MGIC Investment Corp (MTG) 2017 Q3 法說會逐字稿

Good morning. Thank you for standing by. At this time, we'd like to welcome everyone to the MGIC Investment Corporation Third Quarter Earnings Conference Call. (Operator Instructions)

I'd now like to turn today's conference over to Mike Zimmerman, Senior Vice President, Investor Relations. Sir, the floor is yours.

Great. Thank you. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the third quarter of 2017 are CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Steve Mackey.

I want to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force and other information which we think you will find valuable.

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

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

Now I'd like to turn the call over to Pat.

Thanks, Mike, and good morning. I'm pleased to report that as we continue to execute on our business strategies, we had another strong quarter. In a few minutes, Tim will cover the details of the financial results, but before he does, let me provide a few highlights.

In the quarter, we wrote $14.1 billion of new business, which was about flat to the same quarter last year. During the quarter, we continued to see a low level of refinance transactions, accounting for just 9% of our new insurance written compared to 19% from the third quarter of 2016. Through the end of the third quarter on a year-to-date basis, the level of new business written was up about 3% compared to the same period last year.

Year-to-date through mid-October, we have seen a 43% decrease in refinance applications and an 8% increase in purchase applications compared to the same period last year. This is a net positive for our company and our industry as our industry's market share as a percentage of total originations is 3.5 to 4x higher for purchase loans than refis, and through our refis, generally lowers the cancellation rate of the insurance in force.

The expanding purchase mortgage market, our company's market share of approximately 18%, the hard work and dedication of my fellow coworkers that deliver stellar customer service and the higher annual persistency resulted in a 6% increase in insurance in force compared to the same period last year. Since insurance in force was the driver of our revenues, this is a key metric that we focus on.

With the current and expected level of mortgage rates, we expect the continued low level of refinance activity and that the annual persistency metric we report each quarter will continue to increase gradually in subsequent periods. Given the actual dates -- the actual results to date and the anticipated new business, we expect to write approximately $48 billion of new business for the full year.

The expected level of new business, combined with an expected increase in persistency, should result in insurance in force continuing to increase. The increasing size and quality of our insurance in force, the runoff of the older books and our strong financial performance position us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers.

With that, let me turn it over to Tim.

Thanks, Pat. In the quarter, we earned $120 million of net income or $0.32 per diluted share. To provide better insight into our operating results and to make year-over-year comparisons of the financial results more meaningful, we disclosed adjusted net operating income, a non-GAAP measure. While there are only immaterial impacts in the quarter, a reconciliation of GAAP net income to adjusted net operating income is included in the body of the press release.

The primary driver of the improvement in our financial performance was lower losses incurred. Losses incurred were $29.7 million versus $60.9 million for the same period last year due primarily to fewer new notices received and a lower claim rate on the new notices received compared to the same quarter last year.

In the third quarter, we received 9% fewer new notices compared to the same period last year. And reflecting the current economic environment and anticipated tiers, we used a claim rate of approximately 10.5% on these notices. The current period claim rate compares to a claim rate of 12% that was used in the third quarter of last year.

We also modestly lowered the expected severity of these new notices as the time required for servicers to process foreclosures is shorter compared to the extended time frames of the last several years. To try and put some context to this last statement, I would point out that the number of loans that are 12 months or more past due has decreased more than 50% since the end of 2015.

Each quarter, we review the performance of the existing delinquent inventory to determine what, if any, changes should be made to the estimated claim rate and severity factors. As a result of this review, we updated our assumptions for previously received delinquent notices because the actual experience has outperformed our previous estimates. This resulted in a benefit of approximately $38 million to our primary loss reserves, principally due to a lower estimated claim rate.

There was also a $6 million net benefit related to IBNR and LAE. During the quarter, new delinquent notices from the legacy book continued to decline at a steady pace and generated nearly 79% of the new delinquent notices received while accounting for just over 24% of the risk in force. The new delinquent activity from the larger, more recently written books remains quite low, reflecting their high credit quality as well as the current economic conditions. We expect that the legacy books will continue to be the primary source of new notice activity for the foreseeable future.

Reflecting the smaller delinquent inventory, the number of claims received in the quarter declined 30% from the same period last year. Net paid claims in the third quarter were $113 million. Included in that amount was $9 million that was associated with loans that were removed from inventory due to the agreement to terminate coverage that have been previously disclosed in our monthly operating statistics. Excluding this impact, primary paid claims were $101 million, down 31% from the same period last year.

The effective average premium yield for the third quarter of 2017 was approximately 50 basis points, which was effectively flat to the second quarter level and compares to the 53 basis points in the third quarter of 2016. As I have discussed in the past, for a variety of reasons, we expect that the effective premium yield will trend lower in future periods. However, the exact amount and timing is difficult to predict.

At the end of the third quarter, MGIC's available assets for PMIERs purposes totaled $4.7 billion, resulting in $800 million excess over the required assets. MGIC's statutory capital is $1.9 billion in excess of the state requirement.

In addition to writing new business and exploring new opportunities as they arise, we will try to manage the amount of excess may continually reviewing our use of reinsurance as well as continuing to seek and pay dividends out of the writing company to the holding company.

When we analyze various options to deploy our capital resources, we need to take into account that the holding company's primary source of capital is the writing company. So while capital is being traded at the writing company level, its ability to pay dividends to the holding company is subject to OCI review and approval. We also consider the resulting leverage ratio, the ability to continue our positive ratings trajectory and the debt serviceability of the holding company.

Regarding MGIC's ability to pay dividends, during the quarter, we were able to increase the dividend paid to the holding company to $40 million compared to the $30 million dividend that was paid in the second quarter. While future dividends are subject to regulatory approval, we are optimistic that dividends will continue to be paid on a quarterly basis. We are planning to ask for and receive a higher dividend in the fourth quarter.

At quarter end, our consolidated cash and investments totaled $5.0 billion, including $182 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 2.7% and a duration of 4.5 years. Our debt-to-total-capital ratio declined to approximately 21% at the end of the third quarter from approximately 31% at the end of the third quarter of 2016.

The holding company has resources for approximately 3 years of ongoing debt service. As of September 30, the holding company's annual debt service on the remaining outstanding debt is approximately $60 million. This includes approximately $12 million that the holding company pays MGIC, which owns $133 million of our 9% junior subordinated debt.

Before turning it over to Pat, let me make a few comments about the potential impact about the recent hurricanes may have on our financial position. Although we can make no guarantees, as described in our risk factors, based on our past experiences and recent analysis that we have conducted, we do not expect any material impact to our financial results due to these storms.

That said, we do expect to see an increase in the number of new delinquent notices reported to us in future periods and potential increase in the delinquent inventory. We expect that any elevated level of new notices or delinquent inventory will have an immaterial increase on our required assets required by PMIERs and that any such increase would be of a relatively short duration.

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 continues to move forward, albeit slowly. 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 finance reform, we remain optimistic about the future role that our company and our industry can have, but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. As an individual company and through various trade associations, including USMI, we are actively engaged on this topic in Washington.

We are encouraged that the discussions are now more inclusive about the role of each of the GSEs, FHA and private capital versus treating them as separate topics, which is positive for MGIC and our industry.

Regarding the FHA specifically, a new director, Brian Montgomery, has been nominated. And while we have not had conversations directly with him, we continue to believe, based on our discussions with various parties in the administration, that the FHA will not look to expand its footprint in housing finance in the foreseeable future.

Regarding PMIERs, there's no update that I can provide. As a reminder, the GSEs informed us that they currently anticipate that new PMIER financial requirements would not become effective any earlier than the fourth quarter of 2018. And they have committed to us that they would provide 180 days written notice prior to the effective date of new requirements.

I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force, of which nearly 77% has been written since 2008, continue to grow. Annual persistency is increasing, new delinquent notices declined as the newer books of business continue to generate low levels of new delinquent notices and the legacy portfolio continues to run off.

Further, the anticipated claim rate on existing delinquencies declined. We maintained our traditionally low expense ratio, and the holding company received a $40 million dividend for MGIC. As I have said in prior quarters, I continue to believe that there's a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risks while generating good returns for shareholders. And we are committed to pursuing those opportunities.

With that, operator, let's take questions.

(Operator Instructions) Our first question is going to come from the line of Mark DeVries with Barclays.

Tim, it sounds like with the expected request for a larger dividend next quarter, we could be looking at over $200 million of dividends in 2018 up to the holding company. At what point should we think about some of that coming back to shareholders, either in the form of dividends or buybacks? Or do you also have the potential to increase leverage, take on some debt to finance either buybacks or some additional investments in the business?

Mark, it's Tim. It's a good question. I think, as we stated, we expect to hopefully receive a large amount in Q4. I'd say that as far as we will get in '18, we have more formal conversations with the OCI annually as far as what we do there. So I don't want to get ahead of ourselves as far as what we might get in 2018 as far as anything additional. I think we feel pretty confident we'll still continue to get quarterly dividends obviously. But it's one of the things that we'll continue to look at. We feel pretty good now that we've got to 3x sort of our run rate for interest as a holding company at this point. And as that continues to grow, I just think it gives us some flexibility to look at things. From a leverage standpoint, I think we feel pretty comfortable where we are with leverage right now, it gives us some flexibility. So I don't think we're looking to use that in the short term for any specific purposes. But it's something that, obviously, we'll have continued discussions with management and with the board about how we look at any sort of additional flexibility that we have at the holding company.

Okay. But if you are able to maintain that type of a run rate and the dividends from the writing company, what should we expect potentially in terms of changes to the use of those dividends as we look out into 2018?

Yes, I think we talked before about any potential capital return that would happen obviously either in the form of dividends or share repurchases, and we've taken a look at those. I think from a dividend standpoint, we want to have much more clarity around the flow that continues to come up to the holding company and would want to make sure that it's a consistent dividend and hopefully steady increasing. And then we have to get still approved from the OCI that's probably a pretty high bar at this point. And I think as we've said in the past, we're very focused on the amount of dilution that was created during the crisis. So that's something we look at from a share repurchase standpoint. The one thing I'd also add as far as the flexibility we want to maintain, Pat mentioned at the end of his comments that we're still awaiting what PMIERs 2.0 might look like. And while we have no reason to believe that there's going to be anything there that causes us any concern, I think we want to maintain some amount of flexibility until we know what those new rules are going to be, especially where we expect them in the relatively short future.

Okay. And to the extent to what you can share to us, it'd be helpful just kind of know where you are in those conversation with the OCI, any kind of change in the evolution of those discussions and kind of what next steps are.

I'd rather not really comment too much about the OCI conversations. We have a really good relationship with them and touch base on a regular basis. I'd say probably more formally annually as far as discussion of the dividend, but obviously have communication even on a quarterly basis. So we'll continue to have those discussions. They're always very productive and it's a good conversation. And we think that we have a good story to tell based upon the excess that PMIERs continues to grow, and obviously, the operating results that we've been having the last number of quarters.

Okay. And then just finally from me, the claims paid came in lower than we had been modeling. Is there anything kind of notable to call out on that for the quarter?

I think there can be some volatility there. I think there might also be a little bit of impact with us having done some of our -- some of the settlements that we've had on some of our delinquent inventory. As I mentioned in the comments that we have one this quarter that, on average, those are probably a little bit higher severity because they've been in the inventory little longer. So that might have some impact going forward as far as the average severity on paid claims as well.

And our next question is going to come from the line of Jack Micenko, FIG.

Noticed your 95% mix on NIW has come up a bit over the last year. And it stood out for me because I know when the GSEs rolled that back out, we were thinking maybe it was potentially a smaller part of the business. I mean, is that -- I guess the question is, is that something strategically you're looking to do more of? I'm guessing it's driving that increase in the premium yield as well. But is that something you target? Or is that just something that's just at the nature of the flow that comes your way?

Yes, Jack, this it's Mike. I mean, it's -- yes, it's not something we're specifically targeting, it's really just the nature of the business. More lenders are producing new insurance for auto, it took a while, as you pointed out, for that 97 to get started and engrained into the processes of lenders. But I just think it's just part of the natural evolution of lenders looking for increased production.

Okay. And then on the singles, so we had a -- the refis came off and the singles. Your mix of singles has come up. And I'm just curious, strategically, is that something that's maybe changed in your thinking on mix over the last couple of quarters? Or I guess, again, more market-driven?

Jack, it's Mike again. Yes, I guess you hit it on the head again, it's really more market driven. I mean, so we haven't changed our philosophy relative to singles. So you have a little bit more -- there's a little bit of blip in refi. It's not much, obviously, because it's flat 9% to 9%. But as far as the mix of lenders that are doing singles, it's come a little bit more from the nonbanks, they tend to focus a little bit more on refis. But there's been no change to our strategy or philosophy relative to singles.

Okay. Okay. And then just one more. I know you called out persistency improvement a number of times in the prepared comments, where can that number go if rates stay kind of where were at or even migrate higher on a little bit of a steeper curve? How are you thinking about that number internally? It'd be helpful for our modeling.

Yes, Jack, it's Tim. I mean, I think we always sort of center it around 80% persistency quite frankly. And I think if refis stay tamped down, can they go above that? Yes, but I think we don't expect to see the high persistency, let's say, getting to 90%, you might have seen decades ago. I think we've sort of said it's tough getting below -- or above 85%, I would say, and I would say that's very difficult. So when we look at it, I think we centered around 80%, and I think that's a relatively good sort of guidepost looking forward.

And our next question is going to come from the line of Geoffrey Dunn with Dowling & Partners.

Tim, I just want to revisit your comments on the hurricanes. You're going to get the notices in, is basically the plan to just put a low incidence assumption on those?

Yes, I think, Jeff, from our experience, it hasn't been a significant sort of claims paid and loss event to us. So we do have the ability to take that experience and account as well the additional work that we'll do when see the notices come in and adjust these expected claim rate on those sort of notices that we think are, I guess, more temporary in nature and related to the hurricane and don't think we'll end up in the same, I guess, incidence rate as our normal notices. So we are both able to take that into account.

Okay. And then do you have the refunded premium number for the quarter?

Yes, it was -- for the accelerated singles, it was $9.2 million this quarter. That compares to about $7.5 million back in Q2 of '17.

Okay. And then the last question, Pat, you called out kind of the stable favorable operating environment with purchase market growing. Given the existing forecast for '18, I think it's kind of a recurring trend. Purchase growth continue to decline in refi. Any preliminary thoughts on how '18 NIW could compare to what your targeting in '17, given the macro outlook?

Well, I don't want to commit to a number, but needless to say, or as I have said, we feel good about to be more weighted to purchase and refi. And as a result, we think we'll continue to do well there. So it's still a little too early to give you a specific number.

Our next question will come from the line of Douglas Harter, Credit Suisse.

I was hoping you could quantify the benefit from the lower assumed severities going forward from a shorter timelines. And is that -- I assume -- is there kind of a onetime benefit to that? Or is that something that's just going to recur going forward?

I mean, I think when we looked at it and we're talking about the new notices coming in, that's subject to change just like any other assumption on new notices and when we reserve. But as I mentioned in the comments, I think we've seen in general that the new notices coming in are not going to stay in the inventory for quite as long as the ones that, say, came in 3, 4, 5 years ago. So that means that, ultimately, we would expect we're going to pay a lower severity on that. So all things being equal, it'd be something that we look at each quarter that we hope that trend would continue to persist. But that's dependent upon, obviously, what the conditions are and how servicers are resolving any sort of delinquency as they go into claim, but felt comfortable based on of the trends that we've seen recently that we're able to adjust that for this quarter.

Makes sense. Is there any way you could sort of frame how much benefit that is on kind of those new claims in terms of severity percentage you're seeing on kind of new claims versus kind of what you would see if they were sticking around longer?

Yes. I think -- I mean, it's not a large amount. I think for the Q, we'll probably have a little bit more disclosure on that than we do to sort of the reserves development. And so I think that's probably where we'll have any more detail on that.

Our next question will come from the line of Randy Binner, FBR.

I have a couple, just top line-related questions. I guess the first is on FHA. You mentioned the new nomination there and that, I think, the rhetoric from the administration is that they would be less involved in the market. But have you noticed any change thus far? We're almost kind of getting to the end of 2017 here. Has there been any difference you've noticed in how FHA has been involved in the market?

This is Pat. We haven't seen anything yet. I think there has been a general feeling they want to wait until Mr. Montgomery gets confirmed which I think is scheduled for next week. So as we've had conversations in Washington, I think it's been business as usual. But with Dr. Carson in there now at HUD, his consultants as well as Brian at the FHA, I think at that point in time, they'll analyze what kind of changes they'd like to make. So right now, it's kind of business as usual.

Okay. Yes, and that's our perception too. So they would need to make kind of proactive changes. Is that fair to change the involvement or that vision in the market? Otherwise, whomever is set up on the distribution side to supply that to the market would continue until there's an active change. Is that the right way to think of it?

Yes, that's the good way to look at it. They have to make a proactive change. I think my sense of it would be their actuarial report on their capital typically comes out sometime in mid to late November. I think that'll influence it. And then, obviously, with the new person in the chair, that'll influence they're thinking as well.

And then, also, just thinking about the origination side, and we've seen banks retaining more residential mortgage originations, more residential mortgage risk just broadly. I don't think that tends to be for a product that has less than 20% down. But have you noticed any change in how much throughput you're getting as it relates to the banks potentially keeping more of the risk they're originating?

No, not really. I mean, the amount of business that is ultimately getting sold to the GSEs continues to be very strong, and that's the business we insure. So we haven't seen -- there may be a lender or so. But as a broad policy statement, I don't think there's any change.

Our next question is going to come from the line of Bose George, KBW.

Just a clarification on the default, the claim rate expectation, is that -- the 10.5% number, is that sort of a good expectation going forward?

I think the trend has been that that's been trending downward other than first quarter always -- there's a little seasonality involved. So the trend has been downward. And we've said historically that 10% is sort of what we've seen as historical average, so I think whether we can get below that or not is questionable. But I think -- I guess I said the trend has been slightly downward, but it gets tougher to get further down the lower you get on that percentage.

Okay, great. And then actually just on market share, I guess it's probably too early to tell, but any thoughts on whether there's much change in your share this quarter?

Bose, this is Pat. We think we're still in the 18% range.

Okay. Actually, just one more on the FHA. The Congressional Budget Office put out a report, I guess, a few weeks ago just highlighting some of the risk there and the accounting that they use, et cetera. Do you feel like people are paying attention to that report in terms of the people you speak to in Washington?

This is Pat again. Yes, I do. Not just that report, but a general perspective on, again, housing policy to say that there is some concern about the size of the footprint of the FHA. And granted, the economy is doing well and their newer books of business are doing well, but their book is now something like $1.1 trillion. And the question arises, is that the right role for government? Should it be that large? And so I think there's more conversation around is that footprint too big and what steps should be taken or potentially taken to reduce it. And I think the report you referred to laid out a number of steps that are possibilities that I think will be given serious consideration.

And our next question will come from the line of Mihir Bhatia with Bank of America.

And if I could just follow up on that, just on the FHA. I think in your prepared remarks, you mentioned that you don't see -- most of your conversations suggest there's not an appetite to increase the role of the FHA. But are you seeing appetite to decrease the role? Because it's still -- I think the market share-wise is probably still 2x what it was in the early 2000s or something for the FHA. So are you seeing momentum for that? And what kind of things need to happen? Is it just a matter of waiting for the new person to be confirmed and then them taking actions? Or just curious on that.

Well, I would say that if you look at the insured market right now, and these are very round numbers, I think the private MIs have about 35%, the FHA has about 35%, I think the VA has about 30%. Those are ballpark numbers. And so we haven't seen any material change to that in 2017. However, if you look at things historically, the private MIs at one point in time years ago had about 2/3 of that market and the government 1/3. And so there have been various parties within the FHA over the last couple of years that have said they think they need to reduce the FHA's role to more of a historical norm. So at 35%, again that's a round number, that's still much higher than it was in history, save for the Great Recession. So I think there's that view. And then, what I said earlier to the previous question, just the size of the FHA. The private sector has clearly recovered. The private MI industry is as strong as it's ever been, and we believe we can play a greater role. And you have to ask yourself relative to the government and this is, we believe, MGIC believes, that there is a role for the FHA. The question is what is that role? And we believe that there's opportunities for the private MIs to play a greater role. For instance, the FHA will report that a good portion of their business insured is for FICO scores above 700. We would question, is that the right way, the right place for government to play? We would question, relative to loan limits, are the loan limits properly set and things of that nature? So the CBO report laid out a number of alternatives that, I think, all provide some interesting discussion about how to shrink that role. And to do so on a prudent fashion. Again, we're not anti-FHA. This needs to be done prudently. It should be done, as I said in my prepared comments, in the context of GSE reform as well. You don't want to take an FHA -- action against the FHA that would simply drive business to GSEs or take business at the GSEs and drive business to the FHA. It needs to be done holistically as a matter of policy. And as part of that, we think we have a pretty good position. And then lastly, I'll say, I don't -- and as I said, I don't expect anything to happen until a new commissioner is in the seat and he's had a chance to assess things.

Great. And then if I can continue on that same -- on the theme of, like, just the government's role. There was, I think maybe a year ago, there seemed to be a considerable push in the industry on deep cover MI. Any update on that? Any kind of update on that? I know there's been -- recently it's been in the news again in the last couple of weeks. So just wanted any update from your side.

Sure. Well, the update is there is no update. The MI industry continues to believe -- this is on the GSE side of the equation, but we continue to believe that deep cover MI makes a lot of sense with the objective of reducing the GSE's risk and therefore, most importantly, reducing taxpayer risk. The private capital that we provide, that the 6 MIs provide, is well positioned to take on more risk. That said, the conversations have been somewhat or quite limited actually on that specific execution. But the GSEs continue to try to pursue alternatives in the credit risk transfer market. We try to stay very, very close to that. But we continue to believe that the most effective way to reduce GSE exposure and thus taxpayer exposures is deep cover MI. There has been some activity in Congress along those lines, we'll have to see how that proceeds. But right now, we're kind of in a holding pattern.

Got it. Great. And then if I could -- just turning a little bit more, Michael, to MGIC. The monthly premium -- the premium yields have increased, I think, for the last 3 quarters this year. Has that just been a function of the mix of the business? And is that -- I think you talked a little bit about this already, but if you could just, if you don't mind, just give us a little bit more color on that. Is it just the mix of the business? Or is there a strategy to write maybe some of the different payers to manage that premium yield?

Mihir, this is Mike. No, it's really -- again, it's the mix shift. I mean, when you look at the disclosures we have in the supplement, I mean, a year ago, fourth quarter of '16, we were like 6%, 7% greater than 95s. Now we're up to 12% of writing. There's been a modest sort of drift-down in FICO scores, so 760, 750. So it's really just things of that nature, so more of a mix shift. Again, no change in -- just like with the singles, no change in our philosophy or strategy, it's what the market is producing. And maybe to your point, we want to write as much high LTV business as we can that meets our parameters, and that's where the market is drifting towards.

Okay. And despite -- I guess, so let me just follow up on that. And then in terms of your expectations for premium yield, you still think it'll be pressured for the next few years? Is that right? And can you -- any -- would you be willing to put any kind of numbers around that?

This is Tim. I think from -- and we're talking again on the in force, we still think that there's pressure, downward pressure, on the in force just because of some of the legacy book with higher average premium rates expiring, that will keep the dollar pressure. And as I said sort of in the comments, it's tough to pick exactly where it -- where and when it will sort of get to steady state. Obviously, putting on new books of business that are a little higher than average premium rates than what we had a year ago helps in that regard. But I still think it's very difficult to call exactly how much and the timing of that.

Our next question is going to come from the line of Chris Gamaitoni, Compass Point.

Can we -- can you give a little clarity on the pace of the bulk runoff? It was down 13.5% year-over-year, which looks like the fastest decline on a year-over-year basis since 4Q '13. I'm still trying to gauge when that book and maybe the flow pre-2009 book will run off. And the pace seems to be accelerating this year. So do you have an updated schedule of when how that -- how is your trend moving forward?

Chris, this is Mike. Yes, I mean, we're trying to figure that one out ourselves. I mean, it's pretty long-lasting given the nature of it. Steve, I don't know if you can comment on that.

This is Steve. The -- I think the NPL sales that we've done or the communications we've done with the GSEs have been effective in kind of accelerating that. We continue to have dialogue to try to continue those, because we think those are a good resolution. But overall, we haven't seen any significant trends in the performing segments of the, what we call, the legacy book, the pre-2008. It just consistently is grinding down.

Okay. And do you -- I know a large part -- a large population of these have either been HAMPed, HARPed, mod-ed some other way. Do you have a sense of like when the majority of that book or like if there's a bigger year where it should hit its 78% amortization schedule? Or if it was current, it would be able to be eliminated from coverage?

Yes, Chris, this is Mike. When you look back at those books of 5 and 8, the HARP stuff does certainly influence that. But there were so many [9, 7 at 100s], you're looking at 11, 12 years before you get to that 78 LPV. I do believe -- I'm trying to find errors while I'm talking in our risk factors, we talk about how much of the books have not been HARPed or HAMPed, and it's in the single digits percentage with it. So there's going to be some impact of that, but the HARP stuff has really altered that quite a bit. But it's probably a couple of years out yet before you start to see the falloff. And that's a contributor to the premium yield as we've talked about in the past. It's not the driver, but it's certainly a contributor, yes.

But it's positive on the other side. And just given the -- still how large of a percentage of new default notices come from those populations as well.

Yes, absolutely. Right. I mean, 80% or so of our notices are coming from the legacy book, so -- now that said, half of it has also never been delinquent. So there's gives and takes with that, so it helps on the delinquency side when half of it is -- never been delinquent and continues to perform. So there's some income coming from that as well.

(Operator Instructions) Our next question comes from the line of Phil Stefano, Deutsche Bank.

I wanted to circle back on the reinsurance a little bit. Obviously, quota shares have been the primary method of ceding risks. I was wondering, are there any internal conversations about alternative capital or an [ION]? Why does something like that not make sense? Or any thoughts you have around something like an excess of loss coverage?

That's a good question. It's Tim speaking. We have those discussions all the time, quite frankly, as far as whether the quota share and sort of the structure we've had fits our needs the best, which has primarily been capital driven. We're aware of more of the capital markets transactions that have happened out there and look at those. And we've done similar type of transactions back in '07 and '08, so we're familiar with those. So we weigh a lot of the quantitative and qualitative sort of positives and negatives of all those different types of transactions, and we have discussions about what we want to do from a reinsurance standpoint. What we've said is we view reinsurance as a core part of sort of our capital stack as we move forward, but that doesn't mean that we wouldn't look to other forms of reinsurance, whether it's an XOL loss with traditional reinsurers or whether it's an XOL type of structure that's done in the capital market. I think those are all things that we continue to look at and sort of weigh our alternatives.

I guess under the guise of the quota share, the 2018 or it, 2018 method for your reinsurance, at what point do those conversations kick off? When do you start reaching out with sort of reinsurers for indications? And part of embedded in this question is with the third quarter 2017 active catastrophe losses that happened and has impacted the Bermuda balance sheets, is there any sense about their desire to keep writing this business? Any indication of pricing changes or anything like that you can guide us to?

We have conversations with our reinsurance partners on a pretty regular basis. And so through conversations we've had with them, I don't get a sense that there's any change in demand or appetite for what they're reinsuring from our perspective. Obviously, it depends upon market conditions, and a good question of whether the recent catastrophes changed their mind on it. But based on conversations we've had currently, I haven't gotten any indication that, that's changed their appetite at all.

Okay, okay. Good. And from a gross expense basis, it feels like the guide in the past has been somewhere around 5%, maybe just shy of that. The way I've been thinking about the gross expense base growth is something like GDP, GDP-plus, something in that inflation range. I guess, is there a floor on the expense ratio? Or what pressure could investments in the business pose on that as thinking about the inflation-plus growth rate of that expense base?

Well, I look at it -- I think a couple of parts of that. I looked at the -- just the growth of the expense itself and also from a ratio perspective. So from the growth of the expense itself, I think we've talked about somewhat of expectation of closer to maybe in the 5% range year-over-year. So a little bit outpacing inflation. As we continue to make investments in the business and sort of in our structure, somewhat probably deferred coming through the crisis, sort of catching up on some of that, but not a huge cost by any means and try to keep that controlled pretty well. From a ratio perspective, I think the challenge has been more with the revenue line. And we've had a little bit of disconnect as the in force has grown, the revenue hasn't grown at the same pace. And so as that average basis point question we just talked about previously starts to normalize, then I think you start to see that sort of pull together a little bit. So we still feel pretty good about our historical low expense ratio. We're very committed to making sure that stays in a good range in that 15% to 17% range. I think it's where it's been the last couple of years, and we'll stay focused on that. But there is a little pressure from an expense standpoint of just a little bit stronger than inflationary growth.

At this time, we have no further questions. I'll turn the conference back over to Mr. Zimmerman for closing comments.

This is Pat. I just wanted to say thank you for your continued interest in our company, and have a great day.

Once again, we'd like to thank you for participating today's conference call. You may now disconnect.