MGIC Investment Corp (MTG) 2016 Q4 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time I would like to welcome everyone to the MGIC Investment Corporation fourth quarter earnings call. (Operator Instructions) Thank you. Mr. Mike Zimmerman, you may begin.

Thanks, Kayla. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the fourth quarter and the full-year 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 MGIC's website, which is located at mtg.mgic.com under newsroom, includes additional information about the Company's quarterly and annual financial results that will be referred 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'll find valuable.

During the course of this call we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K that was filed earlier this morning. If the Company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the 8-K.

At this time I'd like to turn the call over to our CEO, Pat Sinks.

Thanks, Mike, and good morning, everybody. I'm pleased to report that we had another strong quarter and year. Tim will cover the details of the financial results, but before he does that I would like to spend a few minutes discussing the results we achieved and how we continue to position the Company for further success.

First, despite a low interest rate environment and an increase in refinance transactions -- especially in the second half of the year that put a little pressure on persistency -- insurance in force, the primary driver of our revenues, increased a little more than 4% year-over-year, ending at $182 billion. This growth reflects the expanding purchase mortgage market, our Company's market share approximately of 18%, and the hard work and dedication of my fellow coworkers to deliver stellar customer service. The 2009 and newer books now comprise 71% 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 increasing size and quality of our insurance in force, the run-off of the older books, solid housing market fundamentals such as household formations and home sales, and our improved capital structure positions us well to provide credit enhancement and low down payment solutions to lenders, GSEs, and borrowers. We saw an increase in refinance transactions in the fourth quarter, growing to 24% of our new insurance written from 19% in the third quarter. For the full year, refinances represented approximately 20% of our volume. As I mentioned, the increased refinance activity has resulted in a decrease in our annual persistency rate. However, following the presidential election, interest rates for 30-year mortgages have risen more than 50 basis points to approximately 4.125 % to 4.5%. Still historically low, but relatively higher.

With these higher rates we do expect persistency to increase in 2017. Reflecting the time of year and the higher rate environment, we have seen a decline in the actual number of purchase applications in the last several weeks. However, when we compare the application activity to the same period last year, our purchase applications are up 5% to 10%, while refinance transactions are flat to down. Despite the higher rate environment, most forecasts are calling for an increase in purchase mortgage activity in 2017 compared to 2016, 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 purchase loans compared to refinances and MGIC tends to be at the higher end of that range.

For the quarter we wrote $12.8 billion of new business. For the full year of 2016 we wrote $48 billion of new business. Given the current market environment -- including the recently announced FHA premium cut, assuming it is implemented -- we expect to write 5% to 10% less new business in 2017. This amount of new business, which is consistent with the last several years, combined with an expected increase in persistency, should result in insurance in force increasing modestly in 2017. In addition to deploying capital to write new business in 2016, we advanced our strategic objective of managing our capital to optimize the creation of shareholder value. We utilized the Federal Home Loan Bank line of credit at the writing company, accessed the senior debt market, and purchased nearly $614 million of the holding company's convertible debt and reduced the number of potentially dilutive shares by nearly $66 million and improved our capital profile. Tim will discuss these activities and our approach going forward in a few minutes.

MGIC participated in the GSE pilot MI CRT transactions that will transfer risk to MI companies or their credit insurance affiliates. While it is good to see the GSEs continue to explore ways to reduce the government's mortgage credit risk exposure, we want to remind you that this new structure should not be confused with deep cover mortgage insurance, which is a front-end credit risk transfer proposal that we and others have been advocating. Future participation in credit risk transfers will need to be evaluated based upon the terms offered and expected returns. The market is waiting on the FHFA's response to the comment letters that were submitted pursuant to their request for input on credit risk transfer, or CRT. We believe that an expansion of front-end CRT, including through the use of deep cover MI, warrants serious consideration by the GSEs and the FHFA as a complement to existing back-end CRT.

Without a more robust program, including one that has an entity-based capital component such as deep cover MI, the enterprise's CRT strategy would not function adequately during all phases of the mortgage credit cycle, particularly during times of financial stress and therefore would not fully realize FHFA's principal objective of protecting US taxpayers. We strongly believe that deep cover MI will advance a well functioning housing finance system. Given the changes to the risk in force profile and capital standards, I believe that a mortgage insurance company is a solid counterparty. Discussions with the GSEs and the FHFA are ongoing on this topic and it remains to be seen that have any influence the incoming administration and Congress will bring to bear.

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

Thanks, Pat. In the quarter we earned $107.5 million of net income versus $102.4 million for the same period last year. Net income for the full year of 2016 was $343.5 million compared to $1.172 billion for the full-year of 2015, which included $847.8 million associated with a change in the Company's deferred tax asset valuation allowance. To make the year-over-year comparison of financial results more meaningful, last quarter we began to disclose a non-GAAP measure called net operating income. Net operating income excludes certain items that we do not consider to be part of the operating results of our primary mortgage insurance business. A full definition of these items, as well as a reconciliation of net operating income to GAAP net income, is included in the body of the press release.

With that said, our net operating income for the quarter was $107.5 million, or $0.28 per diluted share, compared to $76.6 million, or $0.19 per diluted share, for the fourth quarter of 2015. For the full year of 2016, net operating income was up 29% to $395.6 million from $306.1 million in 2015. Net operating income per diluted share was $0.99, up 32% from $0.75 in 2015. The primary drivers of the improvement in our financial performance for the year were lower losses incurred as well as marginally lower operating and interest expense.

Turning to the quarterly results, losses incurred were lower as we received 8% fewer new notices compared to the same period last year. The new delinquent notice activity from the larger, more recently written books remain quite low, reflecting the high credit quality. However, the number of notices received is increasing as they naturally season. Meanwhile, new delinquent notices from the legacy book continue to decline at a steady pace. Combined, this is resulting in a moderation of the overall decline in new notice activity when compared to other periods.

Despite the fact that approximately 50% of the remaining risk in force from the legacy books has never been reported delinquent, we expect that the legacy books will continue to be the primary source of our new notice activity for the foreseeable future. In the quarter, those books generated nearly 85% of the new delinquent notices received while comprising just over 29% of the risk in force.

Additionally, nearly 82% of all notices received in the quarter had been reported delinquent previously. Reflecting the current economic environment, the new notices received in the quarter are estimated to have a claim rate of approximately 12%. As we have previously discussed, we view a 10% claim rate as a long-term average. The pace of improvement in the claim rate continues to be difficult to project given the atypical performance of the pre-2009 books.

During the quarter, we also updated our claim rate assumption for previously received delinquent notices because the actual cure rate experience has outperformed our previous estimates. This resulted in a benefit of approximately $39 million to our primary loss reserves. Also in the quarter there was a $4 million benefit primarily relating to IBNR. Despite the steady decline in the delinquent inventory, given the number of delinquent loans, a small change in the cure rate assumption can result in significant reserve development in a given reporting period.

Reflecting the declining delinquent inventory, the number of claims received in the quarter declined 21% from the same period last year. Net paid claims in the fourth quarter were $149 million. Primary paid claims were $133 million, down 19% from the same period last year. For the full year 2016, the effective average premium yield was 51.9 basis points, which compares to 52.8 basis points for the full-year of 2015.

As I have discussed in the past, there's going to be some volatility in this calculation each quarter for a variety of reasons, including the pace of prepayments, and cancellations on older books of business which have higher premium rates than the business we are currently writing; the FICO LTV mix of new writings; premium refund assumptions that are influenced by expected claim rates; premium resets on older books past their 10-year anniversary; and the level of the profit commission we earn on the reinsurance treaty, which is dependent on the level of losses incurred that are ceded.

We forecast that, after considering the volatility I just described, the effective premium yield would trend lower in future periods. However, the exact amount and timing is difficult to predict, but we expect it could be 2, perhaps 3 basis points over the course of the next year. At quarter end, cash and investments totaled $4.8 billion, including $283 million of cash and investments at the holding company. The investment portfolio had a mix of 69% taxable and 31% tax exempt securities, a pretax yield of 2.6%, and a duration of 4.6 years.

Turning to our capital position under the GSE Private Mortgage Insurance Eligibility Requirements, or PMIERs, at the end of the third quarter, MGIC's available assets totaled approximately $4.7 billion and its minimum required assets are $4.1 billion. MGIC's statutory capital is $1.6 billion in excess of the state requirement. Reflecting the profitability of the new books of business as well as the improved performance of the legacy books, the cushion above minimum required assets was at the higher end of the range we are currently targeting. In addition to writing new business, we will try to manage that level by continually reviewing our use of reinsurance as well as continuing to seek and receive dividends from the writing company.

Regarding MGIC's ability to pay quarterly dividends, the Wisconsin insurance regulator approved another $16 million dividend paid to the holding company in the quarter, which brought the year-to-date total to $64 million. We continue to be optimistic that these quarterly dividends will continue and are hopeful that they can grow in the future, especially if the difference between available assets and required assets under PMIERs grow as we expect. Each dividend would be considered extraordinary versus regular, and therefore requires OCI approval.

As we discussed last quarter, we believe it is important to manage the liquidity and 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 the need to access the capital markets. It is also important to maintain a cushion for potentially higher volumes of primary business, new business opportunities, and potential changes to the PMIERs.

Now let me address the holding company's capital position and the capital actions we took in 2016. Two objectives of our capital management activities are to continue the positive ratings trajectory of the last several quarters and eliminate potentially dilutive shares that resulted from capital raises during the Great Recession. We accessed the senior debt markets in August when we issued $425 million of seven year 5.75% senior notes. This is the first time we accessed the senior debt markets in quite a few years and marked an important milestone for the Company. We are very pleased with the investor reception to the offering as well as the terms we obtained.

We use the majority of the proceeds to purchase a material portion of the 2% 2020 senior convertible notes and the common shares that were issued as part of that transaction. Any remaining proceeds from the debt issuance are at the holding company for general corporate purposes. Earlier this year, our writing company, MGIC, purchased a portion of the 9% junior convertible debentures. These debentures are eliminated on our consolidated financial statements. Finally, we also repurchased a fair amount of the 2017 convertible senior notes. Combined, these transactions eliminated 66 million potentially dilutive shares.

During 2016, the writing company returned to investment grade by both Moody's and S&P. While credit ratings are not inhibiting our ability to write new primary business, we think that long-term ratings will become more relevant, especially for non-government executions should they return. Therefore, in the future, when we analyze various options to restructure our capital profile as well as the ability to minimize potentially dilutive shares, we need to consider the resulting leverage ratio, the impact on ratings, and the debt service level of the holding company. Of course we also need to consider the capital is being created at the writing company and its dividend paying ability is subject to insurance department approval.

We will continue to analyze the cost and benefits of implementing various transactions to achieve our capital management goals and when we determine that there is an opportunity to create long-term value for shareholders we will execute such transactions. The good news from my standpoint is that we have a number of options to consider. 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. At this time, we do not expect the revised state capital standards to be more restrictive than the financial requirements of the PMIERs.

In regards to housing reform, our initial reaction to the tone coming from the new administration and new Congress is positive. Any actions that may be taken and the timing of such actions is hard to predict, but the message that private capital can play a greater role in housing policy is positive for MGIC and our industry. As an individual company and through various trade associations, including USMI, we continue to be actively engaged in Washington, hoping to shape a greater role for private mortgage insurance.

Regarding the FHA, they surprised everybody with a material price reduction announced on January 7, effective January 27. At Dr. Carson's confirmation hearing he said he was not consulted about the change and will examine the cut if he is confirmed. If the rate cut holds, it is difficult to predict precisely how much new business would be at risk, as borrowers and lenders will need to assess the impact of the permanent loss of equity due to the upfront premium and the fact that private MI is cancelable, which materially lowers the cost of home ownership over five years.

This is why we have historically insured business that we could have had a payment advantage -- that could have had a payment advantage with the FHA. Lenders also remain concerned over legal risks associated with FHA lending and servicing and have been more actively promoting the GSE's 97% LTV programs, which require private mortgage insurance. So the FHA premium cut will have some impact and it was one of the factors we considered when we estimated the amount of business we expect to write in 2017.

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. 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. I want to be clear: the FHA has played, and continues to play, a very important role in our country's housing market.

As the leader of a private mortgage insurance company, I am not anti-FHA. In fact, over the years, private mortgage insurers have approached the FHA to pursue a more collaborative role in collectively serving our country's housing needs but without success. Rather, the discussion needs to be around a comprehensive housing policy that includes the proper role for the FHA, the GSEs, and private capital. I hope that Dr. Carson, his team, and the new administration take a hard look at housing policy in this regard.

In closing, in 2016 we made great progress in achieving our strategic objectives. We had net operating income of $395.6 million, wrote nearly $48 billion of high quality business, the in force portfolio increased, the level of new delinquency notices and delinquent inventory continue to decline. We improved our capital profile. Our market share within our industry is strong. The writing company returned to investment grade and we maintained our traditionally low expense ratio. We took advantage of our strengthened financial position to reduce potential dilution to shareholders and reinstated dividends out of MGIC to the holding company.

2016 was indeed a very good year. We achieved strong financial results and continue to position our Company for further success. 2017 marks the 60th anniversary of MGIC and the dream Max Karl, our Company's and the industry's founder, had to allow private capital to help support the US housing market and help individuals and families find a better way to homeownership. I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market for another 60 years and keep Max's vision alive.

I continue to believe that there is a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders, and we are committed to pursuing those opportunities. With that, operator, let's take questions.

(Operator Instructions) Phil Stefano, Deutsche Bank.

Congrats on the quarter. The first question I had for you was around the proportion of tax exempt securities. And it felt like that proportion was going to grow with time as earnings grew and the deferred tax asset was utilized. To what extent does less emphasis on the change of proportion here come into play as we think about a potential change in the US corporate tax rates?

It's Tim speaking. It's a good question. I think long-term our strategy hasn't changed, although with potential changes to the tax environment it's something we would take into consideration. I would say it hasn't changed what we were doing so far; it was really the relative value of munis that we were looking at. And we'll continue to look at what the relative values of munis are compared to other options, and obviously the tax rate comes into play in that.

Okay, okay. And changing gears a little bit and thinking about the path back to investment grade, I was hoping you could just high-level walk us through what you see the steps to get there are. Are there any potential hurdles? Something like the junior subordinated debt that stands out as something that needs to be cleared? Or just how you're thinking about framing the Company to the rating agencies to get there in the next couple of years?

Again, this is Tim. I think there's a number of things. I don't think there's any one security outstanding that creates the barrier there. I think there is the positive earnings momentum that we've shown, obviously helps. The continued high quality of the books of business that we are writing will help us from a ratings perspective. The rating agencies normally notch the holding company somewhat with the writing company, so I think we've got to continue to get the writing company up.

And obviously with the high quality business we've written over the last few years that really helps in that, in the capital models for the rating agencies. And I think from a debt to cap at the holding company, we talked about we like to be in the low to mid 20s. We think that's probably important to the rating agencies. In 2017 you'll probably be another step in getting us in that right direction.

Okay. And just a quick point of clarification. The 5% to 10% less in new insurance written for next year, that was under the assumption the FHA price cut does go through, correct?

Phil, this is Mike. Yes, right, that's absolutely -- it's obviously a smaller -- a little smaller origination market as well.

Okay. Thanks, guys.

Chris Gamaitoni, Autonomous Research.

I just wanted to clarify the disclosure you made about the proposed tax settlement with the IRS. Would this clear up all the federal issues, assuming it went through?

Chris, yes, I think it's important to note that we've reached a basis for settlement on the major issues. So it's not a final agreement by any means, and that would still be subject to review to the committee on taxation. But I'd say we are very pleased to make further progress on this.

And then can you give us any clarity on what your projections say on when you may be able to start receiving normal dividends from the writing company; how many years in the future?

Chris, it's Tim again. I think that it's a little bit of a difficult question to answer. Part of it is obviously related to the contingency reserve build that we have right now, and that is a detriment from the current calculation. The reason why I can't give a more definitive answer is, as you know, the NAIC is in the process of looking at their capital model. And so there's no certainty as to what the rules will be once that is in place. And so when we look at dividends over the next few years, especially from a meaningful standpoint, we are much more focused on what are probably extraordinary dividends as opposed to ordinary dividends that would be coming out.

Okay. I think that's all the questions. Thanks so much, guys.

Doug Harter, Credit Suisse.

Can you talk about how quickly the persistency rate can increase, now that we'll see a big -- should see a big decline in prepayment rates in the first quarter? And what is a normalized level that it can get to at this level of interest rates?

This is Tim speaking. I think from persistency it's obviously tough to know. I think the rising interest rate environments would lead us to believe that persistency will improve, keeping in mind that persistency is a year-long lagging indicator. And so, if we saw where it was in the last quarter with the rising interest rates, we would anticipate that that would go up. How quickly, I think it's tough to know for sure.

Got it. But I guess that's factored into your modest growth in the insurance in force commentary?

It is. It is, correct.

Got it. And then just -- I know you gave comments around the goals for the holding company cash. Has the move in the stock price, has that changed to appetite for buying back any of the remaining instruments, be it stock or other converts outstanding?

It's a good question. I think it's something that we obviously continue to look at. Stock price is one part of the equation. Obviously we talked about wanting to take off some of the dilution created during the crisis as well. And so we have those conversations on a regular basis as a management team and with our Board, and we'll continue to examine whether we think there's value there.

Doug, I was going to add, too. With the cash just want to remind you that there we do have the maturity coming up in 2017 of $145 million, so it's not a full $283 million. Tim's comments are obviously right on talking about the cash position in general, but specifically I just wanted to remind everybody that there is that $145 million maturity as well.

Great. Thanks, Mike.

Mark DeVries, Barclays.

Before I ask the question, let me just weigh in and say that we think your equity is cheap, so I would encourage you to continue to buyback converts and the stock. (multiple speakers) First question has to do with -- I know it's early, but we are now a couple weeks since the Arch/UG deal closed. Are you seeing any signs yet of share shifting? And if so, are you getting your proportionate share that you would've expected?

This is Pat. I'll take that one. It's still a little too early. That has not changed our expectation and I don't know that Arch has moved off its public comments it expects to lose share. But as we are only two weeks into the year, to your point, we haven't quite seen anything of substance yet.

Okay, got it. And is an assumptions of share gains embedded in the guidance you provided around the NIW for the year, and also the modest insurance in force growth?

Yes, they are.

Okay, got it. Now, I guess you are also contemplating -- as you indicated, Pat -- that it also factors in the impact of the FHA price cut. Any commentary on what the growth could be if it gets reversed, as we fully expect?

Mark, this is Mike. Well, I don't know if we expect it or not. There's rumors out there, maybe it's delayed. We don't know if it's permanent or not. As we've said relative to public policy, we think a great debate should be had on that. But the impact of that, if it does not go through, it's probably the lion's share of that 5% to 10% decline is represented by the FHA price cut.

Okay, got it. And then just one last question for Tim. I think you indicated you still think you could see the effective premium decline 2 to 3 bps this year, but what type of loss ratio is assumed in that? And if you had loss ratios that are consistent with what you are experiencing in your new book, would that decline be smaller as you get bigger benefit from the profit commission?

Yes, Mark, I was going to say I think you're referring to the profit commission, to the extent that we have higher losses baked in, that we have a lower profit commission, and that obviously brings down our premium yield a little bit. I think that's definitely within there. From a loss ratio I don't have the exact number, but as we've talked before we probably are pegging something in a forecast higher than what we've been experiencing recently, but I don't think that's more than 1 basis point in that calculation.

Got it. Okay, thank you.

Bose George, KBW.

Just going back to the guidance on insurance in force growth. So when you say modestly, is it similar to the 4.3% that you guys did this year?

I would say it's probably no greater than that. So (multiple speakers) the 5% to 10% down, we gave guidance relative to the new insurance writing. It would be -- modest is less than that 5%.

Okay. Sorry, just to clarify on the -- this is just on the insurance in force?

Yes, right.

So, the 4.3% is kind of the cap. Okay. And then just to clarify the answer you guys gave earlier to the market share shift, so this is 4.3% -- the insurance in force guidance, does it assume any shift in share related to Arch, that transaction?

Yes, it does. This is Pat. Yes, it does. We do anticipate that in our forecast.

Okay, great.

The other thing, Bose -- this is Mike. A couple callers ago we talked about the persistency forecast, and that clearly can be a swing factor in that growth rate as well relative to how fast that recovers. Refis were a good portion of the 24% in the fourth quarter. That's going to linger for a little bit in that annual calculation, so the recovery of persistency will have a big influence on the ultimate growth rate for the year, insurance in force as well as the market share shift in volumes.

Thanks. And then actually the single premium percentage continues to trend down. Do you think this reflects a smaller percentage of singles in the market as a whole? Or do you think your share of that market has gone down?

This is Pat. I think our read of the market is it's pretty much the same. About -- in the 25% range of the overall MI production. Our share of it has just gradually drifted down. It hasn't been material. I think it's gone from, over the quarters, 18% to 17%, to 16%. But we are just very selective where we play there.

Bose, earlier in 2016 is when the surcharge came in relative to -- on the singles. And you see -- I think there was a little bit of pullback in the overall market, but our shares kind of -- we were in the mid to lower 20s prior to that. And as Pat said, it's kind of shifted down to maybe a quarter of the market is still that (multiple speakers).

Okay. Great, thanks. One more. Just can you remind us where the tax rate -- where you think that will be next year or this year, rather?

I think it will be marginally down from where it is right now. I think for the year we were somewhere around 32% to 33%. I don't see it moving more than 1 point in the next year to the better.

,

Okay, great. Thanks.

Jack Micenko, SIG.

I wanted to come back to persistency a bit. With the move here in rates and probably the outlook, persistency obviously should go up. It's obviously a lag to that number, but you guys have been around a long time. What did persistency look like? What's the high watermark there? I mean, 1994, we saw rates move higher. 1999, we saw a rates higher. We may be in a situation where rates move -- or even if they just stay flat from where they are, you should see a pretty meaningful move over time, I would imagine. So what's the high watermark? Is it 85? Is it 88? Where do we -- have you seen that number go historically?

Jack, this is Mike. I think historically when you look back in time there was a lot more friction in the origination system than there is that exists today. So we've said more recently in the last several quarters, the mid-80s, so 85 if you had to have a specific number, would probably be the high watermark for the portfolio. And again, the pace of that, you're right, there is a lag on new insurance writings. They come -- it's not instantaneous. It's going to be a two, three month delay depending on the processing time.

So, that's why I say that it's that -- we are starting with a high percentage of refis in this last quarter. That's going to keep some pressure on the annual persistency, but if they fall off precipitously in the first quarter and continue, then persistency will recover faster on an annual basis. But mid-80s would be the high watermark, to answer your question.

Okay. And then we are starting to anniversary some pretty tough years: 2006, 2007. I'm guessing you are going to run into some contractual cancellations here at some point. Is there any loss reserving benefit to having some of those years fall off? I don't know if it's maybe previously delinquent loans that are now paying, and then you cancel out. Is there anything in your modeling that accounts for that? Or is it just loans that are in default and it really doesn't matter how old they are?

It's Tim. I don't -- I wouldn't expect a pickup from cancellations in those years. I think the ones that are in reserve, they won't cancel because they are delinquent already. And to your point, ones that have maybe been delinquent and are current now have had some issues probably over time and probably are less likely to be the ones that cancel at this point. So, while it's good that the books are obviously going down as a percentage of the overall portfolio, I don't see any significant benefit to the reserve number from that cancellation.

Okay. And then just one last one. Is there any possibility for any further expense leverage here in the model as your volumes flatten hear a little bit but the insurance in force grows?

This is Tim. I think we've always said there's a lot of leverage on our expense platform. I think we can write more volume with effectively the current expense base. If you look at our expense ratio, we were 15.3% this year versus 14.9% a year ago; wrote almost $48 billion of NIW this year; been in that narrow range. Growth expenses might tick up a little bit next year, but we feel pretty good about being able to leverage the expense base that we have if more volume is available.

All right, guys. Thanks.

Mackenzie Aron, Zelman & Associates.

Just two questions that I have left, more on pricing. If you could just give an update, overall what you're seeing, and if there has been any impact over the last couple of months after the UG/Arch deal was announced. And then secondly, maybe one that might be tough to answer but just curious. If we do get tax reform and the tax rate is lower, do you think that the industry would continue to price to a midteen ROE? Or would the Company be able to keep more of that benefit?

Yes, this is Steve. On the pricing, we have seen stabilization since the price increases or price changes that went into play in early 2016. LPMI tends to be a little bit more competitive. As Pat mentioned, we pick our pockets where we are going to play there. And as also Pat mentioned, I think it's been too early to see any fallout from the Arch/UG deal on pricing. So we'll see how that evolves over the next quarter or two. So generally I would say pricing remains stable.

Mackenzie, this is Mike. On the other one, we are not prone to speculation. So what, the first thing, who knows what the tax reform would look like, and then how companies would react would be dependent on that. So we are not even going to go down that path. Sorry.

I understand. Thanks, Mike.

Mihir Bhatia, Bank of America.

My question has to do with your reserves and the reserve releases. The positive development in reserve releases and positive development on prior period reserves has been a pretty consistent theme this year. And I was just wondering if you could talk a little bit about just reserve adequacy overall. And just what are some of the things investors should look at as they look at MGIC and think about future period, whether it's releases or builds? Just some of the metrics that maybe that you disclosed that people can look at as they make their own assumptions for the future periods.

This is Tim. I think we've tried to give, in the additional information with the press release, some of the history related to the cure activity that happens out of the different buckets, whether it's less than 3, or 4 to 12, or 12 plus. And so you can see how those trends develop over time. And that's really what we look at from a perspective of accounting, is what trends do we see on that cure rate development in those different areas. And we look every quarter and reestablish the loss reserves. And we looked at it this quarter; we saw that the longer-term trends had continued to improve compared to where we had estimated. And so I'd say that's the best source of information for you in general.

Okay. And then just along those lines, I know one thing that you all have mentioned as being the claim rates around -- claim rates being lower. And is that -- how much more improvement is there in that bucket, if you will? I think you said it was 12% -- is 10% just the normalized rate? So should we expect it to get below 10% given some of the -- for a little while, given how good the underwriting has been in the last few years? Or is it just it will just trend down from 12% to 10% slowly and stay there?

Yes, it's Tim again. [To be] clear that's on the new notices, our expectation of ultimate claim rate. I think we view 10% as the longer-term average, and even though the newer books of business are very clean, I don't think our view is necessarily that they will behave that much differently than that once they go delinquent. I think the benefit of the clean books of business that we've written is that not a lot of them do go delinquent because of the high underwriting quality and credit scores of those books. But once they go delinquent we don't have any reason to believe that they'd behave differently than the long-term average.

Okay, so -- okay. That's fine. Great, thank you.

Geoffrey Dunn, Dowling Partners.

In terms of thinking about incidents on new notice development, is 50 to 100 bps on an annual basis still a good pace to guess at, at this point?

Geoff, it's tough to know. As we said, it's tough with these loans to know how it will be. But I think if you look over the last year, we were probably somewhere close to 100 bps. So I think that still is the right -- if I were to look at it, it's still the right magnitude to think about.

Okay. And then in terms of reinsurance, obviously the capital position is on the high-end of the range. How are you thinking about the benefit of capital or of reinsurance at this point? Is it more a risk management tool, longer-term? Is it more of a capital management tool? How do we think about putting a new quota in place and managing both to the risk and the capital side of the equations?

Geoff, I think we look at it as both. I mean, it's definitely been a significant part from a capital strategy and will continue to be it. I think we'll continue to look at reinsurance from a risk management tool perspective. And to the spot of where we are in our target of 10% to 15% above PMIERs, the tension there is always with how much we can get out from a dividend standpoint, quite frankly, from MGIC to the holding company. And to the extent that we aren't able to get dividends out and free those up, it obviously makes you re-examine how much reinsurance you want.

I think we're going to continue to use reinsurance. I think it goes to the level that you want over time. So we tried to be smart about writing our reinsurance agreements so that we have some ability to cancel them if we feel like we don't need the level that we have, which on our current agreement we can do that at the end of 2018. So I think that's something that we have to continuously look at, but obviously we feel very comfortable with the terms that we are getting on the reinsurance; would expect to have basically similar economics and sizing for 2017 NIW, and feel like it's very good from an add to the return perspective.

Okay. Thanks.

And there are currently no questions. I hand the call back over to you, presenters.

Okay. This is Pat. I want to thank everybody. As you just heard, we had a very, very good year and we are really pleased with it and I want to thank my coworkers for a great job for another successful year. So we'll close out the call with that. Thank you.

This is the end of today's call. You may now disconnect. Have a great day.