MGIC Investment Corp (MTG) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation second-quarter earnings call. (Operator Instructions) As reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. 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 the results for the second quarter of 2016 our CEO Pat Sinks and 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 MGIC's website, which is located at mpg. MGIC.com under investor information, includes additional information about the Company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information we think you will find valuable.

During the course of this call we may make comments about our expectations of the future. Actual results could differ materially from those contained in those forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K that was filed earlier this morning.

If the Company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K.

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

Thank you, Mike, and good morning. I'm pleased to report that we had another solid quarter resulting in net income of $109.2 million, or $0.26 per diluted share. Insurance in force, the primary driver of our future revenues, increased on a year-over-year basis by 5%, ending at $177.5 billion. This growth reflects the expanding purchase mortgage market, our company's market share of approximately 19%, and the hard work and dedication of my fellow coworkers to deliver stellar customer service.

2009 and newer books now comprise 67% of our risk in force and, reflecting the credit quality of the loans and current economic conditions, continue to generate low level of losses. The pre-2009 books are still generating the majority of our incurred losses. While the rate of decline in new delinquent notice is modestly slowing, we continue to experience positive trends relative to the number of new notices from these books. The increasing size and quality of our insurance in force, the runoff of the older books, solid housing market fundamentals such as household formations and home sales, and our current capital status positions us well to provide credit enhancement and low down payment solutions to lenders, GSEs, and borrowers.

Despite the low interest rate environment, we did not see a material increase in refinance transactions, which accounted for 17% of our new insurance written. However, we do expect to see a modest increase in refinances in the second half of the year, which could put some pressure on persistency, but that will be highly dependent on the future level of rates.

Most forecasts are calling for increased purchase activity in future periods, which is a net positive for our company and our industry. We estimate that our industry's market share is approximately 3 to 4 times higher for purchased loans compared to refinances and MGIC tends to be at the higher end of that range.

For the quarter we wrote $12.6 billion of new business, which is up nearly 7%, with an increase of 3% in year-to-date purchased applications and a 19% decrease in year-to-date refinance applications from last year. And for the first half of 2016, we wrote $20.9 billion of new business or about flat to the first half of 2015. Based on actual results to date and the forecasted strength in our overall purchase activity for the full year of 2016, we now expect to write at least the same amount of new insurance that we did in 2015 and we continue to forecast that our insurance in force will increase approximately 5% in 2016 compared to 2015.

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 risk before it even gets to the GSEs and that deeper coverage, or front-end risk sharing, would be the way to readily implement this. As most of you are aware, the FHFA has asked for input about risk transfers, both existing back-end deals but also front-end transactions. We are working with our trade association to formulate a response that is due August 29. We believe that other participants will also write letters in support of front-end risk sharing.

It is difficult to predict how these responses will influence the FHA's and GSE's view of using mortgage insurance, but we feel that our industry has a strong case to make. Meanwhile, we continue to work directly with the GSEs on developing a pilot program that would involve mortgage insurance on the front end.

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

Thanks, Pat. In the quarter we earned $165.2 million of pretax income versus $115 million for the same period last year. The primary driver of the increase was the net positive development on our primary reserves resulting from an improved claim rate on existing notices. Specifically in the quarter, there was positive development of $55 million on our primary loss reserves, compared to positive development of approximately $22 million in the second quarter of 2015.

In addition to the positive prior-year 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. During the quarter we received approximately 8% fewer delinquency notices than we did in the second quarter of 2015 and 4% fewer than the first quarter of 2016.

The new notices received were estimated to have a claim rate of approximately 13%, which due to seasonal influences was up from the first quarter but about the same as the second quarter of 2015. As we have previously discussed, we think of a 10% claim rate as the long-term average. The pace of improvement is difficult to project given the unique performance of the pre-2009 book.

The pre-2009 legacy books, especially chronic delinquencies, will continue to dominate the new notice activity for the foreseeable future. In the quarter those books generated nearly 90% of the new delinquent notices received, while comprising just over 33% of the risk in force. Additionally, nearly 86% of the notices received had been reported delinquent previously.

We continue to expect fewer notices in 2016 than 2015, which is the material contributor to the level of loss incurred each quarter, and given the experience to date, we continue to expect that the 2009 and forward books will generate very low lifetime loss ratios. The delinquent inventory was down 21% from last year and down 5.5% sequentially.

In addition to normal activity in the quarter, 135 loans that were included in a non-performing loan sale that was completed by one of our larger insurance counterparties were removed from inventory. The removal of these loans from our inventory did not have 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 16% sequentially. Net paid claims in the second quarter were $172 million, including $4 million that was associated with the non-performing loan sale I just mentioned. Primary paid claims were $153 million, down 21% from the same period last year.

The calculated weighted average effective premium yield for the quarter was 52.5 basis points. For the first half of 2016, the effective average premium yield was 51.4 basis points, which compares to the full-year 2015 effective yield of 52.8 basis points. Volatility from quarter to quarter can result for a variety of reasons, including the pace of prepayments on older books of business which have higher premium rates than the businesses we are currently writing, premium refunds, premium resets, resets of the older books past their 10-year anniversary, and the level of profit commission we earn on the reinsurance treaties, which is dependent upon the level of losses incurred that are ceded.

We expect that after considering the volatility I just described that the effective premium rate would continue to trend lower in future quarters.

At quarter end, cash and investments totaled $4.9 billion, including $217 million of cash and investments at the holding companies. The investment portfolio had a mix of 70% taxable and 30% tax-exempt securities, a pretax yield of 2.6%, and a duration of 4.9 years.

Turning to our capital position at the writing company, at the end of the second quarter, MGIC's available assets totaled approximately $4.7 billion and its minimum required assets are $4.2 billion. Our statutory capital is $1.3 billion, in excess of the state requirement.

PMIERs is the more restrictive of the two capital standards and so over the last several months we have been analyzing what a prudent level above the PMIERs capital requirement should be. We believe it is important to manage the capital position of the writing company to withstand a mild recession and to preserve the ability to continue to write new business without a remediation plan or need to access the capital markets. It is also important to maintain capital for potentially higher volumes of primary business, new business opportunities, and potential changes to PMIERs.

At this time we think it's prudent to maintain a level of capital that is 10% to 15% above the minimum required asset. Now let me address the holding company's capital position.

During the quarter, the holding company used its resources to repurchase $50.2 million par value of the 2017 5% convertible senior notes. The remaining par balance is $145 million and is expected to be repaid at maturity using holding company resources. The transaction resulted in a pretax loss of $1.9 million on the income statement, but after considering interest savings, it was effectively done at par. The repurchase reduced potentially fully diluted shares by 3.7 million and further lowered our consolidated annual interest expense.

While ratings are not inhibiting our ability to write new business, we think that long term it will be important to have the holding company return to investment grade. Therefore, when analyzing various options for restructuring our capital, we considered the resulting leverage ratio and interest expense of the holding company as well as the ability to minimize potentially dilutive shares. Of course, we also need to consider the fact that capital is being created at the writing company and its dividend-paying ability is subject to insurance department approval.

We continue to analyze the cost-benefit of implementing various transactions to restructure our capital, and when we determine that there is an opportunity to create long-term value for shareholders, we will execute such transactions.

Regarding MGIC's ability to pay quarterly dividends, the OCI approved another $16 million dividend that was paid to the holding company in June. Our expectation is that we would receive similar-sized dividends on a quarterly basis for the balance of this year and are optimistic that these quarterly dividends would grow in the future, especially as the difference between available assets and required assets under PMIERs grows as we expect. Each dividend would be considered extraordinary versus regular and therefore requires OCI approval.

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 and an exposure draft was issued in May. At this time, we still do not expect the revised state capital standards to be more restrictive than the financial requirements of the PMIERs.

At present, there is a great deal of activity around prescribing an end-state for the GSEs that would be delivered to the new administration in early 2017 and we are actively engaged in those discussions. However, 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. We don't believe that it makes sense to change FHA pricing without first addressing the larger question of the government's role in housing.

For example, recent data issued by HUD shows that 18% of the FHA's recent production had FICO scores between 720 and 850, with an additional 25% with FICO scores between 680 and 719. That is not the role that our government should be playing. Simply put, another price reduction would likely shift business away from private capital and expose the taxpayer to increased risk at a time when private capital, primarily in the form of mortgage insurance, is ready, willing, and able to take this risk.

However, if there is an annual premium reduction, we think it would primarily impact business below 700 credit scores, which was approximately 16% of our NIW in the quarter. How much of this business would be at-risk is difficult to say as we would need to take into account lenders' concern over legal risks associated with FHA lending and the 97% LTV programs that a number of lenders have recently introduced and which continue to require private mortgage insurance.

In closing, we continue to make great progress. We had net income of $109.2 million, brought $12.6 billion of high-quality business. The in force portfolio grew; the level of new delinquency notices and delinquent inventory continued to decline. MGIC's capital position and our market share within our industry is strong and we maintained our traditionally low expense ratio.

We also took advantage of our financial position to reduce potential dilution to shareholders and lowered our interest expense through the debt repurchases and continued paying dividends out of MGIC to the holding company. I continue to 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) Bose George, KBW.

Good morning. The first question: just on the average premium on your monthly new insurance written, it was down I guess it was 60 basis points. Does that reflect the new pricing and does that fully reflect the new pricing that's in place?

Bose, this is Tim speaking. I think that when we look at it we think that is probably reflective of some of the new pricing. Obviously if you look at the mix of the business, a little bit higher credit quality as well on the new business with those premium rates. And you can see that in the stats.

We would expect that that -- with the mix of business that we are writing that the average premium rates on the monthlies could come down a couple more basis points. When you think that we enacted the pricing change in April and the NIW is reflective of all months, June was probably trending a little bit lower than what the full quarter was.

Okay, great. That makes sense. And then I guess the flipside is the available assets required for those -- for the new business will also be lower, so the ROEs end up kind of in the same ballpark?

Yes, we believe so.

Okay, great. Then actually just one of the FHA. In terms of competition with the FHA, Wells noted on its earnings call that your first mortgage program had $1 billion of applications in the first 30 days. Do you think this could be a meaningful driver of shift towards the -- away from FHA to private mortgage insurance?

Bose, this is Mike. Clearly with the banks, the depositories, we have all seen that migration away from FHA into these types of programs. But non-banks are filling the void within the FHA, so I think it's a little too early to tell if there's a long-term shift in market share away from the government to the private sector. But clearly, with the depositories doing it and purchased business, we feel that that's to our advantage.

Okay, great. Thanks a lot.

Patrick Kealey, FBR.

Morning, everyone. Thanks for taking my questions. First, maybe -- again on the regulatory front, but looking at it a little bit differently. Obviously there was a letter that included USMI to the FHFA regarding LLPAs, so can you maybe kind of walk through potential impact to the extent that there is adjustments on LLPAs and maybe how we should think about that in comparison to an FHA price cut?

Do you look at this as an opportunity that, to the extent there is movement in LLPAs, you've essentially -- you end up in a good spot in a competitive kind of FHA versus private MI landscape?

This is Pat. Yes, we see it as opportunity, though it's difficult to handicap how the FHFA will respond. When they put out an RFI approximately a year ago, maybe a little longer, relative to [G fees] and pricing, they didn't adjust anything.

So I think it was important to put this letter out for all the various constituencies to sign it. There's a lot of talk, as there has always been, about access to credit and we believe, and the signers of that letter believe, that should there be a reduction in LLPAs, that will bode well for the consumer.

Now relative to us, it kind of depends on where they would drop the LLPAs. They are driven by FICO score as much as anything else and, in fact, in many respects it keeps us out of the 680 and below space, along with PMIER capital requirements and things of that nature.

So would it be exactly a one-for-one trade off relative to an FHA -- winning business from the FHA? I'm not sure, but we are hopeful that the FHFA can be responsive to the concerns.

Okay, great. Then turning to your business; obviously nice growth here in NIW. Did note single premium ticked up as a percentage, so maybe if you can give us a thought process there just as to the dynamics within the quarter.

Then if you can also remind us, with the new rate card, what do returns look like on single-premium business maybe compared to what we would've seen in the year-ago period?

Pat, this is Mike. First, on the singles, it actually ticked down a little bit. It went from 22% to 21%. And as we talked about when we made our changes to pricing last quarter, we are looking at returns that we are trying to achieve midteens returns on the business that we write. It's going to be dependent upon loss performance and everything else, but that's our expectation going forward.

Okay, great. Thank you.

Mark DeVries, Barclays.

Yes, thanks. Could you comment on the level of stability you are seeing in pricing within the industry? Are you seeing signs that we are starting to reach some level of equilibrium now that the industry has adjusted to PMIERs?

This is Pat. Good morning, Mark. I think we are seeing a fair amount of stability, particularly in the borrower paid channel. All of VMIs have pretty much lined up; there's a little bit of difference in the credit union channel, but for the most part we've pretty much lined up. And so in the borrower paid we are not seeing the kind of competition we did.

There still is a good amount of competition in the LPMI space, which is about 25% of the volume. That said, it seems to be -- our sense of it is that people are playing selectively, meaning VMI companies are playing selectively. Meaning they may want to win a bid now and then, but not necessarily every bid, or they may want to win a bid at a particular customer that they are comfortable with. So we still see some aggressive pricing there.

Specific to MGIC, we continue to be very true to our hurdle rates and make sure that when we bid we're going to exceed those hurdle rates.

Okay, that's helpful. Then I know it's early days of implementation, but is there anything you can report on what you are hearing or seeing on the implementation of the FHFA principal forgiveness program?

Mark, this is Mike. First, take the fact that FHFA revised downward about 10% their expectations, but we have heard very little activity at this point so it still is early. We're in contact with servicers; we will wait and see what --. It's like we said last quarter, we are not expecting a windfall from this, but we will have to wait and see how it all plays out.

Okay, got it. Then just finally on the capital structure, I know you made some vague comments on kind of what you are thinking here going forward, but you still have a fair amount of holdco cash. When you think about priority should we think about that, the 2017 converts, what's outstanding, to be the first priority?

Mark, this is Tim. I think the way that we look at the 2017s is we're going to use cash in the holding company to pay those off. So that's the first priority and we've got the interest carry that's out there otherwise. But when you look at the holdco cash that's there now, it's effectively earmarked for the 2017 maturities.

Okay. As you look out to 2017, any thoughts on how much more you could potentially ask for in terms of the dividend up from the writing company?

That something we will obviously discuss with the regulator. I think it depends upon where our capital is at MGIC in relation to where it is now. I don't think that you should think about significant increase in the dividend, but we'd hope there would be a little bit more. But I don't think there'd be anything that would be viewed as highly material.

Okay, got it. Thanks.

Mackenzie Aron, Zelman & Associates.

Thanks, good morning. Of the $55 million positive development on the primary reserves, I know you mentioned that was due to improvement in the claim rate, but just curious, was there any change in the assumption around severities this quarter, as I know that was one of the factors that impacted last quarter's $5 million development? So just trying to get a sense of how the $55 million was broken down between severity and claim rates this quarter.

I would say the vast majority of it was from claim rates. There might've been very, very slight amount of positive from the severity, but when you are talking in those numbers I view it as effectively flat. So when you look at the $55 million, that's primarily related to the claim rate improvement.

Okay. And can you just talk a little more about what changed this quarter relative to in the first quarter when only $5 million was released? What gave you the confidence for such a pickup in the pace of improvement this quarter?

Sure. Like I said, in prior quarters we've had some positive development on the estimated claim rates, but as you mentioned, last quarter we had some negative trends on the severity. So that offset it.

But we saw this quarter, in claim rates in particular, we had a little bit more positive development because we saw again continued improvement on the claim rate, especially in the 12-plus bucket, and a little bit more than what we saw even in the first quarter. So that gave us enough confidence to make a move on the claim rate on those notices in particular.

Okay, great. If I could just ask one more; on the trend in the new defaults, the pace of improvement it has been moderating. It was down 8% this quarter, so just how should we be thinking about going forward? Is that single-digit pace the new run rate we should be thinking about? And was there anything that drove why they were only down 8% this quarter versus the double-digit pace they had been declining at previously?

This is Steve Mackey. I think what we're seeing is just a flattening out of the improvement to a more stable environment. As we mentioned in the comments, much of the delinquencies from loans that have been previously delinquent, so they are coming into the population and curing. But I think we are getting to a point of where it's going to be a more stable environment for our delinquencies.

Great, thank you.

Eric Beardsley, Goldman Sachs.

Thank you. Was wondering if you could help us understand what led to the sequential improvement in the premium rate this quarter.

Yes, if you look at the premium rate, as we said, we think this is general downward trend; that this quarter we saw a little bit of improvement on the average basis point. I would say the biggest mover for this quarter was the impact of the profit commission on the reinsurance. That was probably just under a basis point of the premium on its own.

I think the other difference from last quarter, if you look at premium refunds, probably a little bit more premium refund activity in the first quarter that what we had in the second quarter of the year.

Got it. So the guidance I guess for the year, which I think was down 2 to 3 basis points relative to the fourth-quarter level, is that still the right level to think about?

Yes, I think where we are right now is, like we said in the opening comments, if you look at the first half of the year we are in the 51.5. First quarter was below that; obviously second quarter above that. We still think it's going to trend downward from where we were at the end of last year, which I think was closer to 52, above 52. I think the guidance still by the end of the year that we should be down 2 to 3 points on that level.

Okay. And just wanted to better understand the commentary around I guess where the average premium rate on the new monthly business was coming in. You said you expected a little bit further of a drift downward.

I guess what would lead to that? If you had that pricing out there for almost all but three, four days of the quarter, I guess is there any shift that you haven't seen yet from lenders that you start to see in June? Just if you could help us understand that trend.

This is Steve Mackey. So the shift in pricing, even though it was announced -- effective in April, there were some customers that were rolled out a little bit more slowly because of just system issues, as an example. So Q2 was a complete transition from one pricing framework to the updated prices.

We expect in Q3 that everything on the BPMI side will be fully implemented across the board with all our customers. That's where we're going to see the full impact, so we do think it's going to trend down a little bit. But the mix shift that we are seeing between lower FICO and higher FICOs, the higher FICO is increasing, that's going to contribute to that. But on return basis, we are basically flat to improving.

LPMI there's little bit more in play on the LPMI side, as Pat mentioned in his comments, but again that's something where we will see some stability as we go through Q3, I believe.

Got it. Why didn't we actually see a step up in the LPMI rates?

Yes, I think this is competitive pricing. We adjusted our hurdle, our prices based on our hurdle rates and the new PMIERs capital requirements and we stuck to our hurdle rate there. And many of our other competitors have not updated their pricing to reflect PMIERs. At least it looks like in the marketplace that they have not made a change to reflect PMIERs.

Got it. And just last question, do you have the average FICO of the monthly NIW versus last quarter? I guess where can we see that improvement?

Eric, this is Mike. In the supplement, you can see the weighted average of it and I think it's, I don't know, on a weighted average basis it's the same -- about for the full year it's flat to last year, but you can look at the mix there. It's up maybe a couple of points on a quarterly basis.

Okay. Sorry I actually said last question, but should you actually see market share grow then if not all lenders had shifted to your new pricing yet until June?

This is Mike again. Part of it, as Steve was saying, the transition there is that there is a period of time -- it takes 45, 60 days, perhaps, to convert to NIW, too. So it's way too early to tell from a market share perspective.

Obviously we're the first company to report; we will see how everything comes out. That said, we think we around 19% share at this point, but it's just too early to tell any share impact.

Great, thank you.

Jack Micenko, SIG.

Good morning, everybody. Tim, in the prepared comments I think you had said a 10% to 15% PMIERs buffer and I just want to clarify that's not a -- is that a change in your thinking? I had always sort of thought 10% was the number, but I don't remember you guys crystallizing it at that number. Or were you sort of talking loosely and now you are more narrowing it?

Beyond that is that 10% to 15% range consistent with the midteens ROE still?

Jack, we haven't given a specific point before. I think we've been hovering at around the 10% and trying to determine what we thought was appropriate. We tried to figure out how we should talk about it.

We do think of it in terms of a range because of the availability to get dividends out of MGIC, as well as what might be available to us from new business opportunities at certain points. And so we do think of it in terms of a range, but 10% to 15% is the first time we have really pointed to what we think the right level above the required assets are.

Okay, but there's no change to the ROE outlook? You've always consider that range in your ROE guidance?

Correct.

Okay, okay. And then on the FHA, I think a lot of investors are somewhat concerned more about the removal of the cancelability than they are maybe actual pricing changes. You can do the math on pricing changes and where FICO bands and what kind of business could potentially be at risk, but have you -- it's something I struggle with. How do you quantify, if any, mix or percentage of the business would be impacted by removing or I guess including cancelability on FHA going forward as a potential amendment to their policies?

Jack, this is Mike. One, it's pretty difficult; it's kind of a second derivative, I would say, of the equation borrowers go through. They are mostly focused on the monthly payment.

Clearly, you could say it's an additional selling feature of it, but the primary driver of selection is monthly payments when borrowers are considering taking out mortgages. You would be hard-pressed to try to quantify what that would mean, though, otherwise.

Okay, that's fair. I was making sure I wasn't missing anything in that thought process. All right, thank you.

Geoffrey Dunn, Dowling & Partners.

Thank you. Good morning, guys. A couple questions. First, Tim, ex the seating commission expenses were flat year over year. Can you give us an idea of what we should be expecting in terms of a growth rate from here? I was thinking mid single-digit plus as you think about investments in the platform, etc. Can you frame that for me?

I think when you look at the expense ratio itself, obviously it dipped a little bit this quarter and I think at the end of last year we said we thought we might be a little bit higher than we were last year. And on a nominal expense basis, if you take out the ceding commission, I think we are -- we would expect that we would be a little bit higher for the rest of the year, probably potentially even a few million dollars per quarter higher than the level we were in the second quarter.

Okay. And then, when you are looking at your incidence assumptions, can you talk about -- have you adjusted how you think about the repeat defaulter? You have guys in there that are four, five, six, even seven times defaulting. Are you still reserving as if they are -- the same way as if they are a first-time defaulter? And what will eventually change that, if anything?

I don't think we've changed our view on how we are doing that because the reality is it's been true for a number of years now that we have had a lot of repeat defaulters that are cycling through there. And so we think a lot of our experience from a reserve perspective is built upon the repeat defaulters that are coming through the pipeline right now.

So I'd say, at a high level, we monitor that to see if there's any dramatic shift in that, but based upon the level that has been repeat defaulters for a while now, we don't see any necessary change in behavior impacting reserves in the upcoming quarters.

Okay. Then my last question is from an earlier question. LPMI rates, at least your average on new business, haven't changed at all. Your capital charges are up materially under PMIERs when you look at the year over year. Why should we be comfortable with that average premium rate? Unless you can tell us that the underlying credit quality has gotten a lot better.

I think that when we look at the returns that we are generating under PMIERs, we took a step back and put everything on a risk-adjusted framework and we are confident that what we are earning on the LPMI business meets our hurdle rates and exceeds it. So we look at the LPMI as a segment in the market that we are going to compete in as long as we can generate the returns that we think we need to add shareholder value, and we are able to do that in the marketplace right now.

I guess just to push it a little, mathematically how does that work? If your capital charges are up 30% and your pricing is actually versus the second quarter of last year down, how do we get to the same return hurdle?

I think we've got a little bit of a mix shift in there as well. But I don't have the numbers in front of me of what we were doing last year, so all I can really talk about is where we are today and being highly confident in the way we're looking at risk-adjusted returns. That we are meeting -- adding shareholder value with the business we are doing at LPMI.

Then just last follow-up on that, when companies file a national rate card, is there a percentage band restriction about how much you can deviate off that card? For some reason I remember a 25% spread.

Geoff, this is Mike. There is a number of variations. The rate card is kind of an average -- [probably doesn't] reflect it, but there's a number of adders and tolerances within that that can vary around there. I don't have the code right in front of me obviously with it, but 25% clearly sounds to be the right -- to me it seems the right approach to take.

Okay, thank you.

Doug Harter, Credit Suisse.

Thanks. Can you just talk about whether your outlook for use of reinsurance, whether that might change as some of the contracts come up for renewal?

I think, as we said in the past, we like reinsurance as another part of our capital structure. We have -- on our current deal we have the ability to cancel it at the end of 2018 if we feel like we are building up too much capital at MGIC, but also look at it as ability to build some of that excess for dividend capacity.

When we sort of look going forward, the reinsurance we have only covered the NIW through the end of 2016 so we have been in discussions regarding our 2017 NIW. And unless something materially changes, we would expect we would move forward with covering that book of business. We expect the terms and conditions are probably pretty similar to our current treaty and you know we will run the 10-year so that we made sure it was covered and hopefully full credit from the PMIERs perspective.

So when you look to renew the 2017 you would -- as of now, you would expect it to cover the same percentage of NIW?

I think it's something we will look at, but I think in general that we think the terms will be fairly consistent with what we are covering right now in the NIW.

All right, thank you.

Phil Stefano, Deutsche Bank.

Thanks and good morning. Historically, you talked about a ceiling on persistency being in the mid-80%s, but there wasn't really an impact, or at least not a material impact, from refinances in second quarter 2016. To the extent that refinances do tick up in the second half, how can we think about persistency moving forward? Is there a floor that feels like it puts a range at the other end of that mid-80%s ceiling?

This is Tim. We have -- as you said, we've been sitting right around 80% for a while and if there is a refi tick up that will obviously put some downward pressure on it. But we've seen some refi sort of activity for a certain period in each of the last few years and still consistently stayed right around that 79%, 81% persistency Mark. Things could change on that regard, but based on what we've seen in the last few years, feel like somewhere around 80%, give or take a couple points either way, is probably a good way to think of the persistency right now.

Okay, thanks. That's all I had.

Vic Agrawal, Wells Fargo Securities.

Thanks and good morning. So JPM executed a credit risk transfer transaction earlier this year and I think there's potential for more transactions in the coming quarters. Have you guys looked at those bottom risk pieces or potentially the bank-retained portfolios? Is there a way for you to work with the banks if this becomes a more regular program?

This is Pat. We look at all those transactions in the context of risk sharing in the broadest sense, whether it be with the GSEs or otherwise. We are not ready to move forward or anything, but perhaps is going to present an opportunity.

Again, the objective is to take advantage of our and leverage, if you will, our core competency, which is understanding that risk. It's just taking it in different forms. So we have a little bit more work to do, but it is something we're looking at.

Okay, because I know you have the potential opportunity of the GSEs, but I was thinking that maybe this is a new one. So I guess have you had discussions with the banks on these types of transactions?

I can't comment on any specific conversations we have had. I would just tell you that we are very engaged with our thought process around these items.

Okay. Then can you guys give us some color on severities in default trends in some of the judicial states, please?

From a trend this quarter, I don't think we saw anything that led to a different trajectory. Obviously, we keep an eye on how long those are sitting in default inventory, but from what we have actually seen as far as the claim payment compared to the exposure, we didn't see the worsening this quarter that we have seen the previous couple quarters.

And default trends continue to be favorable? I think last quarter you said that defaults were down, I believe, and severities were slightly higher.

When you say defaults, you mean, Vic --?

Meaning just workouts through the judicial system. I think you said that you started to see some thawing in those states.

This is Steve Mackey. On the overall performance of the delinquent -- late-stage delinquencies, we continue to see that grind down. We are seeing in some of the very slow states; New Jersey, New York we are starting to see a little bit of movement in claims through those states. But it's slow, but it's at least progressing where it almost completely stopped for a long period of time.

Florida seems to have a good volume that's moving through consistently. So I think those are -- our big concerns right now is New York and New Jersey getting their judicial flow rate up. But, yes, it continues to grind down in a positive direction.

Okay, thanks for the comments.

Ron Bobman, Capital Returns.

Thanks a lot. Good morning. I had a question about the reinsurance profit commission. I was wondering how that number compared to any recognition in recently prior quarters and was there anything to the reinsurance book that was eligible for a profit commission that there was sort of a milestone reach or some degree of seasoning that led to the recognition of the commission.

It's something that is calculated based upon the ceded losses every quarter and so, within the additional information we have out, we disclosed the profit commission for each of the quarters. It was $29.8 million this quarter versus $26.2 million last quarter. That was really just a function of the amount of ceded losses in the quarter.

This quarter it was 6.1 versus 8.5 last quarter, so no set triggers based upon time impact, just the mechanics of the quarterly calculations related to ceded losses that calculates profit commission.

Okay, and I had a question. You cited the midteen ROE on the current cohort of business that you are writing, or at least a target ROE, and I think you said you are assuming and you believe you are achieving that.

What is the denominator as far as capital that you are using? Is it marginally-allocated capital? Is it -- to what degree is it reflective of the entire insurance company balance sheet? Could you discuss that a little bit?

We're using the PMIERs regulatory capital requirements as the denominator, so when we're looking at returns it's how much capital are the PMIERs going to require for that cohort of loans based on kind of the LTV, FICO, and age. But for new business, it's that LTV FICO that drives the return requirements.

Okay. And so just sort of following up on that, it was I think maybe two or three questions ago, in fact the fact that you are choosing out of a degree of prudence to carry excess capital beyond the PMIERs number the in fact return is somewhat lower than the midteens. Is that right?

When we're looking at our overall return that we deliver to shareholders, we are adjusting our hurdle rates to reflect the amount of capital we are able to deploy through credit risk. So that is adjusted for and considered in how we are pricing the business.

Thanks again and nice quarter, real nice quarter.

Geoffrey Dunn, Dowling & Partners.

Thanks. Tim, I just wanted to follow up on the cushion on PMIERs. When you think about a 10% to 15% cushion, if you are at the mid to upper end of that range over the next couple of months -- I'm trying to figure out how much of that is in anticipation of the GSE review of PMIERs next year versus what you might be able to operate in the back half of 2017 once that review is done. How do you think about leading up to that review?

I would say, when you think about it, we don't have specific dollar amounts set aside for the PMIERs review, although I would say, for my share, I think I would lean more towards the conservative end of the range until we know how they adjust PMIERs the first go around.

I think it's something that we will consistently look at the range that we think is prudent. And that is one variable that we won't have insight for for some time until probably next year at this time we will have more insight into it versus the other things that we talked about as far as being able to survive mild recession. Obviously update that regularly, but that's probably not going to change significantly overnight.

Great, thanks.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Patrick Sinks for any final remarks.

Thank you, everybody, for your interest in our company and the calls and the questions this morning. So thanks much and with that we will sign off.

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