MGIC Investment Corp (MTG) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the MGIC Investment Corporation's first-quarter call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like introduce your host for today's conference, Mike Zimmerman. Sir, you may begin.

Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation.

Joining me on the call today to discuss results for the first quarter of 2016 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 located at MTG. MGIC.com under Investor Information, includes additional information about the Company's quarterly results that we will refer to during the call, and includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force and other information we think you will find valuable.

During the course of this call, we may make comments about our expectations for 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 these statements in the future in light of subsequent development.

Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call for the issuance of the 8-K.

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

Thanks, Mike, and good morning. For the quarter, net income was $69.2 million, or $0.17 per diluted share. During the quarter, we submitted our PMIERs certification, and focused on ensuring a smooth implementation of our new premium rates. Additionally, during the quarter we repurchased a portion of our convertible debt to lower our interest costs and reduce potential dilution to our shareholders. We reestablished the dividend capability of MGIC and the writing company was returned to investment grade status by both Moody's and S&P.

All in, this was another quarter that demonstrated the increasing positive influence of the new business written since 2009 is having on our financial results. As we mentioned in the press release, there are a number of items impacting the ability to easily compare the first-quarter results of 2016 to the first-quarter results of 2015.

In a few minutes, Tim will go through the financials in more detail. But, I feel very good about the financial results [and] our capital position.

So with that as a backdrop, I am pleased to report that our insurance in force, the primary driver of our future revenues, increased on a year-over-year basis by 5.4%, ending at $175 million. This growth reflects the expanding purchase mortgage market or market share and the hard work and dedication of my fellow coworkers.

I have previously alluded to the 2019 -- 2009 to 2015 books. They continue to generate low level of losses. In addition, we continue to experience positive trends on the pre-2009 business, relative to the number of new delinquent notices, and declining delinquent inventory. The increasing size of our insurance in force, the runoff of the older books, solid housing market fundamentals such as increasing household formations and increased home sales, and our current capital position put us in a great place to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers now and in the future.

Our revised premium rates for both borrower-paid and lender-paid premium plans became effective in April. The premium rates we offer are competitively positioned in the marketplace, and are structured to generate comparable risk-adjusted returns across the spectrum of loans we ensure. A new business written, we expect that the lifetime after-tax returns after considering reinsurance will be in the midteens.

While we expect to see some of the lower FICO score business shift away from us, we still expect to retain some of that business, as lenders value the customer service we provide and continue to find efficient and cost-effective to use private mortgage insurers versus FHA.

Additionally, the GSE's reintroduction of the 97% loan-to-value program, now about 5% of new business, may keep some of the low FICO business with private mortgage insurers, because it will allow borrowers with PrivateMI to enjoy faster equity buildup and have the ability to cancel MI coverage as compared to FHA alternatives.

For the quarter, we wrote $8.3 billion of new business, which is down from last year as a result of fewer refinance transactions, along with some impact from the FHA exchanges that took effect in early 2015, and possibly by TRID as well. We estimate that our market share within the industry is in the 19% to 20% range. While interest rates are staying low, and we have seen refinance transactions increase somewhat, which puts some pressure on persistency, the overall origination market is expected to continue to shift towards more purchase transactions and fewer refinances. This is a net positive for our Company and our industry. We estimate that our industries market share is approximately 3 to 4 times higher for purchase loans compared to refinances, and historically MGIC tends to be at the higher end of that range.

In the quarter, approximately 82% of new business was written for purchased loans versus 71% in the first quarter of 2015.

That all said, I would reiterate the guidance we provided in January, which was that, for 2016 versus 2015, we expect only a modest reduction in new business written, and that the insurance in force will modestly increase.

Turning to 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 a risk before it even gets to the GSEs, that deeper coverage for front end risk sharing would be the way to readily implement this. We have many supporters who agree with this approach, and we have continued discussions with the GSEs and FHFA on these matters, both at the 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 details for the quarter.

Thanks, Pat. In March of this year, we reached another important milestone when we filed our certification with the GSEs that MGIC was in compliance with the financial requirements of PMIERs as of December 31, 2015.

As of the end of the first quarter, MGIC's available assets totaled approximately $4.8 billion. And, based upon our interpretation of financial requirements, its minimal required assets are $4.3 billion. For the quarter, we earned $69.2 million in net income versus $133.1 million in the same period last year.

This is a large decline on a year-over-year basis, but as we pointed out in the press release, there are a number of items that need to be considered when comparing periods.

The biggest change on a year-over-year basis is that, as a result of the reversal of the deferred tax asset valuation allowance, we must now record a provision for taxes. For the quarter, we recorded approximately $35 million of tax provision versus just $3 million in the first quarter of last year. Second, last year we opportunistically realized approximately $26 million of investment gains, versus only $3 million of gains this year.

Next is losses incurred and the impact of positive reserve development. As reported on the income statement, incurred losses were higher year over year, due primarily to less positive development.

In the first quarter of 2015, there was positive development of $22 million on our primary loss reserve was compared to positive development of approximately $5 million on the first quarter of 2016. Absent the positive development, losses incurred on new notices were lower on a year-over-year basis, and that was primarily a result of fewer new delinquency notices received.

Finally, during the quarter, the holding Company repurchased $138 million par value of 2017 5% convertible senior notes, and MGIC purchased $133 million of par value of the 2063 9% convertible junior debentures.

As a result, we recorded a pretax loss of $13.4 million on the income statement. The transactions reduced potentially fully diluted shares by [20.1 million], and lowered our consolidated annual interest expense as the annual interest expense on the repurchased debt was nearly $19 million.

So overall, when you consider these items, we would view the first quarter's results favorably when compared to the first quarter of 2015.

Circling back to losses incurred, during the quarter we received approximately 11% fewer delinquency notices than we did in the first quarter of 2015, and 9% fewer than in the fourth quarter of 2015. Reflecting the current economic environment, the new notices received are estimated to have a claim rate of approximately 12%, which due to seasonal influences, was down slightly from the fourth quarter, but about the same as the first quarter of 2015.

In regards to projecting the future claim rate as we have previously discussed, historically we think of a 10% claim rate as a long-term average. We are currently in the 12% to 13% range. While we do expect that we will ultimately return to the 10% level, the pace of that is difficult to project given the unique performance of the pre-2009 loans.

Importantly, we continue to expect fewer notices in 2016 than in 2015, which is a material contributor to the level of losses incurred each quarter. We do expect the 2009 and forward books to generate materially fewer lifetime delinquency notices than the pre-2009 books did.

As I just mentioned, the pre-2009 legacy book continues to dominate the new notice activity, and they generated approximately 90% of the new delinquent notices received during the quarter, while those books now comprise just over 35% of the risk in force. We expect that the pre-2009 books will continue to be the main contributor due to notice activity for the foreseeable future.

The delinquent inventory was down 23% from last year and down 11% sequentially. In addition to seasonal influences, the sequential decline also reflects our processing previously held rescissions that were involved in the settlement, and the removal of 732 loans that were included in the nonperforming loan sale that was completed by one of our larger insurance counterparties.

Neither of these transactions had a material impact on our financial results during the quarter. We expect to see the remaining inventory continue to decline due to the eventual resolution of older delinquencies, combined with a lower level of notices being received.

The number of claims received in the quarter also declined, down 33% from the same period last year and down approximately 8% sequentially. Net paid claims in the first quarter were $222 million, including $47 million that was associated with claims paying practice settlement and the nonperforming loan sale I just mentioned. Primary paid claims were $166 million, down 23% from the same period last year.

The calculated weighted average effective premium yield for the quarter declined for the fourth-quarter level of 52 basis points to approximately 51 basis points. As a reminder, last quarter we said that we expected the effective yield to be 2 to 3 basis points lower in 2016 than the 52 basis points reported in the fourth quarter.

This is primarily a result of increases in the amount of insurance in force covered by reinsurance and, as expected losses are seated to the reinsurers, our profit commission is reduced while net losses incurred on the income statement decreased. The net cost of reinsurance during the quarter came in as expected at approximately $11.5 million.

At quarter end, cash and investments totaled $4.8 billion, including $265 million of cash and investments at the holding Company. The investment portfolio had a mix of 74% taxable and 26% tax-exempt securities, a pretax yield of 2.5% and a duration of 4.7 years.

As we have previously disclosed, we have been having discussions with a Wisconsin OCI regarding MGIC's ability to pay quarterly dividends to the holding Company. I am pleased to report that the OCI approved a $16 million dividend that was payable by MGIC to the holding Company earlier this month. Our expectation is that we would receive similar size dividends on a quarterly basis. Each dividend would be considered extraordinary versus regular, and therefore requires OCI approval.

The holding Company interest payments on its outstanding debt is approximately $55 million, of which approximately $12 million is paid to MGIC. Regarding the overall capital structure and leverage at the holding Company, we continue to analyze or willing to consider options and lower the leverage ratio, reduce interest expense or minimize dilution in order to add long-term value to shareholders.

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 regulator is leading, continues to move forward, although we are not aware of a timeframe for implementation. We still do not expect the revised state capital standards to be more restrictive than the financial requirements of 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 that 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.

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

In closing, we continue to make great progress. We had net income of $69.2 million, wrote $8.3 billion of high-quality business. The insurance in force portfolio grew. The level of new delinquency notices and delinquent inventory continue to decline. MGIC's capital position in our market share within our industry is strong and we maintain our traditionally low expense ratio.

We also took advantage of our financial position to reduce potential dilution to shareholders and lower our interest expense through the debt repurchases, and resumed paying dividends out of MGIC to the holding Company, and of course MGIC is now back at being investment grade.

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 our shareholders and we are committed to pursuing those opportunities.

With that, Operator, let's take questions.

(Operator Instructions) Mark DeVries.

Have you had an opportunity to assess yet how many loans you have that might be eligible for the FHFA's new principal forgiveness program?

Yes, this is Steve Mackey. We have sized that to be approximately 3,000 loans at this point.

Mark, I would also add to that, one of the things that is hard about the -- we can run the mark to market LTV, make assumptions there, but what we don't know is the borrower's income; and the streamline will require a DTI to get below a certain threshold. So there's potential there, but we don't see it being very significant.

So you're saying there is potential -- sorry, is that 3,000 number, is that pretty firm? Or could it be higher or lower depending on the income information?

Yes, it is our best guess using mark to market LTV information -- this is Mike -- at the MFA level. Keep in mind, 20% plus of our notices are non-GOC. And then when you factor in that, and try to make some estimates as far as the arrearage go, that is kind of our best guess before applying of the rules that are borrower-specific.

Okay, but considering all the maybe eligible borrowers have to be, you know, both three months past due, but also such a high LTV that presumably these would be seriously delinquent borrowers. Is it not safe to assume that for every cure that you get out of that population, that there is probably somewhere on the order of $40,000 benefit to your reserve, right, because it's -- your average claim is about [4950]. Your claims rate assumption on your loans and that bucket is kind of in the 85% ranges. Are my numbers close to correct there?

I think you are thinking about the right way, that if you are talking about the loans and how far they are delinquent, obviously the longer they are delinquent the higher probability to go into a claim. So, we would not have, for example, the 12% claim rate on those because they are not due notices. And to think in terms of severity.

So I think you're thinking about the right way. As Mike said, I don't think at this point we think it's going to be a big benefit to us, but I think we would acknowledge that there could be potential benefit to us from the program.

Sure. But even if you take the 3,000 loan number, which is clearly kind of low relative to what is implied by the addressable pool that they've outlined, and a benefit of that you are still talking about a potential $100 [million] plus benefit to the reserve. Am I thinking about that correctly?

This is Mike. What -- best we can do is tell you that, based on that high-level information that we've got, running high -- at the MSA level, price appreciation. And you have really got to get to the neighborhood level. There is really not reliable data that forecasts mark to market LTVs, at that street level, we can't get you any more specific than that. We are not going to endorse the numbers that you have published or are talking about here now.

We do think there is going to be some incremental benefit from the program, but we have got to wait and see what is out there, and see how it plays out before we can be any more definitive than making these very high level estimates.

Okay, fair enough. For my next question, I think my bigger concern is, by the math we do, just ignoring this whole FHFA principal forgiveness issue, just looking at your existing inventory of delinquent loans, that you could be anywhere between $100 million to $200 million over-reserved just based on the current run rate on your claims rate of the existing pool.

And yet, there is a $5 million claim benefit in the quarter. And a loss ratio that is up year over year at 38% and way, way above the kind of single-digit loss ratios that two thirds of your book is running at. So my question is, when can we expect to see more of the reserve kind of bleed through towards the benefit? And when should we expect the blended loss ratio to start to look more like the loss ratio we see on most of the business that you have on your book now?

This is Tim speaking. I think as far as the reserve development, we sort of set the reserves based upon our best estimate at this point. We can't predict future development positive or negative. We wait to see the trends continue to develop and take those as we see fit.

As far as when the loss ratio continues to decline as we sort of mention in the prepared remarks. The majority of our notices are coming from the 2008 and prior books that is creating the tension of keeping the loss ratio higher. So that will take some time, and we continue to believe that some of our new notices will come from those books, which have a higher loss ratio on them than the newer books that you said are performing extraordinarily well and have very low loss ratios on them.

Okay. Sorry, just one must follow-up. I guess what I am trying to understand is, what did you not see this quarter that you saw in 1Q 2015 around development? You continue to have -- in fact, on a sequential quarter basis, your delinquent or new notices declined more than they did last year as a percentage basis. You had very good claims rate across all buckets, including your 12 or more months past due.

What do you need to see to reflect more positive development going forward?

On the new notices, we are obviously reflecting that based upon the count as far as the number of them, how they all perform. We think it is pretty close to where we have been the last few quarters, again seasonally adjusted.

As far as the -- I guess the older notices as you allude to, we continue to look at the information over the most recent quarters to see if there is sustained sort of continued improvement, and haven't seen enough to lead us to believe that we should lower the reserves on those items yet.

Okay, thanks.

Eric Beardsley.

I guess just as a follow-up to that last question, is there any way to think about I guess what you need to see, whether it is from a tier ratio standpoint or those roll rates to claim to have more of that development? And I guess the cure ratio being 114% this quarter, I mean is there a certain threshold where you can just see more of it even more of a year-over-year improvement?

No specific threshold on that, but as you pointed out, we do focus on the cure activity in particular in that relation to what is being paid on a certain bucket. And when we feel like we have a trend that we can act upon, we do and require it to update our estimates based upon those.

Got it, and just on the premium rate guidance for the 2 to 3 basis points lower in 2016, how should we think about the pace of that over the year? Is that a relatively steady decline? ^ I would say a relatively steady for the most part. The biggest thing -- the variable on that, quite frankly, if they can move it more quickly would be the losses ceded. As we talked before, as the ceded losses under the quota share increased, which we thought they would increase a little bit and they did a little bit this quarter, that takes away from the profit commission and lowers our average basis points. So that is what can move it the most, but that is just -- there is no bottom line impact. That is just a swap between losses incurred and the premium line.

This is Mike. I would also add, I have to remind you that -- or all the listeners that as we have been talking about that last -- for the last several quarters, as the older books, the pre-2009 books have higher premium rates. As those run down, that is going to influence it. As well, the 10-year resets for premium. There is another other item that's in addition to the reinsurance that Tim talked about that will continue to put some downward pressure on that.

Got it. And then, I guess if we were to think about the persistency trends over the rest of the year, obviously there was more elevated refi in the first quarter. Are you expecting to stay around this level, or is it something that we should start to see tick up?

Well, this is Mike again. I think you're right. The refis are going to be -- they are up sequentially, but they are still lower year over year. So, it's that annual persistency -- plus or minus this area, you should be right in this area, yes. (multiple speakers)

Kind of also as a reminder, we have said -- maybe not in the last call but in several calls prior to that, we really don't anticipate the portfolio level getting above the mid-80s, or 85. We had said historically would have been our highest quarter out there. So, I think you're right in the red zone, plus or minus a point or so.

Great, thank you.

Bose George.

Just switching over to capital, you noted that you would like to -- or you expect to have a similar dividend up to the holdco going forward. Just curious if that could increase over time, just given that you seem to have a fair amount of significant excess capital at the insurance Company of least, to space on what you need for PMIERs.

Yes. This is Tim. Our expectation is that we would have the steady dividend at this rate. We hope that they would increase, but I would not expect them to increase this year as part of the dialogue that we continue to have with our regulator, the OCI. And obviously as results continue to be favorable I think that adds some more ability to have more dialogue around that.

I would say for the foreseeable future, I would assume at this level, but I think it is the right way to think of it over time that they could increase based upon results and continue to do well.

Okay, great, thanks. Actually, just switching over to your market share, you mentioned in the 19% to 20% range, did you see any change in that over the last couple of quarters? It seems like some competitors rolled out their rate cards a little earlier or are market shares, do you think, fairly stable in the last couple of quarters?

This is Pat. I think there was a little bit of an adjustment, just based on timing. In other words, some competitors were in all the market sooner than we were. So, if you were to look at an individual month, perhaps our market share dropped. But as a matter of general course, and general trend, we did not see any significant changes. That is why we still think we are in the 19% to 20% range.

Okay, great. Thanks a lot.

Jack Micenko.

Tim, I wanted to go back and get some clarity on something you had said I think in the prepared comments. You talked about a 13% claim rate, and I thought that is kind of where we felt like we were headed for 2016. You kind of threw a 12% in there. So I am trying to figure out is 12% the new 13%? Is -- are you signaling that maybe trends are better in the first quarter than the 13% you had thought, but you are not there yet? How do we interpret those comments?

No, Jack, it really has to do with the seasonality. The first quarter historically has had a lower claim rate on new notices than the remainder of the year based upon sort of the composition of notices that come in at the end of the year going into the first quarter, especially January and February.

So all things being equal, we would expect that the first-quarter claim rate to be slightly better than the run rate for the rest of the year. So, while we said the new notices came out at 12% this quarter, our expectation where -- even if things were still sort of where they are now, the claim rate would probably be back up closer to 13% in Q2.

Okay, that makes sense. And then I noticed in the release, your singles business remains flat as a percentage of what it was in the fourth quarter. I guess I would have thought, with the steeper pricing there, that business would have fallen off. So I guess are single buyers less price sensitive? Is that some residual refi that came out of some of the rate move in the fourth quarter? Or is it just maybe a competitive dynamic? I am just trying to figure out whether number was higher than we thought it would have been.

This is Mike. With the price changes that -- they didn't take effect until this month. People were still really operating with the older pricing. So there really wasn't much change in behavior from the customer base that is relative to singles.

Okay, and then the premium, the guidance of 2 to 3, if singles stayed at this level would that change the premium guidance outlook at all?

Not significantly. Again, I think that the main point on the guidance on the premium of 2 to 3 basis points was more loans covered by the reinsurance and the potential for if there was more ceded losses, that that would bring down the profit commission and bring down the premium line. But still, net income being the same.

Okay, thank you.

Phil Stefano.

I was hoping to revisit the capital management thoughts with the dividend coming up to the holding Company. I guess was there any way that we could be thinking about strategically where this capital, this growing capital base is going to be applied to, or how we can think about that moving forward?

Yes, I mean I think obviously the thing that we focus on is, if we have excess at the writing Company is trying to get some of that up to the holding Company. It gives us some more flexibility.

Obviously we have convertible debt that's out there, the 2017; for the most part we have cash at the holding Company to handle the maturity of those at this point. But obviously, we did some things this quarter with repurchases of [2063s] when we thought the price was attractive. We are using writing Company cash. We could use holding Company from that standpoint, and obviously we have got the 2020 convertibles that are out there that we would still look at to see if there's anything that is economic there.

And historically, we have returned capital to shareholders. But we've got a few convertible issues that we probably are working through before that happened.

No, no, that is great, thanks. I appreciate it.

Geoffrey Dunn.

First question on pricing, and I think the common theme has been fine, pricing has settled down in early April, but what is the risk of additional competition from here?

Magic put out a good card earlier in the year then had to revise, as you saw the other competitive pressures. How are you feeling about the BPMI environment for pricing on a go-forward basis? And what conviction do you have that companies will actually stick to their cards and we won't see continued erosion in the returns?

This is Steve Mackey. We think, in BPMI space, things have stabilized at least a bit as everybody has published their cards and more or less aligned. I think the true test will be as we come through the quarter, and how people are interacting, our competitors are interacting with customers and how that evolves. But we think for the time being it has stabilized, but we are monitoring very closely.

Okay. And then, Tim, on the premium rate this quarter, if you strip out the noise on the reinsurance, you still had about 1.5 points of compression year over year and sequentially. What is it incrementally that hit the quarter? Is it the 10-year reset having an incremental impact versus the 15-year? Or what other factors stepped up more materially in the first quarter that caused the decline before we think about the reinsurance impact?

In answer to the reinsurance is, the items you mentioned had an impact. The nonperforming loans deal that we did had a little bit of impact as well. So I would say between those three items, probably no one significantly larger than the other, those were sort of the main contributors to the decline.

Okay. And then the last question, in terms of -- it sounds like basically you are looking for incidents to be flat year over year. Actually, maybe even a little higher than at least how we calculate it on the 15-year.

What are the factors that can clean out that backaway book? Are we really looking at home price appreciation, giving you a chance to try to cure some of that out? Is it purely mix? What are some of the macro or magic specific sectors we can try to anticipate (technical difficulty) more confidence in the pace that we model?

You are talking about the -- not necessarily the delinquent, the long delinquent. You are talking about just the book in general and how many never come into new notice inventory?

Right. I mean, the challenge here is we know your loss ratio is going down. It's all about the pace.

So, to me, it looked like there was some improvement on the year-over-year annualized cure rates on the mid- and late stage bucket. Maybe you need more trend there to be confident to adjust for it, although it doesn't sound like you are thinking that way for the year.

So, what are the other factors we can look at in your numbers to gain some conviction on the pace of improvement on the incidents?

I think you're looking at the right information. As you said, I think we need to feel confident and have conviction that it continues to improve as far as you start to talk about the claim rate on those new notices. The actual count of the new notices coming in the door, as we said, continues to decline, and that is obviously a major factor.

We don't see there being a big clip of those falling off. We see there being a steady decline that we have been seeing for the last few years.

But then again, getting back to the claim rate on those new notices, we need to have the conviction that that is continuing to improve and we have not seen it based upon what we have been looking at to the magnitude that we -- I guess would like to take that down.

Okay, all right, thanks.

Vic Agrawal.

I was just curious on your thoughts as we are hearing of potential rising credit challenges in auto loans. Thus, are you seeing any spillover effect in your book, given the increasing exposure to lower FICO borrowers?

This is Steve Mackey. No. We are not. The credit box for mortgages has been very tight for a number of years. And as a result, we continue to experience our strong credit performance. And the factor that we continue to monitor on the economy as far as home prices and employment are stable except for a few spots that we are closely monitoring in Texas. So we don't see any spillover into mortgage or into our book at this point.

And how is the Texas part that you just mentioned sort of materializing at at this point?

Yes, so far, remaining pretty stable. We continue to monitor some of those markets very closely. The whole state, as a matter of fact, both in actual performance, roll rates, and then projected home prices and employment. And the outlook and actual performance continues to be relatively stable, so we are cautiously optimistic but closely monitoring that area.

Okay, thanks. And then Tim, can you give us some more color on the use of the FHLB?

Yes, we used the Federal Home Loan Bank as a mechanism to repurchase some of the 2063, the 9% debt at the writing company, you know, effectively trying to trade the 1.9% interest rate that we are paying on the Federal Home Loan Bank line for the 9% that we were paying externally.

As far as the -- if the question is, what capacity do we have to do additional, I would say that we have done what we feel we are comfortable with at this point. So I would not anticipate doing more at the writing Company as far as more draws for repurchases. But, we think it's a very good mechanism for us for us that -- for what we used it for, as well as for other purposes including liquidity at the writing Company.

Okay, thanks. That was helpful.

Doug Harter.

Given the excess capital you have at the writing Company, can you talk about your plans for the amount of reinsurance you want to use going forward?

Sure. I think it is something that we are focused on. I think it's one of the reasons, quite frankly, why we like the reinsurance, is the ability to hopefully scale it. If you recall our current reinsurance agreement, we have the ability to early terminate at the end of 2018 if we feel like we have too much of an excess at that point. But, at the same point, we view it as a very low -- a single digit -- mid-single digit cost of capital for us that is accretive to our returns on the new business.

And so, like that relationship there. so I think as we look forward it is something as we said before that we are going to consider strongly in our capital positioning, because of the flexibility it provides us, and from a cost of capital perspective find it to be something that is very interesting at this point in the cycle.

And just, when you say early terminate, is that kind of an all or none? Or could you early terminate a portion of it to sort of size that to the amount of excess capital that you would have in 2018?

Well, contractually, it is all or none. But what I would say is, one of the things we also like about the reinsurance partnership that we have is that there can be a dialog there, and the current agreement we have had is on a second or third iteration of changes we have had to make, and we have a very good panel of reinsurers on there that we have good dialogue with.

So, if we needed to scale it as opposed to fully turn it off or keep it on, hopefully we could have those discussions. But, contractually, it is an all or none at that point.

Got it, makes sense, thank you.

Mackenzie Kelley.

On operating expenses, can you just elaborate on what drove this sequential increase in the quarter, and how we should be thinking about the run rate through the remainder of the year? Is it going to be similar to what we saw last year where we expect it to kind of moderate following the initial 1Q pickup?

I think as we alluded to a little bit on the last call, we would expect that last year is probably a low point from a nominal dollar standpoint and we guided upward probably somewhere up to 2 points on the expense ratio. Obviously the expense ratio came in higher this quarter than -- I think on average last year we were at 14.9 and expense ratio. This quarter we were 16.9.

I would say first quarter you are right. Normally it is a little bit higher, although based upon sort of the trajectory, I think on the expense ratio for the foreseeable future.

Okay, got it. And just going back to the capital management, can you just give us some framework in terms of as the capital starts to build up at the holdco, roughly how much cash would you want to just have at the holdco as a buffer that would not be used for servicing your annual interest expense, and then being opportunistic with the balance sheet? And then just lastly, when did the dividend from the holdco become regular versus special?

Were you talking on the dividends? The dividends coming from the writing Company right now are special as opposed to regular dividend. The main constraint we have on that right now is because of our building the contingency reserve. The dividend calculation is impacted by that, so I would anticipate for the foreseeable future that there will be special dividends coming from the writing Company. And then as far as the target of cash at the holding Company, something we continue to talk about internally and with the Board of Directors as far as how much cash we want to have on hand there. But as you mentioned, it would be nice to have some dry powder there to be opportunistic.

But that is something that we continue to have dialogue about.

Got it, thank you.

Sean Dargan.

As you look out, at what point do you think the majority of your new notices will no longer be coming from the 2009 bucket, the pre-2009 budget?

This is Mike. I think that is the question both here and out there we are all trying to seek. But the performance, those pre-2009 books, especially the 2005 through 2008, came through obviously once in a generation or multi-generation experience relative to the depth of the house price depreciation, the extraordinary efforts relative to loss mitigation, all the robo-signing issues, etc., along the way.

So I think as we said in the prepared remarks, that is what is making it difficult to kind of linking it back to when we get back to the historic claim rate. And still, 80% plus of the notices we are getting from there are repeat delinquencies. So, I don't know if I have great insight on there, but just reiterating why it's difficult to get there with it. And we keep monitoring that through, and obviously home price appreciation could help.

Steve, if you want to add something?

Yes, this is Steve Mackey. Just to layer on a little bit from what Mike was saying, it could be a couple to several more years before the pre-2009 book actually declines to a level that it doesn't make up the majority of the new notices.

The good part, though, is that the level of new notices coming in continues to decline. So, it's also a function that the 2009 coming forward books are not throwing off any delinquent notices. So, it's not as if we have a steady new notice count that they are continuing to make up. The counts of them are actually coming down. They are just not getting replaced by the 2009 coming forward books because of how clean those underwriting books are.

Yes, I think that's a great point to emphasize. It is coming down to a level that the existing books are just so few notices being thrown off by them, it takes quite a while for the pre-2009 book to come down.

Got it, thanks. And I'm wondering if you can share with us if you have an internal view of excess capital, relative to what you think your economic capital needs are and if you can share that with us.

It is something that we are still talking about, internally talking to the Board about, but nothing to share this time.

Okay. Given your current extraordinary dividend capacity, how long would it take to clear out the converts?

This is Mike. Are you saying that taking $16 million and applying those all to convert [paper]? I don't know if you can necessarily link those two together, if that was your point. The 2017's are coming up for maturity in a year, so on to 12 months to go on those, and the 2020s, they are a function of both the stock price, relative to the (technical difficulty) [part] conversion or the maturity at 2020.

I don't think it's right to link necessarily the dividend of $16 million right to a reduction of the convertible securities.

Okay, thanks.

Chris Gamaitoni.

Could you let us know what the IBNR was at the end of the quarter?

(multiple speakers) If you have another question, we can take that. I will look and try to see if I can get the exact number for you.

Sure, and I guess I'll ask the 50th reserving question. The average reserve per default increased year over year from [29.2 to 30.3 thousand]. And just looking at the mix, there is less late stage delinquencies; and as you disclosed, and we can calculate, the new delinquent or the reserves per early stage delinquencies should be lower.

So it is just hard to make that math work, where you have a newer book and the reserves per newer notice are lower. How is the total reserve higher per doing delinquency?

There is a little bit from mix as far as how old maybe some of the other notices are, but the other thing I guess to consider in that also is the severity on the claims paid out of the default inventory. Our average claim [rate] has moved up a little bit over the last few quarters, and so obviously we take that into account when setting it, so not only the claims rate but also the severity component.

And what is the -- what is driving that severity? It is not HPA. Is it less kind of curtailment expense? Or what is leading to that severity? Mix?

This is Mike. The severity is increasing. One, have the older book, you have the judicial space. You have the New York and the New Jersey, what's left in there is little bit higher dollars stakes that are remaining, mainly because they are in the judicial markets in the Northeast, a little bit down in Florida, relative to the average home on the way.

Plus it is just taking -- I think the average claim we paid was on average about four years delinquent. So those are kind of the factors driving it.

Yes, this is Steve Mackey. We are seeing an increase in claims actually flowing through judicial states that were really shut down to a long period of time. So New York, New Jersey, Maryland, we are starting to see volume come through and those volumes are very old loans that have, I would say, relatively higher severities associated with them.

Okay. And did you guys find the IBNR?

We will get back to you off-line on that, Chris.

Okay, thanks.

Amy DeBone.

I actually have a few more follow-ups on credit. At what point during the quarter did the settlements that impacted the 732 loans take place? And did this potentially increase the reserve for default?

This is Mike. The 732, that was removed in March. So that is when the agreement was finalized and when we processed the transaction. And there was really an immaterial impact relative to our loss reserves that were relating to that.

Okay.

(multiple speakers) So it was not a driver of the change. It goes back to the previous answer of really kind of the mix of what is in there.

Okay. And then, so I guess the mix. Anything from an industry perspective that could be driving the increase in terms of the GSEs or another counterparty?

No.

Okay, and then just regarding paid claims, the average paid claim for bulk declined quarter over quarter and then slow declined as well, but then the total average claim paid actually increased. So, what drove that increase?

I mean, I guess you look at on the bulk, they went from [65.7 to 65.1] with it on there, and then, so I think it is still going to get back to the mix issue of relative to what that process (multiple speakers)

So, slightly more bulk getting processed in the quarter as a proportion compared to last quarter with those being at the higher average claim paid.

And is there anything that could be potentially driving the pickup in claims or late stage claims that are flowing through judiciary states? Is that going to continue throughout the rest of the year?

Yes, as Steve mentioned, I wouldn't say the dam burst, relative to the judicial state processing. But we have seen a pickup and we would expect to see that kind of flow start to come along, but not, like I say, a dam bursting and all of them processing and one given quarter is something about -- a real acceleration of material nature on a quarter to quarter basis.

Okay, great, thank you.

Patrick Kealey.

Thanks for taking my questions. Most have been answered, but I just wanted to go back to the FHFA principal reduction program and the 3,000 loans you have that are potentially affected. Do you have any view on potential take-up rate within those 3,000 loans? Or does that kind of factor into your wait-and-see approach on kind of the ultimate benefit to reserves?

This is Mike. No, we have no view as to what the acceptance rate by borrowers will be. All we did was take the three-day categories of the loan size, GSE investor, and made an estimate at the mark to market LTV to get to the 3,000. Everything else, we really will have to wait and see how things develop.

Okay, great. And then last question, just on your investment portfolio, should we be thinking about the current yields at today's levels where you are comfortable? Or, do you see maybe opportunities to fund some incremental yield within the portfolios as we move forward through the year and maybe into 2017?

We are always looking for more yields at a good risk. I would say that, based upon where we are right now, it is probably good place to take it. We are focused on moving from taxable to tax preference, which we have said that we will move there over time. But, I think as far as the yields on the portfolio, we are not going to sort of go outside of what we have traditionally done, which is high-quality bonds that we invest in.

Okay. Great, thank you.

Matthew Howlett.

In particular, I would ask about the United spinoff, the plans for OC to spin that unit off. I know they are the market leader. Just any thoughts in terms of does that level the playing field? Would they get more aggressive? How do you view -- is that a positive for the industry long term?

This is Mike. We have said for many, many years that we had seven players before the Great Recession. We thought that that was probably too many. We are at seven. So, I think that statement will still hold, so fewer would be better.

But, how it plays out, whether it is still 100% if they're aggressive, it is part of a big Company, a lot of small companies, we will have to wait and see how that all plays out.

Do you feel it is meaningful as the cost of capital advantage the way they sit today? And does that become attached? Does it level things out if they are outside? Anyway to sort of look at it that way? I mean, it was -- it will sort of have seven monoline players in some sort of -- have other businesses. But any -- given that they are the dominant player, just thought that maybe outside of AIG that they will be more at a level cost of capital.

It really depends on who the acquirer is and what their cost of capital is versus where AIG's is -- is at. So I mean, we haven't spent a lot of time speculating about the future of AIG's subsidiaries.

Got you, okay. And then Mike, just switching to the persistency expectations, it is difficult for us to look at it, given this older 2009 book that is sort of just still sitting there. But, when you look at cancellations, particularly as it relates to stuff done after 2010, have those been on the high level of things with the rapid home price depreciation? Do you expect them to come down under a normal price depreciation environment? Does that benefit things like that? How do you look at cancellations going forward in the new business written?

I think -- and I will let Steve elaborate more, but I think we are looking at our average life assumptions are in those 80% type of persistency levels with it, but Stephen?

Yes, this is Steve. We think that it's been pretty stable if you look at the post-2009 book years and how they perform. And with home prices increasing and I think that that could potentially be offset by increases in rates over the next year or two as the Fed moves, and depending on what happens on the long end of the curve. So we -- I believe that it is going to continue to be relatively stable environment there.

Got you. And then just last thing, just on the FHA, anything of than what has been out there, are you guys areas they regarding what is happening internal there? I know they have said they are not going to take down pricing this year again. Just anything anecdotally that is coming that you have heard from Washington regarding FHA.

This is Pat. Nothing beyond what we have mentioned, and I think just recently Secretary Castro came out and said they did not plan on reducing rates, so nothing new to report.

Great, thanks guys.

Geoffrey Dunn.

Tim, I wanted to follow up on your answer about the expenses. It looks like an 18.5% expense ratio could imply double-digit growth earnings expense growth this year. So, are you expecting 10% plus gross expense growth?

No, we would not expect 10% plus growth, expense growth.

All right, but 5% to 10% probably and maybe tempering that gradually over time?

Yes, I would say that 5% to 10% range is probably the right way to think of it on the growth expenses for this year.

Okay, thanks.

I am showing no further questions in queue at this time. I would like to turn the call back to Mike Zimmerman for any closing remarks.

This is Pat. Thank you for joining our call this morning. We understand you had a lot of questions in regards to loss development and premium yields, and appropriately so, and questions in regards to the comparability of the prior year to the current year. That said, we feel pretty good about the quarter. We got a lot done. We don't want to lose sight of the fact that PMIERs finally is over and done with in terms of compliance.

We did quite a bit along the lines of debt, taking out interest expense and dilution. We are very pleased with the rating agency upgrade. We are back at investment grade. It has been a long time coming, and we are back. And then of course, we now finally here in April got our premium rate changes into the market.

So, we understand the focus on the numbers. It is appropriate. But, also don't want to lose sight of the many things that we accomplished this quarter. So, thank you very much, and we appreciate your interest in our Company.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.