MGIC Investment Corp (MTG) 2015 Q2 法說會逐字稿

Good day, Ladies and gentlemen, and welcome to the MGIC Investment Corporation second-quarter earnings call. (Operator Instructions). As a reminder today's conference call is being recorded. I would now like to turn the conference over to Mr. Mike Zimmerman, Senior Vice President Investor Relations. Please go ahead, sir.

Thanks, Candace. 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 results for the second quarter of 2015 are CEO Pat Sinks, Executive Vice President and CFO Tim Mattke, and Executive Vice President of Risk Management Larry Pierzchalski.

I wanted to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website which is located at mpg.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.

We've posted on our website a presentation that contains information pertaining to our primary risk in force, 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 includes any statements regarding our ability to comply with the GSE mortgage insurance eligibility 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 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 Form 8-K. Now I would like to turn the call over to Pat Sinks.

Thanks, Mike. Good morning. I am pleased to report that in the second quarter of 2015 the Company continued to grow our insurance in force by adding another $11.8 billion of high-quality new insurance. We also continue to experience positive trends on pre-2009 business relative to new delinquent notices, paid claims and the declining delinquent inventory.

The combination of profitable new business and continued runoff of the older books and a strengthened housing market position us well to provide credit enhancement solutions to our customers now and in the future.

In the second quarter we recorded net income of $113.7 million or $0.28 per share compared to $0.12 per share in the second quarter of last year. The year-over-year improvements on the financial results were primarily driven by lower losses incurred as well as an increase in earned premium.

Tim will go over the financial highlights of the quarter in a few minutes, but first I would like to make a few comments about the current market dynamics and strategic items we are focused on. Then I will wrap up with a discussion of the regulatory and political fronts.

We estimate that our industry's market share for the first half of 2015 was approximately 13%. Within the industry we believe that we have approximately 20% to 21% market share.

Approximately 25% to 30% of the business the industry is writing is single premium policies which is predominantly lender paid or LPMI. Consistent with our expectations, LPMI singles comprised approximately 17% of our NIW this quarter and, reflecting the competitive environment, there was an average discount of approximately 11% from the LPMI rate card.

To date the FHA premium reduction that went into effect earlier this year is not impacting our volumes in any material way. We still win business and may have a lower monthly payment with FHA insurance as borrowers with private MI enjoy faster equity build up, have the ability to cancel the coverage and, in most cases for loans with a 680 and higher credit score, a lower total cost or the average duration of a policy.

While our expectation remains that we will write more business in 2015 than we did in 2014, the year-over-year improvement as measured at the end of each quarter will be less in the second half of the year than the first half.

Leading off the strategic issues are the PMIERs. As most of you know, under the PMIERs a mortgage insurer's available assets must be equal to or exceed its minimum required assets. In April we estimated that before the effects of reinsurance, MGIC had a shortfall of approximately $230 million.

As of June 30, based on our interpretation of PMIERs, we estimate that this gap has narrowed. The most significant factors in the narrowing was the transfer of $45 million of assets from MGIC subsidiaries to MGIC and an approximate $60 million decrease in required assets due to the removal from the delinquent inventory of the held recessions associated with the implementation of the Countrywide Bank of America settlement.

This estimate considers the capital and risk of MIC being transferred back to MGIC, but again doesn't consider the impact of reinsurance.

Concerning reinsurance, we shared with you last quarter that we had completed negotiations with the existing reinsurers to restructure our transaction and we submitted it to the GSEs for their review to determine what level of credit would be -- we would get under PMIERs.

Based on our discussions with the GSEs over the last few months, we believe that as of June 30 the restructured reinsurance transaction would provide a reduction of required assets as defined by the PMIERs (inaudible) [$600 million].

Once the restructuring of the transaction is complete, and based on our current estimate of minimum required assets, MGIC will be able to certify that it is compliant with PMIERs when they become effective at the end of this year.

On June 30 the GSEs issued some updates to the PMIERs that included, among other things, increases to the level of required assets for LPMI business. The additional charges for LPMI only impacts loans with note dates of January 16 and later.

We are currently reviewing the impact at the increased asset requirement will have on returns both at the product and portfolio level and are determining our strategy going forward with this premium play.

The bottom line is that the final PMIERs have materially increased the amount of capital insurers will need to hold, but we continue to believe we can generate returns that are acceptable for the risk-taking.

The next topic I want to discuss is the opportunity for our Company and our industry to further reduce the risk of the GSEs and ultimately the taxpayers. Through deeper coverage or front-end risk sharing, we believe that private mortgage insurers can take out the risk before it even gets to the GSEs, which would increase access to credit and lower the cost for the borrowers.

These ideas include allowing deeper coverage on about 80% LTVs or placing insurance on loans with LTVs of 80% and below. Both put the GSEs in a more remote loss position than they are today. We are in the early stages of discussion with the GSEs and FHFA on these matters, but are encouraged by the fact that the FHFA lenders, legislators and policymakers are willing to engage in discussions.

We think that the next logical step to take in this area is to have the FHFA add this item to the annual GSEs scorecard. This would enable a pilot program to be developed to validate the content and we are working towards that goal. Tim will now go through the financial highlights for the quarter.

Thanks, Pat. As Pat mentioned, the year-over-year improvement of the financial results were driven by primarily a lower level of incurred losses and modest growth in net premiums earned. The lower incurred losses in the quarter reflect the fact that we received approximately 18% fewer delinquency notices and those notices had a lower claim rate when compared to the same period last year.

Reflecting the current economic environment, new notices received in the quarter estimated to have a claim rate of slightly less than 14%. During the quarter we also updated our claim rate assumption for notices received over the last several quarters given the actual experience that outperformed our original estimates. This resulted in a benefit of approximately $20 million to $25 million.

Regarding late stage delinquencies, we still have not seen any evidence that would materially alter our expectations and therefore still expect a high rate of claim on that bucket.

The legacy books of 2008 and prior continue to generate approximately 94% of the new delinquent notices received during the quarter, while those books now comprise just 42% of the risk in force. The delinquent inventory ended the quarter down 22% year over year and down 8% sequentially as the last part of the BankAmerica settlement was operationalized.

We expect to see the inventory continue to decline during 2015 due to the eventual resolution of older delinquencies combined with a lower level of notices being received.

The number of claims received also declined and was down 24% from the same period last year and down 2% quarter to quarter. Paid claims in the second quarter were $222 million, down 26% in the same period last year and down 4% from the last quarter. Similar to the delinquent inventory we expect paid claims to be lower in 2015 than in 2014.

Insurance in force grew nearly 6% year over year and to end the quarter at $169 billion. During the quarter we eliminated a premium deficiency reserve that was associated with the bulk business and that also impacted net premiums earned as we adjusted our accrual for the refund of premiums associated with claim payments and rescission activity that were previously included in the PDR.

While there is no net income impact as a result of the PDR being eliminated, it did result in the weighted average effective premium yield declining to 51.0 basis points in the quarter versus 52.5 basis points last quarter.

At quarter end cash and investments totaled $4.8 billion including $463 million of 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 2015.

Regarding the overall capital structure of the holding Company, many of you have inquired about our intentions. We are analyzing our options and are willing to consider options that add long-term value to shareholders and we will keep you apprised as our strategy develops.

Finally, let me address the reinsurance transaction. As Pat mentioned, as of June 30 the restructured reinsurance transaction would provide a reduction of required assets as defined by PMIERs approaching $600 million. The terms of the new agreement will be very similar to the existing transaction. That is, it is a 30% quota share with a 20% [gating] commission and a profit commission.

The term of the contract is for 10 years consistent with the PMIERs stress loss scenario, but we have an option to early terminate in 2018. The transaction will cover approximately 70% to 75% of the in force versus approximately 60% for the existing deal and will include NIW in 2016.

The percentage of the in force that would be covered increased as a result of the reinsurers accepting more legacy business than they had previously. Although the GSEs have not yet approved the transaction, either they or the OCI has rated any material objection and therefore we expect that the revised agreement will take effect in the third quarter. With that let me turn it back to Pat.

Thanks, Tim. Next let me give a quick update on the regulatory and political front. The 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 timeframe for implementation. We still do not expect the revised state capital standards to be more restrictive than the financial requirements of the PMIERs.

No real progress is being made on overall housing policy, although the [Shelby Bill] that passed the Senate banking committee did call for the use of front-end risk sharing including the use of private mortgage insurance.

And while the future of this particular bill is uncertain, it provides an important reference point along with the Johnson/Crapo framework and the ongoing housing policy discussions, which is positive for private mortgage insurance. However, 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. We wrote $11.8 billion of high-quality business; the in force portfolio grew; the level of delinquencies and claim payments continue to fall; MGIC's risk to capital ratio improved to 13.2 to 1; our market share within our industry is strong and we maintained our traditionally low expense ratio.

With PMIERs behind us I see lots of opportunity for MGIC in the coming years. And I firmly believe that there is a greater role for us to play in providing access to credit and reducing homeownership costs for consumers and we are committed to pursuing those opportunities. With that, operator, let's take questions.

(Operator Instructions). Bose George.

The first one is just on the high LTV loans, your -- the loans with LTV's over 95 is 5% compared to around 2% last year. Is that coming from but new 97's and where do you see that percentage going over time?

Yes, that is due to Freddie and Fannie getting back into the 97 LTV space. That move was made earlier this year; it took them a few months to kind of get things into place. So I think what we are seeing here in the quarter is probably representative of where it is settling out.

Okay, great. And then actually one on reinsurance. Any thoughts about what you will do in terms of reinsurance after the end of 2015? Could you reduce the percentage of NIW that is subject to reinsurance at that point?

Well, just to be clear, the new reinsurance agreement will cover NIW in 2016, that will be at the 30% quota share. I'd say subsequent to that I think we'd look at other forms of reinsurance.

What we said previously it is still true, we view reinsurance as an important part of our plan going forward and an important part of our capital structure.

It doesn't necessarily have to take the form of a quota share, but we think the current structure with a profit commission in particular makes it an enticing, I guess, alternative for capital right now. But going forward for the 2017 books going forward we take a look at other forms as well.

Okay, great. Thanks.

Mark DeVries.

First question is on the premium yield. It sounds like there was kind of a one-time hit this quarter due to the reversal of the premium deficiency reserve. Should we expect that to move back up to 52 basis points or higher going forward?

Yes, this is Tim, let me address the PDR. So if the PDR previously housed some of the reserve that we would have had for return premium on loans that we will pay claims on and on rescission. And so what you can think of it is as we released from the PDR we had to reclassify that liability as a general liability that came back in the contract (inaudible) premium.

So that has been -- that release of the PDR was a direct hit to the premium line this quarter. So going forward we would not have that noise in the premium line.

The only thing I would say is, as I mentioned, the new reinsurance agreement will cover 70% to 75% of our in force as opposed to the 60% it covers right now. So that could have a little bit of an impact on the yield. But you won't have the noise associated with the PDR release going forward.

Okay. Do you know how much the impact was on the yield in the quarter?

It was about 1 point, 1.5 points.

Okay, got it. And, Tim, I know you mentioned that you are kind of considering capital actions right now. Was hoping to get a little bit more color and that. At least how much of the Holdco cash do you think is available for capital actions? And how you are thinking about your options right now?

When we think about our options I think we take a look at the different convertible securities we have out there and set aside the debt that we have maturing at the end of this year which we have cash set aside for. We look at our 2017 and look at that they have to be above $13.44 to convert at that point. So we want to make sure we have enough liquidity to handle that in case those don't convert.

And then we look at our 2020s that have a low coupon of 2% on them, but we have the ability to force convert them in 2017 if it is above $9.04, which the stock is trading at right now. So that -- the early part of 2017 would provide sort of a natural deleveraging point for us if we didn't want to do something sooner.

So I think we are looking at that along with what ability we might have over the next couple years to get dividends out of MGIC and try to look at all of those factors in relation to how we want to look at the capital structure moving forward.

Okay. And then given the amount of credit you are getting for the reinsurance from the GSEs, how much of your cash at the holding Company do you think is available that you could use to potentially retire some of these converts?

Well, I think as far as the exact amount, I am not going to speak as far as the exact amount there. What I would say is because the credit we are getting from reinsurance we don't expect that we're going to have to use any holding Company cash to put into MGIC to meet PMIERs. And so, the cash that's at the holding Company now is really for the debt and the convertibles that are there at the holding Company.

Great, thank you.

Eric Beardsley.

Just wanted to clarify, you mentioned the claim rate was still 14% in the quarter and there was $20 million to $25 million of positive development?

Yes, Eric, we have been slightly below 14%. So that is a little bit of improvement versus where we would have been we would say last quarter. Again, first quarter is a little bit different seasonally. But definitely an improvement of where we would have been sort of fourth quarter which would be a more traditional quarter last year.

So we are seeing some improvement on that. That improvement again is below 14% of the new notices. And had some impact then on us looking at the notices -- the reserves we set up for prior quarters on notices as well, that is the $20 million to $25 million benefit.

Got it. In your outlook I think you said you expected the claim rate to decline modestly over the balance of the year. Just curious in terms of the seasoning that you have seen on the newer vintages, is there a scenario where you could see that getting below 10% over the next couple years?

Well, the one thing I would say is most of our new notices are still coming from these old books. And so, I think it is less of an impact as far as what you think about loss rates will be on the newer books.

And more -- I think what is more affecting it right now is sort of the repeat offenders, as we like to refer to them as, that the new notices continue to be a high proportion of repeat offenders and those have a higher propensity to cure.

Got it. As you look out further is there anything to think that the new vintages could be significantly better than you had seen in the past in terms of that claim rate being -- I think in the past you talked about somewhere around 10% being perhaps normalized?

Yes, I would say the 10% historically has been kind of the national average in normal times, some markets obviously lower than that, a few higher than that. But I think a reasonable expectation long-term for things to settle out would be about 10%.

Okay, great. Thank you.

MacKenzie Kelly.

Pat, can you speak to the average decline in the discount on the lender paid single premiums from the rate card? It looks like that came down this quarter from the first quarter. Just an update on the pricing environment and if that was something intentional or if it was just maybe a demand change.

I am going to let Larry handle that one.

Yes, the amount of LPMI in the discount really kind of would probably move around quarter to quarter dependent upon the volume coming from various lenders. So in the -- from the first quarter to second quarter we did get less business from one lender in particular which caused the LPMI to drop from 20% to 17%.

And then associated with that the discount went from [13%] to [11%]. So it really depends upon what various accounts are doing quarter to quarter in the LPMI space.

Okay.

I would just add some market color to Larry's analysis on the numbers is that while LPMI, as we talked about, is still the thought there is around 25% to 30% of the business, it seems like the new requests are slowing down a bit. So I don't want to say the market has peaked in any way, shape or form, but it seems to be settling in a little bit and that is how we are looking at it.

Okay. And is that driven by -- is that a refi versus purchase mix issue? Or there has been a lot of regulatory tension from the CFPB and maybe the state regulators on the LPMI. Do you think lenders are backing away from it for that reason or there is something else going on?

I think some lenders have looked at it as more of a refi product than a purchase market product. So I think that could be influencing it. Relative to any CFPB or other inquiry we are not aware that any lender has pulled back as a result of that. We have not been told that in any official way.

Jack Micenko.

I wanted to ask about maybe some timing on deeper coverage. Obviously getting on the wind up would be a positive. Are we thinking -- is that maybe first-half 2016, second half 2016, could you see something sooner? Just curious as to what -- obviously highly speculative, but what you are thinking on a potential pilot for deeper coverage.

Sure. Well first of all, I think there is a lot of discussion around front-end risk sharing and as a component of that deep cover private mortgage insurance. A lot in the headlines. Obviously the private mortgage insurance industry is pushing for the idea. We have got the MBA pushing for the idea particularly as it relates to access to credit. The housing policy council and other policymakers are weighing in.

So there is a lot of positive momentum at the headline level. Once you get below that it becomes more of a challenge. And that is you are finally putting a pencil to paper to say how much will the MI, initial MI insurance cost and how much [GFE] relief will come in turn.

And so, we have just started those discussions with the GSEs and the FHFA. We have agreed to continue the discussions, we have some work to provide -- we being the industry, MI industry, have some work to provide the FHFA and they have asked us to come back to them. And so I think that process in and of itself will take the rest of 2015.

My point is that we believe it is the right thing to do, but when you get down into put the pencil to paper it becomes a real challenge. It is not something that is eminent.

I can't give you a specific timeframe for 2016. My guess would be sooner rather than later. But again, we want to build on the positive momentum that is there, but not yet prepared to make a specific forecast of when it might happen. There is a lot of leg work that needs to be done.

Okay, fair enough. And then I guess on the lender paid, have you seen -- I mean it looks like the pricing discounting came in a bit quarter to quarter coming off the last question. Have you seen maybe less participants around the hoop or anything with the updated PMIERs or is it really not as relevant because we don't have anything until the beginning of 2016?

Yes, this is Mike. Yes, I don't think the updated PMIERs has influenced anything. I wouldn't expect any changes from the marketplace in general, I mean later in the year possibly. But I don't think any impact relative to that change.

Clearly rates raising, LPMI, as you all know, has added to the interest rate. So as interest rates rise it's going to be a little bit less competitive of a tool as well for lenders relative to the parlor paid premiums.

So we'll have to just kind of wait and see how everybody reacts to those things. As we said, we are kind of evaluating the impact of returns and the competitive landscape for it. But nothing relative to just because of the publication at this point in time.

Okay, great. Thank you.

Sean Dargan.

I would like to follow up on the LPMI even further. So if I look at what the FHFA put out the required capital, capital charge is now subject to a multiplier of either 1.1 times or 1.35 times depending on LTV. Which would take a high-single-digit ROE product down to mid- to low-single-digits. So I mean I guess my question is, why wouldn't you be selling this in 2016?

I'm sorry, why wouldn't we be selling it?

I'm sorry, why would you be involved in --?

Oh, why would we offer it?

Why would you offer it?

Well, first of all, this is Pat, as we said, we are taking a hard look at it. I mean returns are absolutely critical to us; we spend a lot of time talking about it. So your question is spot on.

I think in and of itself if you look at the product based on the simple math you would say why would we offer? You can't run this business at single-digit returns for any length of time and it is short-term thinking.

That said, what we typically do is look at it on a customer-by-customer basis where you have got blended returns and a customer may want a piece of discounted LPMI. We continue to be defensive in this matter and that has not changed at all. We do not have our sales organization out there proactively selling it where we do it where we need to do it.

And so, now what we are trying to assess is, to your point, with the returns going down, do we go to individual customers and consider a price increase, should we do it across the board? We have to look hard at the returns that will drive as much as anything in our decision. But we also we have to be cognizant of customer needs and competition.

Okay and I guess a derivative question of that is if I look at your market share for the monthly business, you have a higher share than you do for total NIW production.

Yes.

Right. So if the market acts rationally and everybody pulls back on single premium LPMI, single premium business, then in theory your market share should go up?

That is correct. I mean your assumption is correct. All else being equal we get less in the LPMI space, more in the borrower paid space. So if LPMI were to decline or go away and we get our 20% to 21% our share or more it would go up.

Okay, thank you.

Chris Gamaitoni.

Another follow-up on LPMI. The lower percentage of your NIW quarter over quarter, was that reflective of just lower demand from the market or were you being more selective compared to peers? I am just trying to see if the industry declined or it was just you?

Once again the decline from the first quarter to second I would say was driven by two things. One customer in particular we didn't receive as much business as in the first quarter. And secondly, the LPMI product is much more of a refinance product. So as refinancers tapered off from first quarter to second quarter that in itself would tone down the LPMI percentage overall.

All right. Then on -- persistency was down in the quarter. Was that simply just more refis that were locked in the first quarter being funded in the second quarter?

Yes. Chris, this is Mike. That is right that is the annual number. So as (multiple speakers) spike in refis come down, which is why we (inaudible). That is exactly right.

No problem. And then is there any -- could you give us any -- I know it is really early, but just the thoughts around potential returns for deeper cover? Or would those have lower returns than your current MI business, theoretically they'd be lower risk? I am just trying to get a sense of how that would all work.

Chris, this is Mike. It is way -- as Pat was saying, we are at the very early stages because we don't know what benefits the GSEs would provide in the form of lower [GPs] and [LLPAs] as a result of us taking more risk.

So we don't really know where you can price that, so you have got to do some theoretical exercises. So I think it is premature to think about that at this point until we can get a better handle on what that counterparty would do.

Okay. Thank you very much for taking my call.

Geoffrey Dunn.

I guess I will start with deeper cover. I mean if that ever went through it is pretty transformative for the industry. So I know that the FHFA could add to the scorecard, but if this ever really moved forward past pilot do you think it could go without really Congress changing the charter?

Yes, we do. I mean -- this is Pat, I think it could. I mean I -- the thought is that we -- the charter can stay in place. I mean this is pretty simple execution when you think about it. We are just asking the lender to select a deeper level of MI. So I don't see the need to change a charter requirement -- on the above 80s I assume as what you are referring to.

No, I am really talking below -- above 80 to me is more of a rounding error, it is really the below 80 stuff. So I mean is that what we are talking about, the below 80? That is where the opportunity (multiple speakers).

Oh, I am sorry. Are you asking if (technical difficulty) beyond pilot would they create a charter mandating that the GSEs do that?

Well, no. I am just saying that it is such a profound change in the industry if you start providing cover below 80. Is that something the FHFA alone would stand up and do through scorecard or do you really think that it would have to be a congressional mandated change?

Yes, Geoff, this is Mike. I think in that order it would be probably led by FHFA because I mean we can clearly see the GSE reform is not rapidly progressing over the last several years or progressing at all for that matter. So we think it would be led by the FHFA.

Would it be beneficial if they run it into the charter? Absolutely. But it is not necessarily that. It really becomes an execution for the FHFA would say this helps access the credit and it helps lower the credit risk of the GSEs and lower taxpayer exposure.

So that if they did it on their own there would be no need to go to Congress and ask them to change the charter. But clearly, if we could get written into the charter that way, that would be beneficial. But it's not required.

And deeper cover provided by the MIs upfront is kind of an alternative to some of the back-end transactions they are doing today where they are laying off the risk on 60/80. So they are already kind of laying it off in that 60/80 LTV space, this would be an alternative to do it upfront rather than at the back-end.

Yes, I'm just thinking on the back-end they control it, whereas in the front-end they are kind of competing with you on the GP side. So --.

Absolutely. I think you hit why there is a lot of legwork to be done, you hit on the reasons why.

All right. And then looking at the new reinsurance, you previously said that the cost of reinsurance was probably around 3 bps. Obviously we have had time to go buy it and everything. But is the cost of you net-net similar on the new structure?

Yes.

Okay. And then last, Tim, on the investment portfolio, it looks like the yield started to climb up. Are you repositioning or extending duration at all that is helping that yield and is that sustainable?

We are, we are extending duration a little bit. I think duration was close to 4.5 now, so the yield went up because of that. We are repositioning there. We also are moving a little bit more into tax preference as well.

All right, great. Thank you, guys. Take care.

Doug Harter.

Just a follow up on that last point. Sort of until we get sort of any clarity on deeper coverage, are you considering putting some capital to work in the existing risk sharing transactions?

You mean the ones on the back-end?

Yes.

Yes, that is a consideration. I would tell you there is nothing eminent. But now that PMIERs is done and we know the rules, that is something we would like to participate in given the opportunity.

And I guess how do you view the available returns on that versus kind of the more traditional back-end coverage that you are writing?

To be determined. I mean, it depends on the structure. If we can deploy -- as an example, we deploy more capital into the day-to-day business, if LPMI were to decline as we talked about a little earlier, I would rather put it there than the back-end deals. But if the returns are attractive on the back-end, I mean we meet our hurdle rates, we would go for it.

Great, thank you.

[Jordan Smith].

Hey, it is actually Jordan Hymowitz from Philadelphia Financial. In the quarter how much earnings were generated by accelerated, if that is the correct word, prepayments on the single premium business versus last year. In other words, when you were single premium you paid a certain amount and it's earned over a number of years.

And because prepayments have risen I would imagine an increased amount of earnings were gotten this quarter than last quarter because there was more refinance from the single premium business. Can you quantify those numbers?

Yes, Jordan, I mean it is something we looked at because we know it came up last quarter as far as with all the refi activity. I would say from our premium earned perspective it impacted quarter-over-quarter less than $500,000.

Okay. $500,000 you said?

Yes. As far as the delta between quarters.

Okay, thank you.

(Operator Instructions). Jack Micenko.

Under the assumption that discounted LPMI is a tool to drive market share gains, what is preventing some of those from coming in and lowering price on monthly pay if the returns and the lender paid are no longer acceptable?

I mean is the -- like is the FHFA attention on this an implicit mandate around price competition overall? How do we think about that?

I don't think the FHFA scrutiny is around price competition, I think it is more along the lines of counterparty strength. I mean one influences the other, obviously.

To your question, specifically what would prevent it or allow it, at the end of the day the pricing is dictated, or approved rather, by the insurance departments in the respective states. So each Company would have to make the case as to why they would want to drop their premium or adjust their premium in any way.

Okay. I mean is that something that is on your radar screen as a potential concern or pricing has been stable now for I guess about a year and a half on the monthly, any thoughts -- I mean does the industry hold its ground or do you think there is potential price risk as we migrate away from this type of product?

As you said, I mean a year and half ago or so there was around like a 5 basis point reduction across the board in borrower paid. We haven't seen any material signs of that happening out in the marketplace. Could somebody go out and decide in order to grow the market share I'm going to lower my price? It would clearly come in the form of lower returns.

So Pat mentioned the government relative to the states approving those prices, making sure there is an adequate return. But I would assume the investment community would also have some vote in that relative to where they would want to deploy their capital.

We have said for long-standing we can't -- we don't think this business is sustainable (inaudible) single-digit returns. If the capital gets trapped, it is difficult to return capital to shareholders and extract it out of the writing Company because of the governance processed with it.

So we think it mandates a higher return but would prevent another Company or somebody from coming into sign to discount it would be if they decide they are acceptable accepting lower returns.

And then I guess the lender -- some of the lenders I think there may be more active with the discounting. I think their market shares are pretty significantly different in refi versus purchase. That is a correct assumption?

Yes, I think that's right. I mean you see most of the -- with refi volume, these various call centers and such, there was -- that is where I think price competition in general from a consumer's perspective, they are shopping rate more on the refi than they are [paying] the home.

And whether it is like eight or a quarter or three-eighths higher rate on a purchase, while it is certainly a consideration in a purchase, the reason you are refi?ing is to take advantage of lower rates. So they are going to be more rate conscious in the refi world.

Thanks for the follow-up, thank you.

Geoffrey Dunn.

I had one follow-up on the deeper coverage. With the discussions that are going on with specifically the deeper coverage component of the front end, is it just with the private MIs or is it the scenario where deeper coverage could be provided by different vendors other than just an MI license Company?

The talk broadly is for front end risk sharing, which would include executions beyond private mortgage insurance. I am not sure exactly what those would be but presumably some form of capital markets transaction.

If you look at the Shelby Bill it spoke to front-end risk sharing, the MBA talks about front-end risk sharing, and deep cover MI is a component of that. We obviously have the view that deep cover private mortgage insurance is the preferential way to go.

And, however, if we are not going to be the only game in town, what is critical to us then is that there be parity in the capital rules. In other words, PMIERs is very specific, or the NAIC is very specific on how much capital we have to hold as an MI Company.

And so, if another -- if the GSEs, for example, are going to accept another form of risk sharing our view is they should be asking about for the same amount of capital. So in those cases where risk sharing is defined as broader than MI, parity in capital is critical.

And on the back end with the stack (inaudible) deals, is there parity on the capital rules now between you participating on in [ACS] deal versus a Bermuda Re company?

No, I mean is there right in the rules -- different rules for reinsurers and (inaudible) the bond right so they are collateralizing that way with it. So really there the issue is more that it is a spot loss ratio that the agencies are pointing to and they have no coverage beyond their estimate -- whatever they are selling the losses to where the deeper cover would help.

The other point that we try to make is that to understand respective roles we have said and Larry has said many times over the years that if the private MIs have to compete in the spot market we will not be successful.

But if the objective is to create a housing policy that is long-term and works over different cycles then the private mortgage insurance have to play. You can't go and just capital markets executions because they will move in and out of the market. And that is another reason for them to have to tie up capital for the long-term.

All right, great, thank you.

Mike Zaremski.

One question. Did you guys touch on why the share count declined quarter over quarter and didn't reflect one of the convertibles?

Yes, the share count, it is all a function of whether that convertible would be dilutive or anti-dilutive. And that takes into consideration the interest expense associated with what not (technical difficulty) to 2063.

So the reason why they weren't included in the share count, if we would have included it in the share count we would have had to also subtract off the interest expense on those in the quarter. And that would have made our EPS get better, which from the accounting rules you can't do for weighted average shares for dilution purposes.

Okay, got it. Thank you.

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to management for any further remarks.

Okay, this is Pat. Before we end the call I want to take a moment to recognize Larry, our Chief Risk Officer, and that this will be his last earnings call as we have previously announced Larry's retirement.

Larry has been with MGIC for 33 years and has been held -- and has held the CRO position since 1992. In fact in my research I think it was this month 23 years ago. So Larry's hair is a little grayer than it was back then.

But that length of time means that we and he experienced many different cycles and have seen both the good times and the bad times and now the good times again. Throughout Larry has provided great insights into the markets and has played a critical role for MGIC.

Larry knows the private mortgage insurance business as well as anyone and he will be missed. Thank you, Larry for all of your dedication and hard work and we wish you great success in all of your future endeavors. And with that we are going to close the call. Thank you for the interest in our Company.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.