MGIC Investment Corp (MTG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Sir, you may begin.

Thanks, Tamara. 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 2015 are CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Steve Mackey.

I wanted to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at www.mcg.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 have posted on our website a presentation that contains information pertaining to our primary risk in force, and new insurance written, and other information which we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the 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 8-K. With that, let me turn the call over to Pat.

Thanks, Mike, and good morning. I am pleased to report that in the third quarter, our insurance in force increased by 2.3% compared to the second quarter and more than 6% compared to the third quarter last year. This primarily reflects the expanding purchase mortgage market of the last several quarters, especially the first-time homebuyer and other lower-wealth borrower segments.

I am also pleased with the low level of losses the 2009 through 2014 books are generating and the positive trends on the pre-2009 business relative to new delinquent notices, paid claims, and the declining delinquent inventory. The increasing size of the insurance in force portfolio, the continued runoff of the older books, and expanding housing market and our solidified capital and PMIERs positions position us well to provide credit enhancement and low down-payment solutions to lenders, GSEs, and borrowers now and in the future.

Net income of the third quarter was $823 million or $1.78 per diluted share, of which $1.49 was a result of the reversal of the Company's valuation allowance on our deferred tax asset, or DTA. Excluding the impact of a DTA valuation allowance reversal, adjusted net income for the third quarter was $124.7 million or $0.29 per diluted share compared with net income of $72 million or $0.18 per diluted share for the same quarter a year ago.

In a few minutes Tim will discuss in more detail the financial results as well as the accounting impact of both the reversal of the DTA valuation allowance and the transition to the new reinsurance transaction. But first, I would like to make a few comments on current market dynamics and other strategic issues. Then I will wrap up with a discussion of the regulatory and political fronts.

The business we wrote from 2009 to date is performing well and is of very high quality. In addition, an improving labor and housing market has improved the performance in the pre-2009 books. Over the many years MGIC has been in business, we have seen the combination of improving economic environments along with low credit loss cycles increase the competitive dynamics of the mortgage banking and mortgage insurance industries.

In the last several quarters, we have seen these dynamics playing out in the lender paid or LPMI single segment, which we believe accounts for approximately 25% to 30% of the business the industry is writing. LPMI singles comprised approximately 15% of our NIW this quarter, and reflecting the competitive environment, that business was written with an average discount of approximately 11% from the LPMI rate card. This level of writings and discount is consistent with the last few quarters.

We continually assess the impact that any change to our pricing and business mix will have on our expected levels of new business written, capital requirements, and our returns. We are comfortable that the mix of business we have written over the last several quarters, given the credit performance we have experienced to date on those books will generate midteen returns on capital over their estimated lives.

We are aware of the BPMI premium changes that are being selectively offered by competitors in the marketplace, and we know the investment community is following this issue closely. We continue to monitor the situation and stay close to our customers to determine the extent of these changes.

To date, the FHA premium reduction that went into effect earlier this year is not impacting our volumes in a material way. We still win some business that may have a lower monthly payment with FHA insurance as borrowers with private MI enjoy faster equity buildup, have the ability to cancel MI coverage, and -- for most with a 680 and higher credit score -- enjoy a lower total cost over the duration of the policy. Lenders oftentimes find it more efficient and cost effective to use private mortgage insurers versus FHA. The overall origination market is shifting towards more purchase transactions and fewer refinances. This is a net positive for us in our industry.

First, persistency should increase with fewer refinances. Second, we estimate that our industry's market share for all purchase transactions ranges from approximately 19% to 21%; and for refinance transactions, it ranges from approximately 5% to 7%. This is about a 3.5 to 1 ratio of purchase to refi. Within the industry, we believe that we have approximately a 19% market share and a purchase to refi ratio of about 4 to 1. This benefit is perhaps best reflected in the $33 billion of new business written so far this year, a 39% increase from last year.

Leading off the strategic issuance is our capital position. The PMIERs have been published, with the latest change coming in late June regarding lender-paid single premiums. According to the GSEs and the FHFA, the PMIERs are expected to be updated every two years unless market conditions cause them to change sooner. They become effective on December 31, 2015, and MIs need to certify compliance by March 1, 2016.

As most of you know, the PMIERs require a mortgage insurer's available assets to equal or exceed its minimum required assets. Based on our interpretation of minimum required assets, and as a result of several actions we have taken and plan to take, MGIC will be in a position to certify its compliance with the PMIERs in a timely manner. The actions we have taken include the restructuring of our reinsurance transaction, which resulted in our receiving the $142 million of approved profit commission and which allows us to receive full credit under the PMIERs for the risks ceded under the transaction.

The next topic I want to discuss is the opportunity to further reduce the risk borne by the GSEs and, ultimately, taxpayers. We believe that private mortgage insurers can assume risk before it even gets to the GSEs, and that deeper coverage for front-end risksharing should be the way to readily implement this. With PMIERs now finalized, we are able to more seriously continue discussions with the GSEs and FHFA on these matters and are encouraged by the facts that the FHFA, lenders, legislators, and policymakers are engaged on this topic.

To that end, USMI, our industry trade association, will be publishing a report in the near future that demonstrates how a risk can be prudently assumed by the MIs instead of the GSEs by using deeper coverage on the front end. We continue to believe that the next logical step is for the FHFA to add this item to be annual GSE scorecard. This would enable a pilot program to be developed to validate the concept, and we are working towards that goal.

Tim will now go through the financial highlights for the quarter.

Thanks, Pat. The year-over-year improvement of results was primarily driven by a lower level of incurred losses. The lower incurred losses in the quarter were influenced by two main factors.

First, during the quarter we updated our claim rate assumption for older notices in our delinquency inventory, because the actual cure rate experience has outperformed our previous estimate. This resulted in a benefit of approximately $35 million to $40 million. This trend of improving cures has become more pronounced over the last two quarters. Keep in mind that because our older notices comprise approximately half of our total delinquent loans, even a small change in the claim rate assumption can result in significant reserve development.

The second main factor affecting incurred losses is that we received approximately 15% fewer delinquency notices, and those notices had a lower claim rate applied to them when compared to the same period last year. Reflecting the current economic environment, new notices received in the third quarter are estimated to have a claim rate of approximately 13%.

The pre-2009 legacy books generated approximately 92% of the new delinquent notices received during the quarter, while those books now comprise just over 39% of the risk in force. The delinquent inventory ended the quarter down 22% year over year and down 3% sequentially. We expect to see the inventory continue to decline to 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 31% from the same period last year and down 15% quarter to quarter. Paid claims in the third quarter were $207 million, down 21% from the same period last year and down 7% from last quarter.

During the third quarter, we restructured our quota share reinsurance transaction by commuting the prior agreement and entering into a new agreement. As we pointed out in the press release, net premiums written and earned were impacted by the commutation of our prior agreement. The commutation of the prior agreement resulted in an increase to net premiums written of $69.4 million, an increase of net premiums earned of $11.6 million, and a decrease in the ceding commissions of $11.6 million, which increased underwriting and other expenses. There was no impact on ceded losses or net income during the quarters as a result of the commutation.

The cost of the new reinsurance agreement during the quarter was approximately $9 million, which due to the mechanics of the transition to the new agreement was approximately $3 million or $4 million lower than we would expect in future quarters. The calculated weighted average effective premium yield for the quarter was 56 basis points. However, that includes a 3 to 4 basis point benefit from the transition to the new reinsurance agreement.

After adjusting for the one-time effects of the transition and given the current level of losses being ceded, the effective yield was closer to 52 basis points. If ceded losses would increase the ceded loss ratio to the low to mid-20% range, we would expect the effective yield to drift 2 to 3 basis points lower from the adjusted rate of 52 basis points reported this quarter.

To put that loss ratio into perspective, the ceded loss ratio, excluding the impact of any transition-related activities, was less than 10% in the third quarter. The data for that calculation is contained in the press release.

As a reminder, the new agreement is a 30% quota share with a 20% ceding commission and a profit commission. The term and the contract has been extended to be consistent with PMIERs stress loss scenario, but we have an option to terminate early in 2018. The transaction covers approximately 70% of the insurance in force and includes NIW through 2016.

At quarter end, cash and investments totaled $5 billion, putting $469 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 next month.

Regarding the overall capital structure and leverage at the holding Company, we continue to analyze our options and are willing to consider options to lower the leverage ratio, reduce interest expense, or minimize dilution if they add long-term value to shareholders. Finally, in the quarter we reversed the DTA valuation allowance, which increased book value by $2.23 per share.

Further, under the applicable accounting rules, we are required to treat the valuation allowance released as a discrete item and look at the calendar year as a whole when calculating our tax provision. Without the valuation allowance release, we would have booked little or no tax all year long. So portions of DTA will not be released until the fourth quarter, and we will use it to offset the anticipated tax income on the fourth-quarter income.

With that, let me turn it back to Pat.

Thanks, Tim. Let me give a quick update on the regulatory and political fronts. The review and updating of state capital standards by the NAIC, which Wisconsin's insurance regulator is leading, continues to move forward, although we are not aware of time frame for implementation. We still do not expect the revised state capital standards to be more restrictive than the financial requirements of the PMIERs.

While no real legislative progress is being made on overall housing policy in Washington, we continue to be actively engaged in these discussions to be sure we have a seat at the table. I continue to believe that the current market framework is what we will be operating in for a considerable period of time, or certainly until after the presidential election.

In closing, during the quarter we continued to make great progress. We wrote $12.4 billion of high-quality business. The in-force portfolio grew. The level of delinquencies and claim payments continued to fall. MGIC's risk-to-capital ratio improved to 12.3 to 1. Our market share within our industry is strong, and we maintained our traditionally low expense ratio.

With PMIERs behind us, the bolstered capital position provided by the quality books of recent years as well as reinsurance, 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 increased access to credit for consumers and reducing GSE credit risk. We are committed to pursuing those opportunities.

With that, operator, let's take questions.

(Operator Instructions) Bose George, KBW.

The first question was just -- on the premium number, you said -- you pulled out the $11.6 million from the reinsurance. Was there any other adjustment that you mentioned? I didn't know if I had missed that.

No, that is really the adjustment that we had to make associated with terminations.

Okay, great. Thanks. And then just switching over to capital management, with the new insurance in place now, it looks like you won't need to downstream in the capital support new business. So how do you look at the 2017 converts? Is there an opportunity to pay those down when they come due?

Yes, I would agree. We feel like we do not need to downstream any money from the holding Company to satisfy PMIERs at this point. So we look at the holding Company cash available now to deal with the convertible debt that is there -- the 2017. Other than the debt that we have coming due next month, the 2017 is next maturity. So we view that as being available to pay those off when they mature or if there is something that becomes opportunistic before that.

And then just one last one on the FHA. There has been some chatter that the FHA might take some action after their annual report comes out in November. Do you have any thoughts of what could happen over there?

We have not heard anything specific. We are probably reading the same things that you are. A lot will depend on their actuarial report. The decrease earlier this year of 50 bps was quite sizable, so hopefully they will take that into consideration as they look forward. But we don't have anything specific on it.

Okay, great. Thanks, guys.

Eric Beardsley, Goldman Sachs.

Just a question: how much positive development was there in the quarter?

Approximately $35 million to $40 million.

Got it. And that was all in the claim rate?

Primarily.

Okay. And then I just wanted to follow up on the question on the premiums. You had mentioned the reinsurance impact and where the premium rate could go under various loss ratios on the portion that is reinsured. Could you just repeat that? And I have a follow-up.

Yes, basically what we said is that right now the ceded loss ratio was just under 10%. So if that were to drift into the low to mid-20% loss ratio, ceded loss ratio, that would lower the premium yield by 2 to 3 basis points.

Got it. So --.

We would cede additional losses, and it will become less of a profit commission to us.

Okay. So all else equal, assuming that loss ratio hangs in where it is today -- and, I guess, hypothetically could even improve, depending on the state of the world -- that could -- you know, you would expect some stability, I guess, in the premium rate, then?

I would say we expect some stability there. I think that from the reinsurance, the thing that is going to impact it the most is obviously the ceded losses, because that would take away from the profit commission. I think we've seen somewhat of a drift down in the premium yield as we have seen right now. But for the reinsurance impact on it, we would not see significant volatility other than associated with the losses.

Got it. What is the weighted average premium rate of the new business you are putting on today? Is that higher or lower than your average in the quarter?

I think it is marginally -- this is Mike -- I think it is marginally higher, so probably in the 58 to 60 range.

That will be on a direct basis, though.

A direct basis, right.

Yes.

So, stripping out reinsurance, I guess it is equivalent, then? Or still a little bit higher?

I would say pretty close.

Okay. All right, great. Thank you.

Mackenzie Kelley, Zelman & Associates.

Thanks, good morning. Can you just talk a little bit about what you're seeing in terms of pricing and overall competition that the discount on LPMI was stable? Do you expect heading into 2016 that average discount will decline, just to help offset some of the capital pressure? And then, also, any changes that you are seeing on the BPMI side?

Well, I think in your question you point out that we have seen a lot of things going on in the market. As I said in my opening comments, we continue to monitor that situation and stay close to our customers. I'm always listening to what their needs are to determine the extent of the changes. Beyond that, I can't really add much to that.

Okay. And then also on LPMI in terms of demand, I think last quarter you had said that the level of interest from lenders was coming down. Did that trend continue this quarter? Or has there been any change in just demand overall for LPMI?

Mackenzie, this is Mike. I think, as you see in our numbers, our numbers were relatively stable heading quarter to quarter. Not sure if that carries over to everybody else, because there is not a lot of inter-quarter disclosure from the competitors.

We have not seen a tremendous uptick in customers asking more. It is a steady demand at the level that we are seeing coming in with it. And the whole issue around this -- the pricing, whether it is LPMI or BPI, it just becomes very sensitive to talk about from a -- in a public setting. So it's definitely both items, both the LPMI in the future with PMIERs evolution, with the credit and the surcharges kicking in in the beginning part of the year, as well as what competitors do -- is really nothing that we could talk about publicly. So it's just going to be a reaction to what we see with our customers, and our interactions, and our decisions. And as Pat said in his comments, we are comfortable with the mix and the levels that we are seeing today.

Understood. Thanks, Mike. Just lastly, if I could squeeze one more in, on the operating expenses, just excluding the reinsurance impact, it seems like the dollar as well as the expense ratio have come down. Is there anything else driving that besides the reinsurance? And directionally going forward, how should we be thinking about the level of expenses from here?

No, you are right. The commutation of the reinsurance impacted that a little bit this quarter. I would say if you look at the third quarter compared to the first two quarters of the year, we are probably $3 million lower excluding the reinsurance. I would say that is not necessarily a trend. I would say the first couple quarters are probably a better run rate, but they are all sort of within that zone.

Great, thank you.

Mark DeVries, Barclays.

Pat, I was hoping to get an update from you on where you and the industry stand on getting the work done needed to get deep cover MI potentially included in the scorecard for this upcoming year.

Sure. As I said in the report and I said on a panel I was on last week, USMI has engaged a third-party firm for the purpose of providing, if you will, a proof-of-concept for deep cover private mortgage insurers which would serve as front-end risksharing. The FHFA has made it very clear that risksharing is the way the GSEs will be doing business. Now in other words, it is standard operating procedure, if you will. It is not just pilots.

So what we are trying to do is now -- we being the industry -- try to come forth with our ideas and how we can help that cost. We had to wait until PMIERs was done. We have been anxious to get to Washington and make the rounds, but we had to wait until PMIERs was done, until we could understand what the rules were.

And now we are putting the finishing touches on that report as we speak. And as we said, in the very near future we hope to make presentations to the FHFA and others in Washington to take the discussion down from the headlines and out of the clouds and be much more granular.

As part of the process, then, we of course have to let the FHFA and the GSEs respond. We don't know yet what they are going to think of the matter. We think it makes a lot of sense. What the private mortgage insurers offer is a very strong narrative.

We are private capital. We are long-term capital, and we are willing to put more risk on the line. We have the ability to, we believe, raise capital. So I think it fits with the FHFA and the GSEs are trying to do, and hopefully we will make some progress in the fourth quarter. Again, the next step is make the presentation, allow them to react. You know, they are smart people. They are going to challenge some things. And then the goal is that by the time the 2016 GSE scorecard comes out, we will have a carveout for private mortgage insurance.

Okay, great. That is really helpful. Just a couple of other technical questions for Tim. Tim, we noticed there was no kind of release of the premium deficiency reserve this quarter. Is that going away? Or should we -- or is this just kind of a one-time thing for the quarter?

You should view it as it's gone. We no longer have a liability on the balance sheet. We still have to do a calculation to make sure that the accounting wouldn't tell us we have to reestablish one, but I would say for your purposes, you should not expect one in the future on the income statement or the balance sheet.

Okay, great. And was there a small benefit to premiums from that this quarter also?

No, I mean, this quarter there was no release there. So not really a benefit from anything happening with the PDR this quarter.

Okay, got it. And then, finally, you mentioned taxes for next quarter. Were you basically saying that there should be no net tax number, because the remaining release of the DTA will offset whatever tax you would've incurred in the quarter? Did I get that right?

That is basically what -- yes, that is what the accounting sort of tells you to do, if we bring the DTA back on during the middle of the year, is that -- to look at the whole year on where we should be for taxes. And so the reason why we did not bring the full DTA back on in the third quarter was we have to hold back some of that to sort of offset the taxes that we would incur on the income in the fourth quarter. So, said another way, should not expect a lot of tax on the tax line in the fourth quarter. However, starting next year, you should expect sort of closer to 35% effective rate.

Got it. Thank you.

Doug Harter, Credit Suisse.

Recognizing that it was just one month, the rate of improvement of NODs slowed in September. Do you think -- was there anything there, just given kind of the age of the recovery? Should we expect NODs to keep slowing? Or any color there would be helpful.

Yes, I think in general we try not to get too worried about one month in particular, because we do see some differences depending on services report. What I would say, though, is in general I think we would expect that you would see somewhat of a decrease in sort of the speed of the decline, just because we have fewer items from those older books that are still around and in force at this point.

So nothing that we are concerned about, I would say; although I would say in general we've had a pretty steady decline on the new notices over the last couple years. At some point, that will start to slow. We will see improvement on the cure rate, though, on those new notices which we've seen, which is also very important from an incurred loss perspective.

Got it. And then on that last point, is that improved cure rate -- is that already factored in to the prior-period reserve releases? Or is that something that could be still seen and cause further reserve releases in the future?

Well, I guess I am referring to more of new notices we see in future quarters. We said that the claim rate on new notices this quarter was probably somewhere around 13%. A couple quarters ago, we probably would have been closer to 14%.

And we said long-term historical averages are closer to -- probably 10% is what you should expect. I think the question is: how long does it take to get there? But we would continue to see improvement towards that 10% claim rate on new notices from the 13% that we are at now.

Got it. And then when you are looking at the vintages, the 2010 and later, I guess how do the new notice trends compare? Are you seeing continued improvement or stabilization in those trends?

Doug, this is Mike. There is a slide in the portfolio supplement we put out that kind of tracks the performance of the various vintages by half-year, and you definitely see that there is very low loss content as far as the number of delinquencies against the original risk. And some of those from 2010 and 2011, you know, it's certainly past their -- seem to have termed, but have reached their peak and are declining. But all at very low levels.

Great, thanks, Mike.

Yes, page 16.

Jack Micenko, SIG.

A couple of related questions; we've been hearing recently Wells and Chase, I think, in particular have begun to reintroduce required overlays on FHA as they've been sort of not pleased with the way the certification and indemnification process has gone. Are you seeing any benefit of that in business volumes? Or is that product still far enough away from where you are at on FICO that it is not really the same neighborhood?

I think unfortunately it is the latter there, Jack -- is that we are not any real benefit. The overlays are coming at the very low end of the private spectrum. So not taking loans less than 640, where there is already a pretty significant monthly price disadvantage FHA versus private.

All in, we are seeing maybe 15% of our business is still below 700 credit score. That is pretty stable. We've seen a little bit of increase in that 680/700 in some of the higher LTVs, you know, above 95 with the reintroduction of 97. But nothing significant, at least at this point, anyway.

Okay. Okay. And then on that topic, you know, when you look back precrisis, you see average FICOs in the business were sort of in the lower 700s, and premium yields were in the high 50s, low 60s. And I think in your deck this quarter, and it has been this way for a while, you are running closer to 750 weighted average FICO.

What gets that number moving down and sort of thinking about, maybe, higher premium and blend? Obviously, there is not the bulk transactions in the private deals now; but thinking through that, is it just the demand isn't there for 700 to 720 borrowers? Is it the pricing is still not attractive on affordability basis? Is it -- are the banks playing a part?

What gets the business, the weighted average FICO, migrating down? I mean, there are still a lot of good borrowers, I would imagine, in the 720 range versus 750 on a weighted average basis. But just curious as to your thoughts on what moves that down over time.

Jack, we think the answer to that question would be solving the world's problems, right? Housing would be on a rampage.

It's all of that. You see the banks just recently have released their earnings, and their gain on sales have been dramatically compressed. So there is a lot of -- so demand, I think, is out there. Pricing all in, whether it is from the cost of FHA insurance, the cost of the Freddie/Fannie G fees and LLPAs, the combination of the additional compliance costs that lenders billed in to -- that they need to in order to ensure production, I think all of that weighs into pricing.

And how it translates for us from the mortgage insurance side is just that. All that -- our cost is our cost, and everything else is outside of our control. And I would say the majority of the price differential, where we can't get at the below-720s in a more broad sense, is because of all the external price -- I will call them add-ons, for lack of a better word -- that have been introduced into the system over time. Some of that manifests itself with the FHA, but then there is pushes against that. So it is all that combined.

There is certainly a lack of supply of housing. Still, too, with the underwater housing, but the demand is there as you look at the HMDA data and some of the household formation information. So it is a mixture of all that together.

Is it your expectation that that moves down over time, though, back to sort of precycle or precrisis more normalized levels?

At this point, that would be hard to have a high degree of confidence in a reasonable time frame that we would be all of a sudden migrating down to 700 -- be a fundamental shift that occurs from FHFA and the GSEs relative to how they view credit enhancements -- transference with the primary, with the policy and the losses, etc. That has a lot to do with it, as well as what lenders would charge for their compliance on it. So not in the near-term, no.

No. Okay. And then while I have you, on the pilot -- or not the pilot, the proof-of-concept -- to preview that a little bit more, are we going to actually get potential pricing framework and sort of return expectations? Is it going to be that granular? Or -- just curious as to -- will it give us something that we can maybe, perhaps, model out what this could look like? Not putting it in your numbers, obviously, but give us that much information, that we can actually get a sense of what the returns could look like on this business?

Well, the proof-of-concept is a view based on industry data. And so from that perspective, you could probably draw something to generalize. To go Company-specific would be more difficult.

Right now, what we are trying to do as an industry is move the concept forward and work with the FHFA and the GSEs to provide assistance in trying to perform risk sharing. But once we get the proof-of-concept accepted, if and when that happens, then it will be up to the individual companies to actually win the deals.

So I guess what I am saying is at a high level, you should be able to get a sense for what that means to price and returns. But on an individual Company basis, the greater transparency will have to be forthcoming.

Okay, I look forward to it. Thank you.

Chris Gamaitoni, Autonomous Research.

Quick housekeeping -- can you let me know what the IBNR was at the end of the quarter?

The IBNR of -- the primary IBNR was probably around -- just over 100.

Okay. And then it looks like on the cure rate for the 12 month or greater delinquencies, it keeps increasing. I calculated it was 6.1% this quarter from 4.6% year over year. Just wondering what you're seeing on that on -- you know, it is honestly higher than I thought would happen. So what is kind of driving cure in the late-stage bucket?

You know, as far as what is driving it, the information and data we get on that is, I'd say, not overly reliable. So we don't have, like, the great insight into what is driving each individual tier in that increase. We have the ability to see those cures that are actually happening, but the data that we receive from the servicers doesn't give us a great amount of insight into what's actually moving the needle on that.

Okay. So nice to have, but you are not really sure why.

Right.

And do you have any -- do you plan to give an update annually or quarterly, kind of, of where your available assets will be relative to your minimum required, or what you plan to operate on, just so we understand that other CIBIL construct besides the risk-to-capital base?

I think that is to be determined. We obviously did not put it out this quarter. I think it is something we'd look at once the PMIERs become effective -- of whether that is something that we feel is useful or not.

Okay. Well, thanks so much for taking my call.

Geoffrey Dunn, Dowling and Partners.

Pat, I wanted to follow-up on the deeper coverage concept. There is a ton of appetite for this risk, it seems. I think the last deal there was no equity piece retained by the GSEs. So when you are talking with the FHFA and the GSEs, is there real traction about MIs getting involved? Or is there anything, any worry that it's more lip service, because you have plenty of capacity from reinsurance, private equity, etc., out there?

Well, I would say that the FHFA has stated they are very open to trying different forms of risksharing. Clearly the backend risksharing has developed some market. There is questions around, you know, is there enough capacity -- or willing capacity -- on the back end? And will that capacity be there during difficult times?

But nevertheless, they've got a nice run rate going there, where I think the GSEs, at least on a notional amount, have riskshared in the neighborhood of $700 million worth of risk. So there's clearly the appetite. So what we are trying to be able to do is to now go to them and say, there's other ways of doing this, particularly on the front end. So my point is that the FHFA has stated a willingness.

That said, for the FHFA and the GSEs, the numbers have to work. Again, we believe proof-of-concept will show that. But the GSEs will have to react to that. The theory is that the MIs take a greater layer of risk and, for that, we will charge an additional premium. In return the GSEs will reduce their G fees. That is a very sensitive topic, as you can imagine. So the GSEs are going to have to get comfortable with that, as will the FHFA.

So my point is: the door is open. There's a lot of positive momentum around it. But as I said earlier, the goal now for the next 60 days or so is to take it kind of out of the headlines, and to talk and get much more granular with those organizations, and see if we can make it happen.

Okay. And then, Tim, the reinsurance disclosure is helpful, the incremental detail -- but it is excluding captives. What is the premium impact to run rate from captives still when we look at your net result?

I think it is probably in the $3 million to $4 million range.

Okay. So I want to look at this on a kind of pre-everything basis. So the correct adjustments would be to back out the $11 million ceded, the profit commission of $35 million, and then $3 million or $4 million to captive, and that will show us your gross rate?

You are saying -- so back out the captive amounts, back out the $11 million related to the termination -- and then can you repeat what else you said you'd back out?

And then back out the profit commission.

Back out the profit commission -- are you backing out the ceded premium without profit commission or not?

Well, I guess that is in the numbers. I am trying to figure out what your core rate is relative to the -- you had 56 this quarter, 53.3 without the 11.6 benefit. If you get rid of all that noise, what is your true revenue profitability of the book on a basis point basis?

I think if you're trying to do that and strip out the reinsurance, I think you would have to strip out not just the profit commission, but you would also have to strip out the ceded premium earned in the quarter, which we disclosed sort of a footnote on additional information, which was $22.6 million. And the profit commission was $23.3 million on top of that. So, I guess the $22.6 million is the net amount of those two numbers. So that is the number you would have to strip out.

Okay, all right. Great, thanks.

Mike Zaremski, BAM Funds.

One question. Tim, can you clarify what the -- I guess you could call it normalized expense ratio was, removing the impact of the commutation? And should we expect that ratio to be kind of what is, you know, the ongoing range, given the new reinsurance contract? And maybe also, the 20% ceded commission -- is that higher or lower than the previous contract's commission?

I will start with that last question. It's the same as what the previous reinsurance agreement was. It's 20%. The only difference to note is that now on the reinsurance, you will notice that the premium written and the premium earned that we ceded them is the same, because we are not ceding any unearned premium. But it is still based upon 20% of the ceded written premium amount.

On the expense ratio, we've been this year bouncing around between 14.5% to 16.5%. I think that is a pretty good run range for us. It could bounce up a little bit, but I think we've always said somewhere in the 15% to 20% range is what we would expect on a going-forward basis.

Got it, thank you.

Sean Dargan, Macquarie.

I have a couple of questions about some items that have been kicked around in the press. One is the notion that the FHFA will revisit the capital credit you get for using reinsurance. And I was wondering if you had heard anything about this, because at least as it applies to third-party reinsurers, the prop cat specialists, that seems kind of insane to me if the worry is that they won't be able to pay.

Sean, this is Mike. We said when we've got the approval for the reinsurance from -- the last one from Freddie but also with Fannie, we disclosed that they will review that on an annual basis -- the level of credit that they will be providing. We have full credit today, but annually they will review that to see. Again, keeping in mind it's a fixed-term reinsurance contract and a floating 10-year stress period with [PMIERs] every time on an annual basis when they measure things with it.

But that is true; we would expect them to reevaluate it annually. We don't know if there'd be haircuts or no haircuts. It depends on the results of their evaluation in any year.

Okay, but that would apply to third-party reinsurers as well as captives?

Well, it's on to the third-party reinsurers, as the captives are prohibited with the PMIERs under the way they are stated.

Okay, okay.

It really only applies, I would say, to the external reinsurers.

Got it. And one more question; we've been hearing reports from the field that 80/10/10s are making a comeback. Is that just in the jumbo market at this point? Or is that emerging as competition again for private MI?

I would say it is emerging in a small way in certain markets. It is always there in California in particular. And we are always watching it, given its history. But I would not say that at this point it yet rises to the level of any major concern.

Okay, great, thank you.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Mike Zimmerman for any closing comments.

This is Pat Sinks. We don't have any further comment. We thank you very much for joining us on the call this morning and your interest in the Company. Have a good day.

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