4.3% sequentially, ending at 72,236 loans. We expect to see the inventory continue to decline during 2015 through the eventual resolution of older delinquencies combined with the lower level of notices being received. The number of claims received also declined and was down 29% from the same period last year and down 9% quarter to quarter.

Paid claims in the first quarter were $232 million, down 32% from the same period last year and down 6.5% from last quarter. Similar to the delinquent inventory, we expect paid claims to be lower in 2015 than in 2014. We estimate that our industry's market share in the first quarter of 2015 was 14% with approximately 25% to 30% of that business being written as single premium policies, which is predominantly lender paid, or LPMI. Within the industry, we believe that we have maintained the market share gains we realized over the last several quarters and estimate that our first quarter market share was at least equal to last quarter's market share of 20.6%.

We expect that FHA's market share increased in the first quarter, primarily as a result of a surge in refinance transactions subsequent to the FHA premium reduction. We previously estimated that approximately 80% of the business we wrote in 2014 had a lower monthly payment using private MI than FHA applicants considering the FHA rate reduction, but looking at Q1 NIW and our application pipeline for March and April of 2015, there is no material change in this mix. So the substantial majority of borrowers we ensure enjoy a payment advantage with private MI, and all the borrowers with private MI enjoy a faster equity build up and the ability to cancel the coverage when compared to FHA programs.

In the first quarter, the GSEs began acquiring 97% LTV loans. This was welcome news, as we were already willing to insure these loans with established guidelines and pricing. However, given the LLPA announcement last Friday by the GSEs, we would not expect a material increase in this segment.

LPMI singles comprised approximately 20% of the quarter's volume and reflecting the competitive environment, there was an average discount of approximately 13% from the LPMI rate card. As we discussed last quarter, our expectation was that the level of LPMI and the level of discount would increase from fourth quarter levels and we are seeing that play out in the first quarter.

Our expectations that the percentage of our 2015 volume from LPMI singles will be higher than last year, but not as high as it was in the first quarter. All that said, in the first quarter our NIW increased over last coming in $9 billion. This year-over-year improvement primarily reflects the fact that both the MI industries and our Company's Q1 2015 market share with higher than it was for the same period last year. Currently, our purchase application pipeline remains robust, running approximately 29% higher that the same period of a year ago.

Our expectation remains that we will be write modestly more business in 2015 than we did in 2014. Year-over-year insurance in force grew nearly 5% as a result of the increased levels of new insurance written and higher persistency to end the quarter $166 million. At quarter end, approximately 61% of our insurance in force was covered by reinsurance transactions. During the quarter, in total, the reinsurance transactions had the effect of reducing net income by approximately $10 million.

Overall, the weighted average effective premium yield was 52.5 basis points in the quarter versus 52.2 basis points last quarter and 54.1 basis points in Q1 of 2014. At quarter end, cash and investments totaled $4.8 billion, including $494 million in cash and investments at the holding company. Our total annual interest expense is approximately $66 million and our next scheduled debt maturity is $62 million, due in November of 2015.

Let me now take a couple a moments to discuss PMIERs and other regulatory matters. The long-awaited GSE private mortgage insurer eligibility requirements, or PMIERs, were finalized and published last Friday. We expected that MGIC will be in compliance with the PMIERs when they become effective on December 31, 2015. While we would have desired more balance in the final rule, I am pleased that the PMIERs, including their financial requirements, and when finalized, and we can for the most put this issue behind us.

Furthermore, given the conservative nature of the financial requirements, it is now time to accelerate the discussions regarding proposals that would allow private mortgage insurers to further reduce the risk of the GSEs and ultimately the taxpayers. These proposals include allowing deeper coverage above 80% LTVs or placing insurance on loans below 80% LTV. We believe that allowing private mortgage insurers to take out the risk before it even gets to the GSEs could increase access to credit and lower cost for borrowers.

Under the PMIERs, the mortgage insurers' available assets must be equal to or exceed its minimum required assets. We estimate that as of March 31, 2015, MGIC has a gross shortfall of approximately $230 million. This compares to a gross shortfall of $1.1 million under the draft PMIERs we disclosed last year. Our shortfall estimates are based on our interpretation of PMIERs and assume that the risk in force and capital of MGIC's MIC subsidiary will be repatriated to MGIC.

However, this shortfall estimate does not include any benefits from the existing reinsurance agreement or the anticipated restructure of the existing reinsurance transaction, any capital contributions from the holding company of MGIC or the transfer of assets from regulated insurance affiliates of MGIC that, subject to regulatory approval, could increase the assets of MGIC. As we have previously disclosed, we were assuming we would receive approximately $500 million of benefit under PMIERs for the risk that was received. However, we also said that we do not expect that we would have received full credit under PMIERs or our existing reinsurance transaction.

As a result, over the last few months, we have worked with our panel of existing reinsurers to structure the transaction in a way that we believe will result in MGIC receiving the maximum benefit under the PMIERs. We recently completed these negotiations with the reinsurers and have submitted the final contract to our state regulator, as well as the GSEs for their review and approval. In addition to the benefits we would gain from the restructured reinsurance transaction, here in April, we received regulatory approval to transfer $45 million of assets from regulated insurance affiliates of MGIC that will increase the available assets of MGIC.

Finally, we also believe that a portion of the holding company's $494 million of cash and investments at March 31, 2015, may be available for future contribution to MGIC. We estimate that for the new business we are currently writing, the initial minimum required assets under PMIERs would equate to a 14 to 1 risk to capital ratio.

After considering normal delinquency development, seasoning, reinsurance, and an operation cushion, we would expect to generate a mid-teens after-tax return. Clearly, the final PMIERs have materially increased the amount of capital insurers we will need to hold, but we believe we can generate returns that are acceptable for the risk taken.

And looping back to LPMI for a moment, the GSs said they are considering changes to the PMIERs for LPMI business through primarily duration risk and expect to have those finalized by June 30, 2015. Depending on the outcome of their analysis, single premium plans may become less prevalent than they are today if more capital is required by the GSEs. So net-net, as I said, I am pleased the rule is final and we can concentrate on approving access to credit for consumers and de-risk in the GSEs with credit mortgage insurance.

A review and updating of State capital standards by the NAIC, which the Wisconsin insurance regulator is leading, continues to move forward although we are not aware of a time frame for implementation. We do not expect revised State standards to be more restrictive than the financial requirements of the PMIERs. No real progress is being made in the debate over housing policy in Washington, so while it is possible with the change of parties in control of Congress that there is more legislative activity than I anticipate, I continue to believe that the current market framework is what we will be operating in for a considerable period of time.

In closing, during the quarter we continued to make great progress building on the foundation of delay in 2013 and 2014. During the quarter, we wrote $9 billion of high quality business, the insurance portfolio grew by 5%, the level of delinquencies and claim payments continued to fall, MGIC's risk to capital ratio improved to 13.7 to 1, MGIC's market share within our industry is strong, and we maintained our traditionally low expense ratio.

In many respects, the finalization of PMIERs is the last remnant of the recent crisis, as well as a building block for our future. It has taken a lot of hard work by my co-workers and the support of the shareholders to get MGIC to this point, and I thank you for your commitment to our Company.

As an industry, we learned some tough lessons during the financial crisis but we are stronger for it. Mortgage insurers have been recapitalized, successfully implemented a new master policy, and now we have modernized GSE eligibility requirements.

With all of that behind us, I see lots of opportunity for MGIC in coming years. There is a greater role for us to play in providing access to credit and reducing home ownership costs for consumers. It's time to shape the future of private mortgage insurance, and as the founder of this modern day mortgage insurance industry, MGIC can and will lead those discussions.

With that operator, let's take questions.

(Operator Instructions)

Mark DeVries, Barclays.

I first just wanted to clarify where you stand from a capital position after PMIERs and all your comments. Based on the $230 million gross steps that you talked about, the what is it, a roughly $45 million you think you're going to get from -- credit for MIC, $90 million plus on credit for the profitsharing commissions. And then I guess, Pat, you indicated you now expect full credit for the extension of the existing reinsurance of $500 million. That gets you to roughly a $400 billion day one surplus. Am I thinking about that correctly?

Yes, I think -- this is Tim speaking. I think in general as you walk down and talk about the dividend credit, and those are from non-MIC subsidiaries, and then talk about the profit commission that we would expect would be accommodated as PMIERs are going forward. The only variable in there is the reinsurance credit, and as we've talked in the past, we don't know the exact amount of credit we get.

And we've talked to the reinsurers about being able to scale that based upon the final PMIERs, so I think your basic answer is correct that we will have a surplus. The question really is how much reinsurance do we seek and how much credit do we get for it.

Mark, this is Mike. Just to clarify. That $500 million that we referenced was the credit we were assuming under the existing deal but obviously that does (inaudible) just more of a reminder of what was the benefit we assume.

Yes. Exactly. So the next question is assuming full credit on the existing deal, or the old deal, if it is roughly a $400 million surplus, presumably you wouldn't feel like you needed that much surplus to begin with. So does that give you room then to potentially scale down the size of that reinsurance contract?

Yes, I think it's something that we'll obviously discuss. We view it as the attractive source of capital and view reinsurance as important part of the capital structure, and we've talked before how it helps our returns out, but obviously there's a balance with that in having excess over the required capital amount. So that was those decisions that we'll be making in the near term here.

Okay. Are you in a position yet to talk about what kind of a cushion you think you're going to want to hold day one?

Not at this point.

Okay. Got it. And then when you think about how much excess you want day one at the writing company. Is that going to depend in part on the opportunity you see out of some of these other opportunities that Pat alluded to, particularly deeper MI coverage or anything like GSE risk sharing?

That's definitely a consideration when we talk about cushion is what opportunities might be there for additional volume past our current forecast or other opportunities, as Pat mentioned.

Okay. And finally could you talk through -- ?

Mark, one more and then I'll ask you to go back so we can get to some others in line. All right? One more, though.

Yes. Sure. If you could just, Pat, walk us through the timeline of your thoughts of how this opportunity around deeper coverage could evolve in the coming months?

I think first of all, there's been a number of people in Washington, primarily led by the MBA, who have been advocating for deep cover for a bit, a long period of time going back to 2014. The private mortgage insurers are generally aligned with that. I think one of the hurdles that we've had is that PMIERs was not final.

That's what we heard consistently was well, let's wait and see how PMIERs shake out. Now that they're finalized, I think we have a stronger argument to be made. I think that argument has to be made or those discussions have to take place with the FHFA as well as the GSEs. And I think that'll take a period of time. I don't think it's eminent but I think we've got momentum now that PMIERs is done.

Got it. Thank you.

Thanks, Mark.

Bose George.

Good morning. First on the singles, the 25% to 30% you mentioned for the industry, how does that compare to the last few quarters? And then you noted that you expect your percentage to be lower for 2015 versus the first quarter. Just curious what's going to be driving that.

Hello, Bose. This is Mike. The overall (inaudible) of the industry I don't think has changed much. So our expectation really is just as we look at the pipeline and we see what the application volume has relative to the mix of singles versus the monthly which is why we make that statement that we think it's going to be lower going forward than it was in the first quarter (multiple speakers).

Is the first quarter piece being driven by more refi's or is that the structural issue that's drove it up little bit more this year -- this quarter?

I mean I think that could be. We definitely -- we saw a surge in refi volumes and as you know it's -- we haven't had a lot of singles in the background but when we refer -- over the course of the last year or so, the lenders seemed to like it with refi's. So I'm sure that was a contributing factor to the increase.

Okay, and then switching to the FHA, the comment you guys made on the FHA volume, do you think a lot of that was FHA to FHA refi's? Do you have a sense for that?

Yes, it's Mike again. That's where we think that primarily why the streamline refi's FHA to FHA, you saw a large spike in the refi index -- FHA refi index as a result of obviously where rates went to but then coupled with the price cut that they had.

Okay, then. Just one last one. In terms of the HAMP modifications, I guess we are started to see some HAMP resets. Is there any early read on whether -- the re-default rates on that? Do you think it's going to be an issue at all?

Updated it in the supplement. It may still on there and most of our HAMP [odds] are the HAMP 2.0 where it is really the 1.0 had the reset condition relative to rate. But no, we haven't seen any changes in the reperformance of those.

Okay. Great. Thanks.

Eric Beardsley.

Hi, thank you. Just back on the reinsurance side, would you expect to get a majority of your original expectation, the $500 million?

I think our view is our expectation is that we will not receive a haircut or that we'll get the maximum credit for it. I think the part to be determined is the size of the -- respectively the quarter share that we would have on it and that will be determined in the near future.

Got it. Just as you look out at capital deployment opportunities in the future, how do you prioritize in terms of looking at whether it's the converts taking down reinsurance or participating in some more growth opportunities?

It's obviously the growth opportunities, the returns that we get off of those and make returns off the capital that's in the writing company is something that we focus on. If we're not able to deploy the capital there and have obviously some money at the holding company, what we can do on the converts is something we'll take a look at. Obviously, we have a few different issuance is that it's at the holding company level to deal with all of their own nuances. But it's something that we keep an eye on, obviously.

Eric, this is Pat. I would add to what Tim said that now with PMIERs being final, we can start to answer these kinds of questions. We've been very focused on capital for a long time but the last five or six years have been in the survival mode and now we can shift to growth mode and what's really important is that we have options. How much reinsurance we choose, what we're going to do with the debt, dividends may be available to us in small amounts, and nothing definitive yet but for the first time we can have a more robust discussion with our Board about these matters

Great. Thanks. And just really quickly, I'm not sure if you said but what was the ultimate claim rate in the quarter?

Are you talking on new notices?

Yes.

I think we've been talking before that most recent quarter is it was slightly better than [15%] claim rate, as Pat mentioned in his opening comments. Usually the first quarter is better. I'd say it's probably 1 point to 2 points better in the first quarter.

Okay. Great. Thank you.

Jack Micenko.

Good morning, everybody. I wanted to go back to pre-crisis times. I think one of the interesting things on the LLP revisions was a seemingly discouragements of potential piggybacks going forward, and I know that was a competitive pressure pre-crisis. How much NIW do you think the industry gave up to piggybacks before the downturn?

Jack, this is Mike. Testing memory banks pretty well on that one. I think at one point we would say several points of our industry shares, so in the range of a 25 to a third maybe of potential. I mean, they got pretty high at one point. Especially in the early 2000s.

If you go back to 2003 and 2004 and particularly in states like California, piggyback lending was huge. So it was a major competitive issue.

We're not seeing that -- today that's not the case. Piggybacks are just some -- it's more of the traditional role. That product (inaudible) contend, was a lot of times used for jumbo borrowers and some really trying to, if you will, work around some of the conforming limits. But we don't see much of that activity at this point anymore.

Right.

Banks aren't overly thrilled with the CLTV ratios on those.

Right. I guess staying in the earlier 2000s and I know it's maybe a bit premature, but remind us of what your corporate capital return payout strategy had been. I mean, dividends versus buybacks, ballpark payout ratios. I know that the industry had been an active repurchaser of their shares and dividend payer, but can you just maybe put a sharper point on some of those numbers?

Well, I think -- this is Pat. I will give that one a shot. We had, I think in the late 1990s, early part of the 2000s, and don't hold me to those exact years, we were buying back stock. But it was a situation where we couldn't deploy the capital back into the business and there are risks to capitals back then based on the old traditional calculations were a 9, 8, 7 to 1. And so we thought the most efficient use of the capital was to send it back to the shareholders in the form of shareholder buybacks.

We were -- there was upside, there wasn't that much upside in the ability to redeploy the capital in MI business. As you alluded to, piggyback lending had become a threat, and so it was a challenge for us to redeploy it and the profitability of those rate books of 1990s was such that we just accumulated capital. So there was a period of time. We had a dividend payment back then but I would not describe it as sizable. It was more of an effort to be attractive to shareholders and investors who felt they needed a dividend paying stock.

Yes, I think we got about $1 a share on the dividend side.

Okay. Great. Thanks, and then just one last one. Why do you think the final PMIERs broke out the post 2008 into three additional buckets?

I think there, Jack, this is Mike again, is they indicated in the final rule that they are going to be updating these tables every couple of years. So this rule, Pat said in his comments, one, [the weighted], right, so, this was a -- that is for all of 2014 the rule was probably finalized but they finalized but the tables maybe formulated back in 2013 and so they went through the process of updating for home price appreciation.

The relatively less severe CCAR stress scenario as it reflects a better economy. So it seems that it's just in line with what they are selling in the rules that they'll update these every few years and they've update those, but really you'd have to ask them but that seems to be the bent on it.

Okay. Thank you very much.

MacKenzie Kelly.

Thanks, good morning. First, Pat, can you just clarify on the comment that you made with PMIERs potentially seeing some additional changes on the single premium capital requirements?

Well they in their announcement last week alluded to that one of the items they were still working on is what kind of assets should be held against LPMI and there was concern over the duration risk. You always have that with single premiums depending on what's going to happen with interest rates. And as a result of that, our expectation based on what they said is that we'll see some kind of additional requirement for assets to be held against single premiums.

Okay. And now feeling like you're somewhat on par with the market on the LPMIs, and I know you made the comment that you expect that share of the business to decline, do you think that the pricing should be relatively stable in that part of the market? And then also on the borrower paid in more traditional business, how do you think about balancing returns in volumes in this environment especially now that we do have clarity on PMIERs and no real offset with the GSEs, how should we expect overall pricing to trend?

This is Larry. I guess as far as the impact of PMIERs on the LPMI singles, we'll have to wait to see what the GSEs finally do there in terms of capital requirements and then we'll have to evaluate that. Because it's a longer lived loan, because it's the premium is really built into the interest rate and it's not subject to Homeowner's Protection Act, the risk is on the books longer subject to what happens in the interest rate environment.

So we'll have to see what comes of all that and have to make our decision then. Much like the impact of PMIER capital requirements on our borrower paid rate card now that we have the capital requirements we can look to see what the returns are by LTV FICO pricing bins that we currently have and see how much the returns deliver and how much volume is in some of those sells and make a business decision.

Okay. Make senses, and if can just squeeze one more in. Looking at the reserves that you've set aside for the existing delinquencies, can you just provide some perspective on what you've seen more recently with the very late stage delinquencies? Has there been really any movement in the progression of those loans to resolution and how we can expect severities and claim rates to trend on the later stage?

This is Tim. On the later stage, quite frankly, we haven't seen a lot of changes on their behavior as far as the resolution whether it be a claim or whether it be a cure on those late stages. Severity wise, I haven't seen any significant real movement on those either. Obviously, the longer they're in there, we face some additional carrying costs.

But there hasn't been a significant movement as you can see from our average paid claims statistics. But in general, we talk about the claim rate on those items, we haven't seen a lot of change in those -- in the behavior of those in the last few quarters.

Yes. The only additional comment I would make, even on the very aged delinquencies, three years plus, we do see a fair amount of cure activity. They don't all go to claim, some are out there because they're tied up in bankruptcy and what not, but a material portion of those fees and delinquencies do in fact cure.

Okay. Great. Thanks.

Geoffrey Dunn.

Thank you, good morning. A year ago, you were talking about incidents rates and the expectation was that rates would deteriorate as the year went on after a good seasonal first quarter. Now, we're looking for rates to gradually improve.

What occurs in the book that gives you the confidence that we're shifting to that trend and probably more importantly, what do we need to look for to try to determine the pace of improvement? Is it simply just the mix of the inventory or what other factors do we need to do to try to gauge how quickly or slowly that might develop?

This is Larry. I'd say the claim rate on new delinquencies, the trend is a slow improvement, upward path. On top of that, you've got the seasonal pattern that Tim has spoke to. What's driving that is a couple of things. One is the home price appreciation. So some of the loans that we're way underwater aren't so much anymore, and those on the margin are now maybe above water. So that helps.

I think on the servicing side, there is a strong effort more so than ever to try to work with borrowers to avoid some of the scrutiny of the CFPB and what not. The CFPB instituted a rule a year ago not to start foreclosure proceedings until a borrower is down at least 120 days. So, all of that together and then we still have HAMP out there contributing. So all of that together and then aside from that, the mix shift, fewer delinquencies from the old books more from the new book as the portfolio transitions.

So all that collectively together is causing this rise in the overall cure rate. On top of that, that's seasonal. And we're still below the historic norm. I'd say the historic norm in general is around a 90%/10% split, somewhere in that area, maybe a little better than that, so 90%, 92% going to cure, 8% to 10% going to claim. We're still below that. We're trending up to that. How long it takes I guess depends upon all those factors I've mentioned.

And Geoff, this is Mike. Just to clarify, I mean, too on the comment with some unexpect modest improvement of the year is without considering from the fourth quarter, without considering that seasonal influences and all the things Larry said. So, improvement if you will from the fourth quarter forward absentee's that seasonal benefits we saw in the first quarter.

I guess just to try to frame what might be modest changes in incidents. Year over year, is a 1.5, 2 points of shift a reasonable assumption giving the trends we've seen?

I think that would probably be the maximum we would expect to see, but I think we would expect to see, as we've said, positive movement on that. We would not expect it to be more than 2%.

Okay. And then just one more question on the PMIERs. I understand that you don't know what cushion you need to operate with under the new rules, but are you able to talk even at a high level how you even go about try to approach it? I mean, we saw just after two years when they finally update their model how much of an impact that had. Going forward, it seems like there's potential for a lot of volatility as macro factors shift. Any thoughts at the very high level how you're going to begin to approach the cushion you might need?

I mean, at a high level, Geoff, I think you hit on an important aspect there that we know that there could be volatility with these where they reset them every couple of years. That could be up or down. So that does have to be a consideration on that.

Obviously, other considerations are the dividends that we may or may not be able to get out of the writing company. That has to be approved by our state regulator. Those are probably a couple of the main considerations. You think of on top of, as we've talked about, what we think we can deploy at the writing company and new opportunities that might be there to have some capacity to take those opportunities up when they come.

And then I'd add on to that, too. Just having a relationship with the panel of reinsurers, just having that relationship in place over time, to a degree there are changes to PMIERs or the opportunities, or the economy or what not, it gives us much more flexibility and improves our response time because we can easily go to those panels. They're in touch with the business, and because they've been in touch with the business, we can talk to them about maybe changing the structure to deal with any of those opportunities or changes to PMIERs.

Okay. Are soft capital facilities an option for the industry?

Soft capital?

You know like a (multiple speakers) preferred or something like that?

I think anything outside of what's prescribed in the PMIERs, the play would be conservative but it would have to pay -- would need GSE approval.

Okay. All right. Thank you, guys.

Chris Gamaitoni.

Good morning, guys. Thanks for taking my call. Just an update on the capital structure. Is there any, besides the point of excess or potentially excess over your cushion around capital, is there any way to, or any thought about, issuing non-convertible debt to take out a portion of the convertibles?

I don't want to talk any specifics, I think as we've said before, as a holding company, now that we know what the PMIERs are, we can start to have more of those discussions with our Board and say anything we might want to do with the debt as a holding company. So we'll look at different options, but not talk about anything specific.

Is there a target in a normalized period when all the capital rules and earnings are more steady? Is there are a target debt to equity leverage ratio at the hold co?

I think we've talked in terms about keeping an eye obviously on how the rating agencies do leverage. We've talked before that we'd like to back to investment grade. In particular, that is meaningful from being able to market the business. Past that, I don't know if there is a set ratio at this point, but that will be a consideration in whatever we settle on.

Okay. You made a comment that you expect NIW on a year-over-year basis to be modestly higher. So year over year on the first quarter, I believe was up 74%. Is that an indication that you expect the rest of the three quarters to pretty much be flat year over year?

I think we were building NIW and share during the fourth quarter of last year. So by the time we get to the fourth quarter of this year, you're just not going to see the same kind of percentage increase. It's simple math, actually.

Okay. And is there any update on the DTA?

DTA, we sense that we expect it to come back on this year. I would say based upon the level of earnings we've seen over the most recent quarters, our expectation would be -- it would be before the fourth quarter that would come on, but too difficult to tell what specific quarter.

Okay. Thank you for taking my questions. Appreciate it.

Thank you.

Doug Harter.

Thanks. I'm wondering if you could -- you talked about the competition in LPMI. Can you talk about the level of price competition in the borrower paid and the monthly pay products?

I don't think -- this is Pat, I don't think there's anything unusual there that we have seen. Certainly not from a pricing perspective. Discounted LPMI, by definition, contains a discounted price that causes the competitive pressure but day to day on the borrower paid side, it's all about execution. Right now, some things are simple as delivery time to customers. When they have a higher refi market, they want their loans turned quickly, and that becomes a source of competition but not in terms of pricing at all.

Can you just help remind us in a more normalized environment, which it looks like were going towards, what are the rules as far as getting dividends approved from the writing company up to the hold co?

Well, the rules as they stand right now, look at the lesser of 10% of surplus or effectively your prior year statutory income. The statutory income has the calculus of deducting our contingency reserve build against it. So what I would say is that the dividend capacity under the strict rule is fairly minor over the next couple of years because [like insuries] are built and so that leads you into the extraordinary dividend realm of having to get the approval from your state regulator.

And so that is sort of the -- I guess the world we'll be living in for the next few years. Now, historically, we have gotten extraordinary dividends out pre-crisis. So that is not something that is uncommon, per se but that is something that would be a request as opposed to a pure amount of dividend that we can take out without any discussion.

Got it. And the ability to take the standard that's as long as you're in compliance, you have that ability to take the standard amount?

Right.

Great. Thank you.

Sean Dargan.

Yes, thanks. Just following up on the last question. Now that you have the final PMIERs, when do you think you'll be in a position where you're generating enough statutory net income so that you'll be able to pay a regular ordinary dividend?

I would say following up the prior question that the statutory net income that is designed today where we have to deduct our contingency reserve, which is 50% of our premium, that's a pretty significant drag on our statutory net income even for the next few years. So the amount of dividends that you'd be getting out from just that pure calculation I would say are for the most part immaterial. Anything that would be sizable would have to be an extraordinary dividend.

Okay, so I mean like okay, all right. Now that we do have some sense of what the level playing field is going forward, is there any appetite if an MI property became available to raise capital to acquire in force premium?

You mean in acquisition?

Yes.

Well, I think we will have to wait and see what PMIERs does. As we've talked about, it does take returns down a bit because we have to hold more capital going forward. Does that change the appetite of some of the MIs or their parent companies to be in the business? I don't know yet. Everybody has said they're going to comply. So we would be opportunistic.

You always have to be cautious when looking at acquisitions as to whether or not you can maintain the market share on the customer. If an MI, or rather a customer divides their MI between four companies and two of them merge, that doesn't mean that the merged company gets both shares, and that has to be factored into our equation. So MGIC would be good listeners and be opportunistic but I don't have anything on the horizon that I see that's going to happen for sure.

Great, thanks.

Mike Zirensky.

Thanks, good morning. Follow up on the DTA reversal potential. What's your estimate of the expected tax rate? I'm wondering if there's an impact from some muni bonds or other items?

Well, I think from a -- talking once we bring it back on and what our effective rate is once we have the DTA back on the books?

Yes, exactly.

Right now our muni bond portfolio is relatively small, and so we get some benefits. Obviously, as we switch over into a position where we become a taxpayer, historically we have moved more to a muni bond portfolio which could benefit us on the effective rate and lowering it past 35. That will take time based upon our current path.

Okay, got it. Also, next on expense levels, it jumped single digits on a year-over-year basis and a good deal on a sequential run rate basis, how should we think about either the absolute level or the ratio going forward throughout the year?

I think on an absolute dollar amount, and probably on the ratio, that the first quarter is probably a pretty good run rate for you to assume for the rest of the year.

Okay, great, and lastly, you guys have done a good job of lifting the portfolio yield in the face of falling interest rates. Is there more you guys can do outside market interest rates increasing?

We'd like to get the yield higher. Part of it is obviously the equation of how far out do you want to go on duration we're very cognizant of not going too far out on duration to make sure that when rates do go up, that we would get hit going the other way. So we're trying to bring up the yield as much as we can, but I don't think there's any silver bullet there to take it up significantly.

Thanks for the answers.

(Operator Instructions)

Christine Worley.

Turning back to reinsurance for a second, I know you know we are in an environment right now where there's a lot of excess capital in the reinsurance market, and it sounds like that's a capital tool that you guys will look to utilize going forward as we could potentially see some capital requirement changes.

I mean, are you looking to build anything in, in your renegotiation that would allow you to dial up or dial down the amount of reinsurance used without having to necessarily go through a full discussion process with the reinsurers again? I'm just -- my concern would be going forward when there's less capacity in the market how that would impact your relationship.

It's obviously -- I think we're cognizant of this interactive time to be seeking reinsurance right now. I think as Larry said earlier, whether we can get anything in contractually or not that would allow us to dial up specifically, I think that would be to be determined. But I think we do feel that the fact that we've worked with this panel of reinsurers over a period of time and effectively have been renegotiated a third time now shows our willingness to work with them and their willingness to work with us. So hopefully that would provide to be mutually beneficial in the future as well.

Thank you very much.

Thank you.

I am showing no more questions in the phone queue at this time. I'd like to turn the call back over to management for closing remarks.

Okay, this is Pat. Thanks everybody in your interest in our Company. As we've discussed this morning, the fundamentals of the business are strong. PMIERs is now known and we can get back to just competing on the business and competing toward the business and the future is bright and we're excited to get on with it. Thank you.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.