MGIC Investment Corp (MTG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the MGIC Investment Corporation fourth-quarter earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Mike Zimmerman. Sir, you may begin.

Thanks, Shannon. 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 fourth quarter and full year of 2015 are CEO Pat Sinks; Executive Vice President and CFO Tim Mattke; and Executive Vice President of Risk Management, Steve Mackey.

I want to remind all participants that our earnings release of this morning, which may 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 include certain non-GAAP financial measures. We have 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. 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 other time other than the time of the call or the issuance of the Form 8-K.

At this time, I will turn the call over to Pat.

Thanks, Mike, and good morning. During 2015, we focused our energies on positioning the Company for growth and compliance with the financial requirements contained in PMIERs that were finalized in June. I am happy to report that as a result of the actions we took during the year, as of December 31, 2015, MGIC is fully compliant with the PMIERs financial requirements.

Turning to the results for the quarter, net income for the fourth quarter was $102.4 million or $0.24 per diluted share. Excluding an adjustment to the DTA valuation allowance reversal, adjusted net income for the fourth quarter was $113.9 million or $0.26 per diluted share compared with net income of $75 million or $0.19 per diluted share for the same quarter a year ago. For the full year, net income adjusted for the reversal of DTA was $485 million or $1.13 per diluted share compared to $252 million or $0.64 per diluted share in 2014.

I am pleased to report that our insurance in force, the primary driver of our future revenues, increased by approximately 6% during 2015, ending at $174.5 billion. This growth reflected the expanding purchase mortgage market, our increased market share, and the hard work and dedication of my fellow coworkers.

I am also pleased with the low level of losses the 2009 through 2014 books are generating and the positive trends we continue to experience on the pre-2009 business relative to new delinquent notices, paid claims, and the declining delinquent inventory. The increasing size of our insurance in force, the continued runoff of the older books, continued solid housing market fundamentals such as an increasing household formations and increased home sales, and our solidified capital position puts us in a great place to provide credit enhancement and low down payment solutions to lenders, GSEs, and borrowers now and in the future.

In a few minutes, Tim will discuss in more detail the financial results, but first I would like to make a few comments about our approach to the business. At MGIC, we have always believed in taking a long-term view of the market, but we make our decisions relative to capital requirements, returns, and the competitive landscape, including more recently the secular shift that places increased emphasis on risk-adjusted returns.

We believe that to be successful in this business over the long term, a mortgage insurer needs to prudently grow its insurance in force, be transparent in its offerings to customers, and achieve at a minimum double-digit after-tax returns through the cycle. The basic tenets of our beliefs have been under pressure over the last year or so as higher capital charges have been mandated by the GSEs as well as an increase in what I would call off-rate card pricing.

By off-rate card pricing, I am referring to both black box pricing and the offering of alternative rate cards on a so-called select basis that several of our competitors are promoting. And so it is with that long-term view in mind, and an eye towards improved transparency, that we will be revising our premium rate cards for both borrower-paid and lender-paid premium plans. We expect these adjustments to the premium rate structure to generate comparable risk-adjusted returns across the spectrum of loans we insure.

Importantly, we expect that the revised rates will result in lifetime after-tax returns that are consistent with, not lower than, the mid-teens returns we expect to earn after considering reinsurance. In some instances, the borrower-paid monthly rates for BPMI are higher and in some instances the rates are lower. But in all scenarios, the revision is considered the associated capital charges of PMIERs as well as the current marketplace dynamics.

Realizing that investors need more information and granularity to understand and analyze the changes to the premium structure, we provided some examples of the revised BPMI rates and the impact that the revised rates would have on returns in the portfolio supplement that was posted to our website earlier this morning. The revised rate structure may likely cause some of the lower FICO score business to shift away from us. However, we still expect to retain some of that business, as lenders value the customer service we provide and are increasingly finding it more efficient and cost-effective to use private mortgage insurers versus FHA.

Additionally, the GSEs' reintroduction of the 97% loan-to-value program may keep some of the low FICO business with private mortgage insurers because it will allow borrowers with private MI to enjoy faster equity buildup and have the ability to cancel MI coverage as compared to FHA alternatives.

As a result of these changes and lender preferences, we expect to write modestly less business in 2016 than we did in 2015, primarily in the lower FICO scores. However, we expect the insurance in force portfolio will grow modestly in 2016. By modestly, I mean in single digits.

The overall origination market is expected to continue to shift towards more purchase transactions and fewer refinances, which is a net positive for our Company and our industry. We estimate that our industry's market share is approximately three to four times higher for purchase loans compared to refinances, and historically, MGIC tends to be at the higher end of that range.

Let me take a few minutes to provide an update on our industry's opportunity to further reduce the risk borne by the GSEs and ultimately the taxpayers. We believe that private mortgage insurers can assume risk before it even gets to the GSEs, and a deeper coverage, or front-end risk sharing, would be a way to readily implement this. We have many supporters who agree with this approach, including the MBA, who recently submitted a letter to the FHFA of [this town].

We are encouraged that there is a requirement in the 2016 FHFA scorecard to conduct an analysis and assessment of front-end risk sharing, including a request for public input. Meanwhile, we have continued discussions with the GSEs and FHFA on these matters, both at a trade association and individual company level. We continue to believe that the next logical step is for the FHFA to conduct a pilot program with the MIs and lenders to validate the concept and we are working towards that goal.

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

Thanks, Pat. First, let me address PMIERs. As a result of the actions we have taken, which include the restructuring of our reinsurance agreement in the third quarter, the repatriation of $387 million from MIC to MGIC in the fourth quarter, and the second-quarter transfer of $45 million of assets from MGIC subsidiaries to MGIC, as of year end 2015, MGIC's available assets total approximately $5 billion. Based on our interpretation of the financial requirements, its minimum required assets are $4.5 billion.

I would also like to note that at year end, MIC still has approximately $100 million of statutory capital in excess of the minimum state capital requirements, and in the fourth quarter, we commuted the remaining risk at MGIC's Australian subsidiary and it has approximately $38 million of assets at year end. These assets are not included in our available asset for PMIER purposes.

Turning to the financials, the year-over-year improvement in the financial results was primarily driven by a lower level of incurred losses. The lower level of incurred losses was primarily due to the receipt of 14% 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 fourth quarter are estimated to have a claim rate of approximately 13%, which was flat to the third quarter. Additionally, we had net positive development in our loss reserves of approximately $10 million to $15 million during the quarter.

The pre-2009 legacy books continue to dominate the new notice activity and generated approximately 91% of the new delinquent notices received during the quarter. While those books now comprise just over 37% to the risk in force and approximately one-third has benefited from the HARP program, we expect that the pre-2009 books will continue to be the main contributor to our new notice activity for several more years.

The new delinquent inventory ended the year down 22% from last year and down 3% sequentially. We expect to see the inventory continue to decline due to the eventual resolution of older delinquencies combined with a lower level of notices being received. However, we are not expecting significant improvement in the claim rate on these notices we receive in 2016.

The number of claims received in the quarter also declined, and was down 42% from the same period last year and down 7% quarter to quarter. Net paid claims for the fourth quarter were $188 million, down 24% from the same period last year and down 9% from last quarter.

As expected, the calculated weighted average effective premium yield for the quarter dropped to 52 basis points from the third-quarter level as the full effect of the new reinsurance agreement had its impact in the quarter. As a reminder, we expect the affected yield to be 2 basis points to 3 basis points lower in 2016 than the 52 basis points reported this quarter, as more losses are ceded to the reinsurers, which reduces our profit commission. That said, the net cost of the new reinsurance agreement during the quarter came in as expected, at approximately $11.5 million.

At quarter end, cash and investments totaled just under $5 billion, including $402 million of cash and investments at the holding company, at a mix of 78% taxable and 22% tax-exempt securities, a pre-tax yield of 2.5%, and a duration of 4.7 years.

Looking at the holding company, during the fourth quarter, we repaid the $62 million of senior notes that were maturing. Additionally, we repurchased $11.5 million par value of the 2017 convertible senior notes, which is the equivalent of approximately 855,000 shares if they were converted.

To help bolster the liquidity at the holding company, insurance subsidiaries that do not include MGIC or MIC received approval from the OCI and paid $38.5 million in dividends to investment. Additionally, we have been having ongoing discussions with the OCI, which I would characterize as positive, to allow MGIC to pay quarterly dividends. We hope to receive approval as early as the first quarter of this year. Any such dividends would be considered special versus regular. Our total interest expense on the outstanding debt is approximately $62 million per year.

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 that adds long-term value to shareholders.

Finally, in the quarter, we adjusted the DTA valuation allowance release, which decreased book value by $0.02 per share. Under the applicable accounting rules, we are required to treat the valuation allowance release as a discrete item and look at the calendar year as a whole when calculating our tax provision.

In releasing the valuation allowance in Q3, we are required to estimate Q4 income. The adjustment to the valuation allowance released in Q4 was the result of a modest underestimation of Q4 income. For modeling purposes, you should think about our tax rate being in the low 30%s.

With that, let me turn it back to Pat.

Thanks, Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. The review and updating of state capital standards by the NAIC, which the Wisconsin insurance regulators are leading, continues to move forward, although we are not aware of a time frame for implementation. We still do not expect to revise the 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.

Regarding the FHA, while we cannot say definitively that there will not be any further price reductions, based on public comments by FHA officials, we are not aware of any changes that are being planned at this time.

In closing, during 2015, we made great progress in transitioning the Company from one that was still in recovery mode to a company that is now positioned for growth. We had income of $485 million; grown $43 billion of high-quality business. The insurance portfolio grew. Lower incurred losses as the level of delinquencies and claim payments continued to fall.

MGIC's risk-to-capital ratio improved to 12.1 to 1. Our market share within our industry is strong and we maintained our traditionally low expense ratio.

The PMIERs compliance behind us, a bolstered capital position provided by the quality books of our recent years, and reinsurance, I see lots of opportunity for MGIC in the coming years. 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, while generating good returns for shareholders. We are committed to pursuing those opportunities.

With that, operator, let's take questions.

(Operator Instructions) Geoffrey Dunn, Dowling & Partners.

First, on credit, I think in the previous calls, you have indicated maybe the year-over-year incidents improvement assumption could be maybe in the range of 150 bps to 200 bps. Do you think that is still a prospect for 2016?

This is Tim. I would say that we don't think that is the likely scenario, that it would improve by that much. As we get closer to what we said is the historical average of 10% expected claim rate on the new notices, it gets tougher to make that move. It's on a percentage basis becomes more significant.

And when we look at how we put on the notices in the fourth quarter compared to the third quarter, it was pretty much stable. So I would say that a full movement of another 1% to 1.5% next year we would not expect.

One thing I would say, though, is we normally seasonally see some improvement in Q1 based upon the notices coming in. So you could see it being better in Q1, but we would expect it would revert after that point.

So overall, you think it would be less than 100 bps?

That is what our view would be right now, correct.

Okay. And then obviously a lot of movement on this new rate card. If you put your 2015 business through the new card, is your average rate higher, lower, or in line with what you actually generated for 2015?

This is Mike. By applying it to the second half of 2015 business, we would have a higher premium rate. With the same mix of business, right.

Okay, thank you.

Bose George, KBW.

A couple more on the new rate card. Just that the pricing was in place in 2015. What would you guess would be the impact on your NIW in terms of what would end up -- could end up moving to the FHA?

I think it would be similar to what we are forecasting for 2016, and that is that you would see more business potentially shift to the FHA because we are going to increase prices in the lower FICOs. Now, we don't expect to lose all that business because we are still a more efficient execution. But we would lose some of it.

Is it possible to quantify that a little in terms of the percentage of NIW?

This is Mike. About 15% of our business was below 700 and so you would probably -- I think order of magnitude maybe as much as half of that.

Okay, that is helpful. Thanks. And then just on slide 19 and 20, those are helpful. And just looking at the back of the envelope that we did on the ROEs, it looks like in the scenario one, it was kind of 20% for the higher quality and 10% for the lower. And in scenario two, you kind of end up in the mid-teens for both. Is that -- does that seem right?

Yes, that is correct. That's right.

Okay, great, thanks a lot.

Jack Micenko, SIG.

Rate card again. Looking at the slides 19 and 20 in the presentation, it looks like you went to a more granular bucketing around FICO. Is that -- and I also noticed that some of the lower ends of -- with the [727, 39] implies a pretty significant price increase. Am I looking at that the right way? And what is the rationale behind going to more FICO buckets?

What it does is it's reflected in the increased capital charges of PMIERs along the way. And then also -- that is the primary reason for it. And then built into that those risk-adjusted returns to get to comparable rates.

Okay. And then increasing the lower end pricing, obviously PMIERs driven as well, but is there sort of an acknowledgment there we could interpret on your part, that hey, look, the FHA may raise -- or lower price again and let's just forgo that business anyway at this point? Do you have any view there?

This is Pat. No, that did not influence our thinking. That may be an outcome, but that did not influence our thinking. Ours was based strictly on the PMIER requirements and the need for us to generate adequate returns.

We are very sensitive to the role that we play in the marketplace. We would very much like to play at those lower FICOs if possible and play an important role in housing policy. But obviously we got to generate returns that are adequate.

Okay, great. And then one last one for me. With stock, you are bouncing around what we think is close to book value here. Does your mindset change around additional redemption of the converts or any share repurchase or anything along those lines?

This is Tim. It is something that we obviously keep a close eye on. We are focused on making sure we pay off the 2017 to get any dividends out of the writing company do that. As we mentioned, we will sort of look opportunistically to see if there is anything else we can do on the other converts, the 9%. So it definitely -- it piques our interest, but we have to make sure it makes sense for us from a long-term perspective.

Okay. Thank you.

Mackenzie Kelley, Zelman & Associates.

Just on the new pricing as well, when you think about the share that you get from your existing customers, I know you've talked in the past about how some of the larger, especially the banks, require standardized pricing across all of their MI providers. How do you expect this new rate strategy to work, particularly for those customers? And is there any risk that pricing -- you won't be able to adopt that pricing for certain customers, or that you are actually at risk of losing share with them?

This is Pat. I would say these things have happened in the past, and what typically happened is some of those large, more sophisticated lenders will look at all their MI partners and try to get them lined up. We obviously can't predict what our competitors will do. We believe this is the right thing to do.

It is based on input from customers. In other words, they didn't tell us what our pricing should be, just that pricing is important to them. And so we make these kind of judgments with that in mind, but what -- how competition is going to react and where the lenders may push us remains to be seen.

So when you expect pricing to be down in 2016, you don't think that if the rest of the industry doesn't follow suit, I know that you don't know what your competitors are going to do, but if you are more competitive on the highest FICOs, is there actually opportunity for you to take share among the higher FICOs relative to your competitors?

Just to be clear, we don't think, when you look across it, that we think price is down. In certain cells it is down, but it is up in other cells. And sort of weighted averages, we think we end up in a pretty similar spot. But as far as us being able to pick up more business in certain cells, we aren't making any assumptions associated with that when we look at our plan for 2016. We are looking at a similar mix other than the fact that we might lose some business to FHA, for example, on the low FICOs as we increase the price there.

Got it.

Douglas Harter, Credit Suisse.

This is actually Sam Choe filling in. So there has been a lot of negative press on commodity prices and how that affects housing markets in states like Texas. Just wanted to hear your thoughts on your exposure to these markets and whether the industry as a whole is ready to take on a slowdown in these markets if it does occur.

This is Steve. We are very closely watching the development and the impact in those economies, especially in Texas. We have about 6% of our risk in Texas; the biggest chunk of that or the biggest concentration of that is probably in Houston, which is about 2%.

So we are very closely monitoring those market and those situations. We have a number of economic forecasting tools that we get in-house. We also have a number of home price tools in-house as well as looking at the performance in our current portfolio.

We are certainly not seeing anything yet, but we are very closely monitoring it. And as we see things develop, we will evaluate and try to take appropriate action.

Got it. So my second question is going back to the FHA and the possibility of cutting prices. So how is the industry positioned right now versus when the FHA did cut last year?

We think that over the course of 2015, the price cut that the FHA announced in early 2015, we probably lost about 5% business to the FHA. We still get a fair amount where the monthly mortgage amount to the consumer is higher with private mortgage insurance, but the lenders prefer the private mortgage insurance execution because they are able to cancel the MI and they are able to build equity faster. So we think it has cost us about 5% of the business. Also, a lot of the FHA growth was in the refi segment, as we saw particularly in the first half of the year.

Got it. And my final one is have you heard any updates on deeper cover MI?

Well, as I said in my prepared comments, we are engaged in conversations with the FHFA and the GSEs. When I say we, I mean our trade association, USMI, as well as us as an individual company.

In their scorecard, they put out what they called an RFI or asked for an RFI, request for information, and we will certainly respond for that. That officially hasn't come out yet. But there's a lot of ongoing discussions. There's a lot of momentum about it. But the GSEs and the FHFA have to do their due diligence. And so we are progressing nicely, but there is more work to be done.

Got it. Thank you.

Mark DeVries, Barclays.

It seems to me like the type of flattening on the rate card that you are doing was kind of inevitable with the new risk weights that came out under PMIERs. I know it is not easy to project what your competition is doing, but interested in hearing your level of optimism around the prospect of competitors essentially following us and us getting some pricing stability as we head into kind of the middle of 2016.

You're right. We are hesitant to comment on what competition is doing, and we are not going to do that.

Okay. But just thoughts on -- this is a new stabbing. Your reaction to my comment that it is kind of inevitable and it seems to make sense and it could be some baseline that the industry can kind of coalesce around?

Well, again, Mike here. Yes, and we think that this is a very logical thing to do, given the increased capital charges that came about as a result of PMIERs and where the business is being generated and the returns that the business mandates over the long term, as Pat mentioned in his opening comments. So we think it is a very logical position for us to take and that is why we did it.

Okay. And then it looks like there was kind of a material drop in both the cures and the paids in the 12-month past due bucket in this quarter. Is there anything to call out there?

And I guess as a separate question, how do we think about the reserves on that bucket going forward? Because it seems like that bucket is rolling off very slowly. There's probably not a lot of new inventory coming into it. And it raises the question of how many of these defaults will actually result in claims, because there is clearly in some cases deficiencies in the documentation, and the ability to even perfect a claim. How do you guys think about that when you're looking at your reserve levels?

I would say we look at that. We track how the resolution is happening on those oldest loans. We obviously have some loans that we would deny if they were not able to perfect a claim. What I would say is we have not had experience recently or over the last couple years where the servicers on any material basis haven't been able to perfect the claim. So I don't think that is our working assumption within the reserving for that.

Now, that could change over time and maybe there are some bad loans out there, but that isn't reflected in our numbers and we just haven't seen it yet.

Is it your sense that servicers may just be sitting on some of those loans because they don't know what to do with them?

It is not our sense. I mean, there's a lot of these that get hung up in a bankruptcy process that take a long time to just work through the system. We see a lot of these loans being in a judicial state that take a long time to get to resolution. And so when we went out and tried to do some sampling on these loans, there seems to still be some activity associated with them, as opposed to them sitting on them.

And just to add a little bit to that -- this is Steve. Some of the states that are very slow in allowing foreclosures, like New York and New Jersey, those are starting to become a higher percentage of our late-stage delinquency bucket as the states that have been more proactive in dealing with foreclosures work the inventory through. So those have moved up as a percentage, and they are still very, very slow states. So we are getting down to those states that are really, really slow, and that is I think what is holding up the process.

Okay. And is there anything to call out in kind of the drop we saw in both the cures and the paids in that bucket?

This is Mike. I would say the paids is just a function of what Steve and Tim just articulated is that we have less raw materials, if you will, in that bucket of claims being submitted, that -- but looking at the transitions from the middle stage bucket to the 12-plus, that has been relatively steady. So on an absolute basis, it's because there are fewer delinquencies on account basis. But as a percentage, it has been fairly steady.

Okay, thanks.

Eric Beardsley, Goldman Sachs.

Just on the rate card changes again, I think over the last few months, you talked about if you narrowed price and moved more tiered levels, you could potentially reduce the scope of who you serve. And that might not be good for the industry long term. Do you feel like you are doing that with this rate change as you talk about potentially losing some share to the FHA at the low end? And I guess if so, what drove this? Is this really PMIERs or how much is competition?

I think it is a combination of the two. PMIERs was a major influence. That was introduced in June and we spent the second half of the year assessing it and declared in our own minds that the returns there were not adequate.

Again, we very much like to play in that market. As I think Mike said earlier, about 15% of our business in 2015 was below 700 FICOs. So we have the appetite for it. It's just that we have to make sure that we generate adequate returns. So it was PMIERs-driven as much as anything else.

Got it. And then I guess as we think about -- you made a comment that your pricing would be up. I think we calculated industry average maybe be up 2 basis points on borrower-paid relative to last year. If you start to lose some of that lower FICO business, particularly if the FHFA cuts premiums, I guess where would you see pricing netting out on average versus 2015?

We think it is going to be very close to the same.

Based on the mix of business will get to your point.

Yes. And I guess if we were to factor in the FHA premium cut?

Well, if the FHA cuts their premiums, I don't think it is going to impact us in any great way because number one, the move we are just announcing, we are increasing rates. And I think some of the other MIs have done the same. So we expect to lose some of that business to begin with.

And then in addition, one of the big differentiators in the lower FICOs are the LLPAs at the GSE level. And unless the GSEs are going to change their LLPAs, and we have no indication of that, we don't have an opportunity for much of that business to begin with. So a further price cut is -- we can't lose more than we are already losing, if you will. In other words, it's just going to be -- the difference is just going to be greater.

Got it. And then just I guess lastly, as we think about, just back on the credit commentary in terms of the claim rate, I guess where do you peg it in the fourth quarter? And just want to make sure I understood about potentially not improving 100 bps to 150 bps in terms of I guess what the improvement you saw this year on average in 2015 versus 2014, and where we could think about that claim rate coming in next year.

Yes, we saw it in the fourth quarter around 13% claim rate on new notices, which was pretty similar to where we were in the third quarter. That had improved during the year up to the third quarter. But like I said earlier, our expectation in 2016 is that we would not see much improvement over that 13% claim rate for the full year.

I did say in the first quarter seasonally, normally, we see the cure rate get a little bit stronger and so inversely, the claim rate is a little bit lower in the first quarter. But when you look at the full year, we would not expect it to be materially better than the 13% that we experienced in the fourth quarter.

Got it. So I guess if we were running around 13% third quarter, fourth quarter, would it have to be significantly higher in the second quarter then to actually not be below that level?

I think -- I am looking at sort of the run rate, excluding the first quarter.

Okay, got it, got it. So weighted average could end up working out lower, just as you start to exit the year. Maybe not significantly better than it is now.

I would say not significantly, correct.

Okay. Great, thank you.

Chris Gamaitoni, Autonomous Research.

Thanks for taking my call. Moving to the capital structure side, you talked about the potential for some actions. How much cash do you want to hold at the holding company that is not related to debt payments, just kind of working capital? And what do you think your target debt level or debt to cap level would be, assuming -- once everything gets worked out?

Well, there is a lot there as far as assuming when everything gets worked out. What I would say is we much prefer to hold excess capital that we have at the holding company at the writing company. But there is a long way to go to sort of get to that point, because we have to have our regulator-approved dividend out.

One of the reasons why we have been very focused on getting dividends out of MGIC -- and we are happy to get the dividends out of some of its sister entities recently -- was to get that flexibility at the holding company. But those will come hopefully quarterly starting this year, like we said. And that will give us some flexibility at the holding company, especially to pay off the 2017.

As far as the debt to cap ratio, as we said, we want that to come down from where it is right now. We have said that we think that even though ratings might not matter quite as much right now from a standpoint of being able to get business from our lender customers that in the long run we think it will matter more. So we are focused on keeping the ratings improvement. So we would like to see that debt to cap ratio continue to come down.

And is there any thought about the opportunity to switch out some of your converts for -- at least partially with term debt?

It is something that we talk about as a management team and with the Board about, to try to understand what our options are. There is definitely nothing definitive that we plan on doing at this time.

Okay. And then finally, it looks like you have about 11% available asset buffer at the writing company. Is that about the right level? Or have you kind of -- now that it is finalized, have you targeted kind of a buffer level that you want to hold down there?

I would say we are still looking at how much we want to hold there. Like I said earlier, I think we would prefer to hold more excess at the holding company if we could. We would expect that that buffer will grow as some of the older books burn off a little bit here, and we become -- continue to be profitable. So that could grow a little bit, and then hopefully that just allows us to preempt more dividend capacity would be the goal.

The other adjustment that we would be looking at is obviously working with our partners on reinsurance and trying to size the reinsurance deal appropriately. That has worked very well for us, and that gives us a lot of flexibility. And that is why we try to develop those relationships.

Right, but you don't have a target of we want to hold 5% buffer at the writing company, or 10%, or whatever it might be?

We don't now.

Okay. That's all my questions, thank you.

Amy DeBone, Compass Point.

Thanks for taking my questions. I just want to follow-up on Chris's cap structure question. When you talk about your mid-teen return target, is that relative to required assets or equity?

The mid-teen returns that we are targeting with our pricing and then looking at returns are the economic returns. And against economic capital that we have deployed against the credit side of the business.

So then if we are looking at the available asset balances, like $5 billion in shareholder equity is about half that amount. And when you talk about debt to capital coming down, do you expect the difference between those two balances to come down as well?

They are somewhat -- I mean, there are obviously related figures that are with it. But one is on a statutory basis, and when we are talking about those returns, we are talking about it at the writing company level. Clearly the profitability on a GAAP basis will increase shareholder equity. As Tim said, our available assets will grow, too.

Yes, the one thing I think maybe trying to pick out of it is there would be no leverage implied within the return that Steve is talking about, an economic basis. So I think you'd try to link it somewhat to either debt to cap comes down. With the number that Steve has given, that is not a levered number as far as including any sort of debt at the holding company.

Okay. So if longer term you were able to lever that return, there would be upside.

Yes.

Yes. Let me just clarify a little bit. You can look at the required asset levels in PMIERs as a proxy for economic capital. So that would be a proxy for a regulatory capital requirement. And we are looking at regulatory capital requirement versus what we think the economic capital would be, and then pricing to the more restrictive of the two.

Okay. And which is the more restrictive of the two?

Generally, it is the PMIERs requirements.

Okay. And then when you mentioned the tax revision adjustment related to underestimating 4Q net income, can you just provide more color on if it was revenue or expenses that came in above your expectations?

It would have been the losses. Losses was a positive development we had in the quarter. We would not have had that forecasted.

Okay. That's all my questions. Thank you.

Al Copersino, Columbia Management.

Just two clarifying questions, if I can. I just want to make sure I fully understood the answer to the last question. So the mid-teens figure you communicate, that does not include leverage. But it is also using the PMIERs requirement for equity, rather than your existing equity.

So those two things would -- I'm guessing, would essentially offset or perhaps there may even be more upside from the lack of leverage assumed? So the mid-teens return you talk about may translate into mid-teens or slightly higher on a reported basis? Do I have that correct?

I think leverage can improve those ratios. I think it comes between where the mix as far as the -- I guess I would say undeployed capital at the writing company compared to the leverage that you were able to get a benefit from at the writing company -- or at the holding company, I should say.

When we are looking at our pricing, we are looking at our weighted average cost of capital and what we believe that is. And the economic capital or PMIERs capital. So those two components -- the weighted average cost of capital certainly reflects our debt and estimated cost of equity. That is reflected in there.

Okay.

The mid-teens does, as we showed in the example, include the impact of reinsurance. But those are really the primary components that would be -- that we are considering when we are talking about mid-teen returns.

Okay. And then the last again clarifying question I had. You answered a question and said that the rate card changes here you are making, that if applied to your 2016 business, your estimate is that the overall pricing would be about the same as under the old rate card.

I guess a quick question there. If that is the case, does that imply higher risk-adjusted returns? As presumably a bigger portion of your business would come from the higher FICO scores.

We expect on a risk-adjusted basis that this should be relatively flat to slightly up.

Okay. All right, great. Thank you.

Patrick Kealey, FBR.

First question: on deeper cover MI, you still seem pretty confident that there -- the pilot program is coming down the pike. So maybe you could give us an update on your thoughts of what timing would be there, given the analysis that's being done and the comments with the FHFA?

Sure. It's difficult to forecast the timing. The FHFA has not yet formally put out the RFI -- the request for public comment. My sense of it is is that would be towards the end of the first quarter, and I would expect them to take until -- through the end of the second quarter to gather input. So I think you are well into the second half of the year before we would see anything.

And we are -- while we are very engaged in the discussions, there is still a lot of work to do. And we are not prepared to forecast any certainty into any kind of transaction getting done yet this year, although we are certainly going to try to do that.

Great. And then just one housekeeping question on your expense ratio. Heading into 2016, do you think there is additional leverage in that line? Or do you think where you are exiting the year for a full-year 2015 is probably a good run rate for the next 12, 24 months?

Yes, the expense ratio drift down a little bit this year. I would say we would not expect to be quite as low in 2016, but would expect it to be within a couple points of where it is right now.

Okay, great. Thanks, guys.

Tom LaMalfa, TSL Consulting.

Congratulations on a good earnings report; continued improvement. I have really two questions for you. They are in a sense indirect, but they pertain to the industry and the industry's strategy in dealing with the 800-pound gorilla in the room, the 29% market share that the FHA is today. What is the thought on how to deal with that?

And my second question has to do with risk sharing and whether all of the deals that are being done by the GSEs whether they are helping or hurting the mortgage insurance industry. Thank you.

Tom, this is Pat. Thanks for the questions. On the first one relative to the FHA market share, as I said, I think it's a combination of the reduction in prices earlier in 2015 as well as the LLPAs that are added on at the GSE level. Until those change, it's very difficult for us to say we are going to win business back from the FHA.

We have, for many years, as a company and as an industry approached the FHA to try to find ways that we can work more closely together, that there is ways that effectively we do the same things. There is not an obvious difference in that they have a mission and we have public shareholders, but there is a middle ground where we could play.

So it is difficult to see that number moving in any major direction. It could be impacted by a purchase versus refi mix, but we are well aware of it. We talk about it often: how can we partner with those guys. But oftentimes they have bigger priorities to deal with or you'll see every two years you got a changing of the guard here and you got to go through a whole re-education process.

In terms of risk sharing, I don't think there's anything that's going on right now that are hurting the MIs. However, we are very sensitive to that. Obviously we are protective of our turf. And we think not only can we -- our narrative is very, very strong.

We are private capital. We are first dollar loss. If we can help reduce the GSE exposure, we by definition reduce taxpayer exposure. So it is a strong narrative.

The FHFA has been very clear that this is no longer a pilot. It has been in their scorecard now for three or four years. This is a way of doing business. I think the GSEs have embraced it, if you will, an acquire-to-distribute model, where they acquire the risk and then distribute it on the back end.

Our point and those of others, like the MBA and the Urban Institute and folks like that, is that there is not enough capacity in the current market to satisfy the needs of the GSEs. And therefore, we need to be able to find -- they need to be able to find alternative instruments, alternative executions. And that is where front-end risk sharing, in particular private MI, comes in.

So I can't say that they have heard us thus far, but we watch it very closely. And as I have said in my meetings with the FHFA and the GSEs, we as an industry are private capital and we are standing in front of them waving our arms going here we are. Let us play. And they are doing their due diligence, and hopefully at some point this year, we will hear something more positive.

Thank you, Pat.

Scott Frost, Merrill Lynch.

I think I've got this, but I just want to make sure I understand how you think about the effects of the new pricing structure on lower FICO borrowers. Would you characterize them as potential borrowers you are okay with missing? Or alternatively, ones you would like to capture but can't because of FHA or other reasons?

This is Mike. We would -- at these -- at our pricing, we would like to have these borrowers. There are -- otherwise, as you point out, the impediment to that is FHA as well as Pat mentioned the GSE LLPAs that caused the monthly payment to go higher. On an all-in basis, if you just take out just the insurance as a discrete element and skipped how it's financed to the loan amount, in that case with FHA, we believe the consumer is better off because they got cancel ability with it.

Just add on to what Mike was talking about, the PMIERs requirement has certainly increased the amount of capital we have to hold in those buckets over what the original rate card or previous rate card was priced to. So that is a big driver is making sure we hit our hurdle rate and return target against that increased amount of capital.

Okay, okay. Next question; I think you touched this a little bit. The current environment has some thinking that -- about a potential reemergence of asset quality issues. Can you talk about why that may or may not be occurring?

I think it depends on how this evolves. There's a huge amount of, I would say, risk in some of the energy-related states. We are certainly focused on those where we have a material risk exposure. Texas is the only what I would call energy state where we have an exposure greater than 1% of our portfolio.

But I think right now, it's very uncertain and it's going to take some time to see how things evolve. So we are monitoring it. We have tools to help us manage our risk. We do have the risk exposure in Texas as part of our reinsurance agreement. So we share some of that risk.

But we are monitoring it very closely. At this point, we haven't seen any signs that would warrant us taking significant action, other than monitoring it very closely.

This is Mike. I would just add to that, too. When you look outside of Texas and the points that Steve made to the consumer at large, employment, while it's not skyrocketing, continues to expand. Wages, while -- are modestly expanding, especially in the nonsupervisory payroll segment; credit card debt seems to be holding in there.

So as Steve said, we continue to monitor not only the markets, but from the consumer perspective, which is the big driver of employment perspective, that is maintaining its relative strength. But that is something that absolutely bears monitoring in volatile times.

Okay, okay. And last question, and I appreciate the comments on leverage. And what it sounds like is you are trying to drive -- it sounds like an upward NRSRO ratings trajectory, because those ratings in the long run will matter. The question I have is it your sense that your equity capital providers agree with that view?

I think it comes down to what the opportunity is there. As we talk with investors and talk internally, there is always a trade-off there. If you have lower debt ratios and it helps you with the ratings, but the ratings don't matter for the volume of business you can write, you can obviously make the argument why have lower leverage. You should have more leverage at that point.

But it is our belief that over the long run that the ratings will matter in that they will help us keep the volume and write the business that we want to write, and without having investment-grade rating over the long run, that we could be hurt in that manner. Not that it hurts us right now, but that is our focus. So we want to make sure we keep open those lines of availability at the business we want to get.

So just to make sure, just to recharacterize, if you don't see an operational benefit to those ratings, that would cause you to reconsider that view?

I think it is a factor in what we look at. It is something that you have to consider. It's what do we think the return to the shareholders are by the different levers that you can pull as far as the debt ratios.

Okay, thanks.

Mike Zaremski, BAM Funds.

First question: primary average claim payment levels are up about 6% year over year to about $50,000. Can you help us think about the variables and dynamics impacting that metric?

Yes, so they can be impacted by the mix of the loans that are there. I think there's some aspect of it that can be impacted by the duration of how long those have been delinquent. As Steve was talking about earlier, we have a lot of loans that have been in the delinquent inventory for a significant amount of time.

So some of those carrying costs we pay our percent of the claim on those. That is probably the biggest impact of that versus anything to do with home values or anything like that.

So I guess are you saying the -- if I need to think about this prospectively, the new vintages would have much lower levels than the older vintages. So I kind of need to bifurcate and estimate based on vintage and that will come -- let me trend out where that is going over time?

It's not really a vintage issue as much as it is -- because most of these loans that are being paid off are on the 2008 and prior books of business. It is how long they have been in the default inventory for is probably the biggest component that would add additional cost to the average claim payment.

I'd just give you some perspective. The current average loan size of loans we are insuring are in the $250,000, $200,000 range. So then you take that times the coverage rate, and obviously whatever frequency. But just to give you some perspective on the loan side that we are insuring to that.

Another driver of that over the year was prior to the Countrywide settlement, we were holding a lot of claims. And the average size of the claim coming through from once we implemented that settlement has been one of the drivers of that increase.

Okay, that helps. Lastly, the investment portfolio yield continues to move north. What's going on there? Are you guys taking on more risk, more duration, do you have more appetite?

It's more on the duration side. As the years went on, we've moved from probably around a 4 duration to a 4.7 duration, so that is probably the biggest component. We are not necessarily taking on more risk. We are moving toward tax preference. But the biggest driver in the pre-tax yield was what we disclosed. Actually it would not be the mix. It is more on the duration side.

I guess do you keep planning on adding more tax preference? Is that why you said the tax rate would be low 30%s for 2016?

Yes. We do -- have moved more towards tax preference during the year and we would continue to do so.

Got it, thank you.

Sean Dargan, Macquarie.

I have a question about a competitor. There is a financial conglomerate that is coming out with the results of a strategic review next week. I am just wondering if you could give us any thoughts on one possible outcome, which is UGC being spun out. If that company, UGC, was subject to the same investor scrutiny that you and your peers are, what do you think that would do to competitive pressures or their pricing?

This is Mike. As you're closer to that, I would say -- and the folks that follow the P&C space and what the management teams are thinking about over there than we are with it. We would watch and observe it to see what the structure is and where do they end up. Do they end up part of something else? Do they end up independent? I think at this point, highly speculative for us to make comments about what it would mean to the industry.

Okay. And a related question: you for several years now have been talking about pricing to mid-teen ROEs over the cycle. But the market is not valuing your peers there now. And an argument can be made that perhaps a P&C carrier with a lower tax domicile could pay a premium for you and make a deal ROE accretive. Do you think the stand-alone business model for an MI is the appropriate one?

This is Pat. I don't know if it is the most appropriate one based on history, it is just that for years, we've had both the stand-alone MI company as well as one that has been owned by a larger parent company. We have seen both business models successful.

Obviously it depends on return calculations, and returns on -- it depends on alternative uses of capital and your expectations of returns. We have seen, for instance, reinsurers interested in the MI space, because on a relative basis, our returns are better than theirs.

So it's difficult to predict which is the better model. I think some of the fundamental things that influence that decision is this is a capital-intensive business, and while you can put money in, you can't always get money out. We've learned that many times over many years because the insurance regulators are very cautious and appropriately so.

And so it is not something that you can make a quick buck on. I think in addition to that, there is -- until GSE reform shows some greater clarity, and we think that's going to be a few years out, it is difficult to -- and it is not to say that it won't happen. That somebody won't come in and either start an MI or buy an MI. But there's certainly still a lot of uncertainty around GSE reform and what that means, and the influence they have on what the private mortgage insurers can do.

Thank you.

Jack Micenko, SIG.

My original follow-up has been answered, but Pat, since I am on the line, your opening commentary seemed to really drill on transparency a bit more. And I was hoping you could expand on that. Obviously, there is a newer entrant that is focused on black box and I think a larger one has been doing it for a long time.

I guess what I'm trying to get it is, is there an increased interest or demand from your customer base to be more transparent? And can you maybe flesh that out a little bit for us?

Well, first, in terms of transparency, fundamentally we believe that is the right thing to do. And so that is the way we run our Company. In terms of the black box pricing versus transparency, the black box pricing has been in place now for a few years and the number one thing we do is stay very close to our customers. We do business with just about everybody.

And the feedback that we get is that they prefer transparency. That is not to disparage our competitor that does black box, but the feedback that we solicit says that they prefer the transparency. They want to know what premium rate they're going to be charged.

I think what the comment in regards to black box, I used the term off-rate card pricing. And that is as these pricing changes have developed in the MI market, we have seen more of what we would call -- I guess what I would call one-off deals, where deals are being cut with individual lenders. And as time has gone by, we see more and more of those deals being cut. At some point in time, they are no longer one-off. And we don't believe that is the best way to run this business and run our Company.

And so we are saying in an effort to try to -- not to say that that would never happen again. I don't want to say that because it most likely will in certain circumstances. But we want to take those one-off deals out of the norm, out of the main, and create a transparent pricing structure that makes sense for everybody.

Okay, thank you.

Bose George, KBW.

Just wanted to ask about pricing on singles. Are you guys making any changes there?

Yes, we will be updating the rate cards on singles as well.

And is the change that you are making there an increase largely to reflect the increased capital charge?

Yes, that is correct.

And just given that, do you think we could see shift from the industry market share from LPMI to BPMI? Just because it looks like everyone is going to be raising rates there?

We certainly think that is a potential outcome.

Okay, great. Thanks.

Eric Beardsley, Goldman Sachs.

A really quick follow-up. Do you know offhand how much of the positive development in 2015 was from a lower claim rate? And is there a way to think about what a 100 basis point improvement in claim rate would do for positive development this year?

Eric, are you just talking about the claim rate, the improvement on the new notices?

Well --

Or are you talking about development on already existing notice inventory?

I guess just new notices, but if you could break that out, it would be helpful.

I don't have the numbers off the top of my head; we would have to go back and look and see where we were at the beginning of the year as far as where the expected claim rate was. My recollection is we were probably just around 15 or slightly below, and so that improved to 13 by the end of the year. So if you take that delta times the number of new notices in the year, that is probably your number.

As far as the benefit on the already existing notices, we have a disclosure in our Q, and there will be an update in our K that talks about the positive development on loss reserves and breaks it out what the component is on the claim rate.

Got it, okay. So as we go into 2016 here, is there a view that positive development I guess it will be more dependent upon what happens with the existing delinquencies and cure rates as opposed to what is trending with new notices?

Yes, our view is, again, on new notices, from a claim rate, we think that we are at 13 now and we don't expect significant improvement there. So if you saw reserve development, it would be more on the already existing notices.

Okay, great, thank you.

I am showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

Okay, this is Pat. Thank you very much for joining our call. I know the nature of the beast, if you will, is to always look forward. But I do want to reiterate what a great year we had in 2015, with $485 million of income before the DTA; $43 billion of high-quality insurance in force done in a year where there were great competitive pressures. The Company has now been profitable for eight consecutive quarters, so demonstrating a consistent pattern of profitability is important to our regulators, our shareholders, our customers.

The underlying quality of the business; Steve talked a little bit about concern in some of the energy states, but generally speaking, we feel really good. So I want to not lose sight of what was accomplished by my coworkers and our Company in 2015.

We talked obviously a lot today about the price changes. We try to be very, very thoughtful there. First and foremost, what we do is stay very close to our customers always. We believe customer service is the way to compete on. It is not just a case of price. In some cases it is, but that said, our feedback from our customers, watching what our competitors have been doing, and getting a better understanding of what PMIERs really means to us has led us to the action. And so we have taken it at the right time.

At the end of the day, what we need to do is compete and we will compete, and we will do so balancing the needs of our customers as well as our shareholders.

And so with that, we will close out the call and I thank everybody much for your participation.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.