MGIC Investment Corp (MTG) 2018 Q1 法說會逐字稿

Good morning, my name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the MGIC Investment Corporation First Quarter Earnings Conference Call. (Operator Instructions)

Mr. Mike Zimmerman, Senior Vice President of Investor Relations, you may begin your conference.

Thanks, Felicia. 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 first quarter of 2018 are Chief Executive Officer, Pat Sinks; Chief Financial Officer, Tim Mattke; and Chief Risk Officer, 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 results that we will refer to during the call and includes certain non-GAAP financial measures. We've also posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information which 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 Form 8-K.

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

Thanks, Mike, and good morning. While the environment we operate in continues to evolve as it has since we opened our doors 61 years ago, we are focused on executing our business strategies, and I'm pleased to report that 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 $10.6 billion of new business, which was 14% higher than the same quarter last year, and we are still targeting to write $50 billion for the full year. This reflects the strong purchase mortgage market and some possible share gain from the FHA.

Looking at GSE securitization data reported by Inside Mortgage Finance, private MI purchase volume increased more than 14% year-over-year, while FHA purchase volume decreased 9%. While this data is lagged, it does suggest that our industry seems to be increasing its share of the total origination market.

During the quarter, refinanced transactions remained low, accounting for just 12% of our new insurance written compared to 17% for the first quarter of 2017. Compared to the same period last year, there was a 22% decrease in refinance applications, which was offset by an 8% increase in purchase applications. The shift towards purchase activity is a positive for 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.

The expanding purchase mortgage market, our company's market share of approximately 18-plus percent, the hard work and dedication of my fellow coworkers to deliver stellar customer service and higher annual persistency resulted in greater than a 7% increase in insurance in force ending the quarter at $197.5 billion. Since insurance in force is the primary driver of our revenues, it is a key metric that we focus on as well as the expected returns on the new business.

Let me take a few moments to touch on last week's announcement on changes to our borrower-paid mortgage insurance, or BPMI, pricing. Before I provide more insight into our announcement, let me state what was not a motivation for making the price changes. Despite speculation by some, it was not a response to IMAGIN, which is a Freddie Mac pilot program. At its core, IMAGIN is another form of lender-paid mortgage insurance, or LPMI, that has a marginally lower price than what we currently offer on a majority of the LPMI that we write. Our revision to the BPMI pricing is also not a concentrated effort to get more share from the FHA. Nevertheless, our premium changes offer some modest benefits for both of these items.

Over the past week, many investors have asked about our decision to adjust premiums, so I want to provide some perspective on how we came to the decision we did and why we did it in the manner we did. On our last earnings call, in response to a question about pricing and the corporate tax rate, I answered that I had not yet seen any tax-related pricing changes of significance and that we did not have a material change to our pricing in mind at that point in time. However, the environment began to change in mid- to late February, when we began hearing from a few of our customers that they had been offered BPMI rates from our competitors that were lower than published rate cards. These types of reports are not necessarily unusual as we hear about BPMI discounts from time to time, but typically they are one-off deals and not widespread.

Then in early March, a popular mortgage industry blog discussed BPMI price discounting for a very large lender by one of our competitors. From that point, the volume of customer inquiries about our plans began to rapidly increase, and we learned that the discounted prices were much more widespread and involved more than just one other private mortgage insurer. At that point, we decided we had to act as this revised premium rate structure, in our judgment, was clearly already being implemented.

When deciding how to respond, we took into account state regulations, which, according to the California insurance regulator, prohibit a mortgage insurer from selecting the offering to lenders different premium rates. That is, if you want to vary off the rate card, the regulator says you need to establish an objective risk-related criteria and proactively offer that lower rate to all lenders doing business in California that meet the criteria, not just a select few. This is not a new interpretation. We are very fortunate to do business with just about every lender in the country. The overwhelming majority of these customers want a level playing field when it comes to MI pricing. They do not want to be disadvantaged to other lenders when competing for loans.

As a result, we made a very transparent announcement last week that lowered our premium rates for all lenders and borrowers. I've often said that MGIC does not proactively use price to gain market share. This remains true today. Our premium adjustment is a reaction to market conditions. We are simply reacting to these new market conditions in an open and transparent manner.

Our goal has never been to be #1 in market share for the sake of being #1, and I believe that our actions have consistently reflected this. I have repeatedly said that return on capital is our priority. By incorporating the lower federal tax rate into the new premium structure, it brings expected after-tax returns in line with the returns we expected to generate on business we wrote in 2017 under the GSE's private mortgage insurance eligibility requirements, or PMIERs, as they exist today. While lower than they otherwise could have been due to the tax cut, they still result in very attractive expected lifetime returns.

If we have to lose market share for the right reason, we will give that every consideration. I've been asked over the years how much share would I be willing to lose. I've never provided a specific number. Our goals are to remain a relevant business partner with our customer and to prudently generate long-term premium and book value growth for our shareholders. In that sense, market share matters at some level.

So are we prepared to lose market share for the right reason? The answer is yes. In this instance, we have received ample evidence from our customers that if we did not purchase in some manner, our relevance will be put at risk. I hope this helps you better understand how we reached this decision and the transparent manner in which we announced it. We continue to have pricing that will protect our policyholders, help people attain home ownership and provide a meaningful return to our shareholders.

With that, let me turn it over to Tim.

Thanks, Pat. In the first quarter, we earned $143.6 million of net income or $0.38 per diluted share compared to $89.8 million or $0.24 per diluted share in the same period last year. 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, along with a reconciliation to GAAP net income in our press release.

Our adjusted net operating income for the quarter was $144.5 million or $0.38 per diluted share compared to $117.1 million or $0.31 per diluted share for the first quarter of 2017. The primary driver of the improvement in our financial performance for the quarter was the lower tax provision. The tax provision for the first quarter 2018 reflects the new, lower corporate tax rate compared to the first quarter of last year. Additionally, the Q1 2017 tax provision included an additional $27.2 million that was recorded relative to the IRS litigation. Regarding this litigation, in the second quarter, we have received notification from the IRS that they were notified that the joint committee on taxation had no objection to the settlement, and we are now moving towards finalizing all of the required documentation. We hope that this matter is finally completed in the next few quarters.

Losses incurred were $23.8 million compared to $27.6 million for the same period last year. Losses incurred consist of reserves established on new delinquent notices plus any changes to previously established loss reserves. As we do each quarter, we review the performance of the delinquent inventory to determine what, if any, changes should be made to the estimated claim rates and severity factors of previously received notices. We continue to see some positive primary loss reserve development, but less than we have seen in prior periods.

Specifically, we recognized $31 million of positive development on primary loss reserves compared to $49 million of positive development in the first quarter of 2017. During the quarter, we received 2% fewer notices, including those from the hurricane-affected areas than we did in the same period last year.

Notices received outside of hurricane-impacted zones were down 4% compared to last year. The level of new notice activity in the hurricane-impacted areas was nearly aligned with the first quarter of 2017. So we use the same claim rate for all new notices received in the quarter. The claim rate in the quarter was approximately 9%, which reflects the current economic environment and anticipated [cures] and compares to 10.5% in the first quarter of 2017. Keep in mind that historically the delinquent notices received in the first quarter have cured at higher rates than subsequent quarters.

During the quarter, new delinquent notices from the legacy book generated nearly 73% of the new delinquent notices received while accounting for approximately 21% of the risk in force. This speaks as much to the quality of the business written since 2009 as it does the decline in delinquent inventory of the legacy books. 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.

Reflecting the smaller delinquent inventory and the impact of the GSE foreclosure moratoriums related to the hurricanes, the number of claims received in the quarter declined 44% from the same period last year. Net paid claims in the first quarter were $82 million compared to $128 million last quarter, down 36% for the same reason.

The effective average premium yield for the first quarter of 2018 was approximately 47.3 basis points, which is down about 2 basis points from last quarter. As I have discussed in the past, for a variety of reasons, we have expected that the effective premium yield will trend lower; however, the exact amount and timing is difficult to predict. For this quarter, we saw a continued decrease in earned premiums due to acceleration of single premium cancellations, less benefits from reduction of premium refund accruals and the continued runoff of the older books that have higher premium associated with them.

I would also like to point out that the average direct premium rate we disclosed on new insurance written is lower than in previous reported periods. There is no change to the previously reported monthly BPMI premium rates, but upon review of the calculation, we discovered that the manner in which borrower paid split premiums, which account for less than 1% of our new insurance written, was being included, has been causing the weighted average to be overstated. So we changed the calculation to reflect this. In essence, what was occurring was the upfront premium was being included as recurring premium versus being spread over an average life. This change has no impact on the reported effective premium yield in this or any prior quarter.

Net operating -- net underwriting and other expenses were $48.7 million in the first quarter of 2018 compared to $43 million in the same period last year. The increase in expenses was primarily due to higher stock-based compensation, which resulted from a higher stock price at the grant date, changes to our nonexecutive compensation and employee benefit plans.

At the end of the third quarter -- first quarter, MGIC's Available Assets for PMIERs purposes totaled approximately $4.7 billion, resulting in an $850 million excess over the required assets. MGIC's statutory capital is $2.2 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 PMIERs excess by 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 created at the writing company level, we need to notify and ask the OCI not to object any dividend payments from MGIC. We also consider the resulting leverage ratio, the ability to continue our positive ratings trajectory, the debt serviceability of the holding company, and of course, changes to PMIERs. We will continue to evaluate all capital management options.

As we reported in the press release, during the quarter, MGIC paid a $50 million dividend to the holding company. We are optimistic that dividends of at least this level will continue to be paid on a quarterly basis.

At quarter-end, our consolidated cash and investments totaled $5.1 billion, including $257 million of cash and investments at the holding company. The consolidated investment portfolio had a mix of 70% taxable and 30% tax-exempt securities, a pretax yield of 2.8% and a duration of 4.2 years. Our debt to total capital ratio was approximately 20% at the end of the first quarter of 2018.

The holding company has resources for more than our target of 3 years of ongoing debt service. As of March 31, 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.

Finally, I know that many of you are interested in the possible changes to PMIERs that the GSE has recently shared with us. Unfortunately, we are not at liberty to discuss any of the proposed changes or subsequent discussions that we have had with the GSEs in any detail as we are bound by a nondisclosure agreement.

As a reminder, in December 2017, we informed you that FHFA had not yet taken a position on the proposed GSE changes. However, if they were implemented as proposed and effective on December 31, 2018, our PMIERs excess at that time would be materially lower than our current PMIERs excess of $850 million. However, we expect that we will continue to maintain an excess and that we will be able to pay quarterly dividends to our holding company at the $50 million quarterly rate. As a result, we expect the cash at our holding company at the end of 2018 would increase over the level at the end of first quarter of 2018. At this time, we have been told by the GSEs that changes to the PMIERs will not be effective prior to the fourth quarter of 2018 and there would be a 6-month implementation period prior to the effective date. We do not plan to provide updates on the status of the discussions with the GSEs and FHFA until they are finalized.

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. In regards to housing finance reform, we remain optimistic about the future role that our company and industry could 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. While it is possible that GSE reform proposals may be forthcoming from the Senate and the House, we do not think it is likely that they would be acted upon in 2018. 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.

Regarding the FHA specifically, a new director has been nominated. Based on our discussions with various parties in the administration, we believe that the FHA will not expand its footprint in housing finance in the foreseeable future. With respect to the new pilot program that Freddie has introduced, what we find most troubling about the program is not so much the new competition that it brings, rather it is the fact that Freddie and the FHFA are attracting new counterparties by creating an unlevel playing field. We believe this is a result of having 2 sets of capital and collateral requirements for the exact same risk: one that is public and transparent through PMIERs, and one that is nonpublic and lacks transparency but appears less stringent. Clearly, if a counterparty is required to hold less capital to support the same risk, then they can charge a lower price to get a similar return. In addition, we now have a government agency, while in conservatorship, expanding its reach into the primary market. Looking ahead, I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force increased by more than 7% to end the quarter at $197.5 billion. Persistency continues to trend favorably and the credit trends continue to improve on the legacy book. I expect that our insurance in force will continue to grow due to the level of new business we expect to write.

Further, I anticipate that the number of new mortgage delinquency notices, claims paid and delinquency inventory will continue to decline. And finally, we will continue to focus on capital management activities and generating very attractive returns for our shareholders. The last few weeks have been challenging, but we continue to focus on the long term. I continue to believe that there is a greater role for us to play in providing increased access to credit for consumer -- 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) Your first question comes from Mark DeVries.

Pat, appreciate all the context around the decision to cut the pricing on the BPMI. But I had a couple of follow-ups. One is, could you just share your thoughts on what you expect the industry response to be to the price cuts?

Mark, I don't know what they're going to do. I honestly can't speculate. We've not heard anything to this point, and I'll just have to leave it at that.

Okay. The reason I ask, I mean, we're getting plenty of questions from investors who were kind of concerned that this kind of touches off a series of price cuts, would -- assuming there is a response, and I don't know how there is a response now that you've kind of set a low public rate on the rate card. I guess, the fear is that it goes below that. Do you think you found a new return level that you would hope sets the kind of the new equilibrium back to where it was prior to the tax cuts?

Well, we certainly do. I mean, I think that was our objective, is to find something that was reasonable. Last year's returns in that pricing structure was generating what we believe were very strong returns. That's why we targeted to go back to that point, and hopefully that sets the bar.

Mark, this is Mike Zimmerman. Just to, maybe, add to that when you say the response. This is, I'd say, the response to what's already in the marketplace. So whether the competitors publicly respond, that's what we don't know about, but our -- what we did was in response to what's already taking place.

Understood. And then -- sorry, Pat, I think you alluded to a couple of unintended benefits, which were potential market share gains relative to the FHA and some potential offset to pressure from IMAGIN. Could you elaborate a little bit more on those points? And kind of where you think the benefits could be? And then give us some sense of how meaningful that could be?

Sure. Well, relative to IMAGIN, our understanding is, it's off to a -- based on customer feedback, it's off to a relatively slow start, and I don't mean that as a criticism. That's just where it's at as they introduce it. So there was some discussion, and I know it's being pitched that IMAGIN offers lower pricing. Again, as I pointed out in my comments, we believe that comes through capital arbitrage, not through actual expense structures. So this reduction should make us more competitive in that regard on the LPMI side in that regard or in that segment, rather. Specific to the FHA, looking at the simple math, we think as much as 10% of the FHA volume now looks more attractive to a private mortgage insurer execution. I'm not prepared to say we're going to win that 10%, but it's reasonable to think that we have a greater opportunity there on the FHA side.

Mark, this is Mike. Maybe just to give some color to that on the FHA is that, I mean, that's theoretically what's in play. But from a -- on the 97%, for example, we dropped down FICO a bit. So maybe now the 7 -- down to 720s would be potentially more attractive depending on lender preference and borrower preference. And then, in the 95% LTVs, we moved down where the bright line used to be around 720, now we're down to maybe around 700. So again, we wouldn't expect all that 8% to 10% to move to our sector, but certainly a segment of that could come that way.

Your next question comes from Sean Dargan.

I think, Tim, you said that you weren't going to give premium margin guidance, but if we take a step back and just think of the shift from refi to purchase and then pricing actions, we probably shouldn't expect it to go higher over the course of this year. Is that correct?

That would be correct, yes.

But it sounds like the penetration rate of private MI of total mortgage origination continued to increase over the first quarter, if your estimate of market share is correct, and should that continue, if we do see more of the market move to purchase over the course of the year?

Sean, this is Mike. I mean -- I think, yes, I mean, again, to statistically cite our MBS securitization data, and obviously that's lagged a little bit, but traditionally purchase, we're 90-plus -- 9% purchase activity within the segment -- within the MI space. We have 3.5, 4x higher market share when we talk about as an industry within the purchase. So as long as purchase market is growing, which is forecasted to on both the unit and dollar basis, we'd expect to win our fair share, and we outperform in the purchase market versus refi.

Okay. And just one final question. Is there an expected return on new business? And yes, I realize that Pat addressed this. But I mean, the investor fears that this is going to keep on getting closer to your cost of capital. Is there a number internally that you won't write new business below?

This is Tim. I think, from our perspective, again, a large part of where we end up back after this is closer to where the returns would have been pre sort of tax reform. And so I think we feel very comfortable from a return perspective at those levels, and we're hopeful of what we've done from a pricing standpoint that, that's the level that the pricing is at -- is going to be at.

Your next question comes from Doug Harter.

Sticking with the returns on new business. I understand you can't sort of give more detail about PMIERs. But I guess, just help us think about is there any way to think -- I guess, the thought process internally around how that pricing might change under kind of new PMIERs given that you've said that the capital require -- you have less of a cushion under PMIERs 2.0?

Yes, I guess -- this is Tim. Again, I think the one thing we have been able to see at least with the GSEs proposed at this point, so we do have information from that. We don't know if that will be the final where it is. So I guess, from our perspective at least, we had that data point as we were thinking about where we wanted to put the pricing to with the rate card that we put out. So from our perspective at least, we had that information even though we recognized from a market standpoint we're unable to discuss that with you and you aren't able to see that.

Your next question comes from Bose George.

Just one more on the price cuts and the potential, like, on how the rest of the industry responds. Just given that we already have -- there is one player who uses black box, so there is less transparency there. Do you think we could move towards an industry where there is just less pricing transparency where everyone doesn't have to kind of reset their rate cards based on this?

This is Pat. It's possible. The black box has been in the market now for a number of years, started by United Guaranty, then Arch brought in their own model and then Arch bought United Guaranty. What we react to more than anything is our customers. We stay very close to them and that is why we have not instituted the black box. But if the demand comes from them, then we'll have to react accordingly.

And then just -- when you look at the competitive landscape now versus last year, I mean, do you think the difference was that people were willing to sort of compete the tax benefit away and now that, that's happened, we go back to a landscape that's stable, which it looked like it was -- things were quite stable for an extended period before the tax reform?

This is Pat again. I think that premise is correct. That certainly what we targeted was to return to, let's call it, the 2017 returns. Again where competition lands, I'm not sure. But based on what we had heard going back to February, as I described in my opening comments, that appeared to be what they were doing. But I can't say it with certainty.

Okay. And then, actually just switching the subject. The change that Fannie is making to the loans with DTI over 45%, the -- what's the expectation in terms of how that impacts the market? I mean, I assume it goes down. But do you think it goes down meaningfully? Just curious there.

This is Steve Mackey. I think it's going to take a little while to see that change, but our expectation is that it would trim that DTI greater than 45% by a couple of points, maybe 2 to 4 at the most, but just a couple of points. Because the way they targeted that was a combination of layered risks. But we'll have to see as that takes hold, and we see the DU originations come through in the next 45 days or so.

And Bose, just as a quick reminder too to everybody, we did make a change on the low FICO scores earlier this year where we eliminated the less than 700 above 45. So certainly there is still above 700, so they have a better, obviously, demonstrated ability to manage credit, which is our main decision, but that's something we're, as Steve said, keep an eye on.

Your next question comes from Mackenzie Aron.

First question, can you just provide the dollar value of the single premium cancellations this quarter?

Yes. I think single premium cancellations or the accelerated was around $6 million.

Okay, great. And then, more broadly on NIW and with the first quarter seeming to be off to a pretty good start. Can you just update us on what you're thinking for the full year? I think last quarter, you had said, just a slight increase similar to what we saw in 2017. Does that still feel reasonable? Or how should we be thinking about growth for the remainder of the year?

This is Pat. We continue to think that we're going to be write $50 billion, which is what we had disclosed in the first quarter and the year-end earnings call back in January. So we're still on target for the $50 billion.

Okay. Got it. And then just last question. On the LPMI, I know you said off to a slow start. Does that mean you're not seeing as much pressure? I think, the expectation when the IMAGIN program came out is that the industry would be forced to compete with that pricing on the lender-paid even though it's already discounted. Can you just give us an update on what you're hearing from your customers in reaction to that news getting out into the market?

Mackenzie, if I heard -- this is Mike. If I heard the question right, it is not about relative to our positioning of the LPMI as it currently exists versus the IMAGIN program.

Yes, exactly.

Yes. So as Pat said in the comments there, the majority of our business, close to 2/3 or more, is very close to the IMAGIN pricing. Pat said we -- it's early in the program, but the initial feedback isn't -- has not been -- is not immediately accepting by the lending community. That said, let's see how that plays out. But with the pricing close by, they do prefer doing business with the MI versus directly with the GSEs, but at least that's been relayed to us in certain conversations. So we'll have to see how it all plays out. Obviously, that's where the price is at today and that's kind of where we get to the troubling part of the program, as Pat mentioned in his comments, about the lack of transparency around IMAGIN and what is the requirements, the capital or collateral requirements versus the transparency of PMIERs to figure out how is -- how does that all shake out and what is the competitive landscape look like once the program, if it is successful.

Your next question comes from Jack Micenko.

This is actually Soham on for Jack this morning. So on the direct premium yield, how much was it overstated by on average? And how should we think about your net premium yields going forward as you fade in the new rate cards?

I think, I'll take that in a couple of pieces and then try to address sort of the fall off that we saw in the fourth quarter. Again, this is Tim speaking. I think when you look at it, there are 3 things that sort of impacted it from where we were last quarter. We talked about accelerating premium on singles. We are probably -- that probably reduced this quarter by about 0.5 basis points. If you think about the premium refund accrual and how that sort of interacts with what we think about our claim rate and loss reserve, we probably had about a 0.5 basis point less in this quarter because of that as well. And then, I'd say the other basis point out of the 2 total is really sort of on a direct basis. And then -- so that's when you think about the fall off of the legacy books of business becoming a smaller part of the pie as well as through the premium reset on those after 10 years. That was sort of on a direct basis, that 1 basis point. So all in, the 2, spread across those 3 is really how we look at it.

Okay. And how should we think about premium yields going forward with the new rate card?

Well, I think from a premium yield perspective, again, we have been saying that we'd expect it to yield. We continue to trend downward. With the new rate card, obviously, we said that that's going to be off of where we are currently by 10% or 11%. So that's going to continue to put pressure on the premium yields over the next few years. It will take a while for the new business to fully get baked into that, but obviously, it's additional downward pressure on the premium yield as we go through the upcoming years.

Okay. So an expectation of faded over the next 1 to 2 years, right?

Soham, this is Mike. I'd say it's going to take -- you're going to start to feel the impact as each year goes by.

(technical difficulty)

Starting in June. And then NIW in the latter part of the year. Next year, you'd have a full year of NIW, but that's one year of the total in force. So each year, it's -- so I think it's a little farther out on a fully baked basis into 2 years. It'll take probably closer to 3, 4, maybe 5 years before it's fully reflected in the effective yield.

Okay. And then on capital structure going forward, I mean, so we've seen some of your peers take to the [ILN] market, obviously, over the past year. So I was just wondering if you guys have considered [ILNs] becoming a part of your capital structure some point down the line as a way to maybe offset that reduction in excess capital you disclosed where PMIERs 2.0 to be implemented as proposed today?

Yes. So I think, we paid very close attention to what others are doing in the industry, and we obviously have conversations about how we execute with our current reinsurance structure with traditional reinsurers versus doing something from an insurance like (inaudible) perspective. I think what we've seen the execution has been pretty good. It's something we will continue to look at whether it's for our capital relief or whether it's for thinking about risk management sort of purposes. It's something that we will continue to look at, but I think it's very good from an industry perspective. It shows one additional resource that the industry can layoff capital or layoff risk and is done over time. And it's something that we'll look at as the potential for us as well.

Got it. And just quick one on loss ratio. I mean, is there a way to get to the -- just the cure-default ratio on the hurricane book by anyway?

So this is Mike. It's difficult to do because we don't have -- we get notices that -- coming from those areas that may not have anything to do with the storms. So it's difficult -- and that's why we don't -- we broke out the notice activity in prior periods, which we'll probably stop doing going forward because those have kind of returned to normal level. But from the cure perspective, it's difficult to get that level of granularity. So the long answer is no.

Your next question comes from Phil Stefano.

I was wondering if there is any way -- it seems like the expenses were little higher than we expected. The commentary was higher stock comp and then changes to employee benefit plans. Presumably, the stock comp is more of a first quarter issue where the employee benefit plans is probably going to be more persistent through the year. Guidance in the past have kind of poked around the idea of a mid-single-digit expense growth. Maybe you can help us try to triangulate how much was driven by stock versus the benefit plans? And how should we think about expense growth in the forward quarters?

Phil, it's good question. It's Tim. I guess I would say one thing to -- from a stock perspective that would be sort of recurring too -- and it's really a function of where was the stock price on the day we granted it. And you think about it sort of replacing grants that we would have on the book 3 years ago. Stock price, especially, in January this year ran up pretty good. And so our expense is really dictated by that and it's sort of fixed in at that point we granted. So that will be recurring during the year as well as benefit plans, as you know, and not to get into too much accounting. But on benefit plans, it's all about the assumptions in there and as things change and discount rates, et cetera, you have to reflect the expense. So we think that, that's sort of baked for the year as well. We tried to -- we talked, I think, at the end of the last year expect something mid-single digits probably people sort of went around the 5% mark. Because of those items, it's probably going to be a little bit higher than that. But I think on a gross expense basis, we are maybe $6 million higher this quarter than we'd been sort of running last year. I don't think it's going to be quite that much the rest of the year. The first quarter we always have a little bit of additional expenses, but it's definitely going to be higher than last year. So I think it's right to think that it's not going to be as fully baked as the 6 increase than we had this quarter. But it's probably somewhere in that still $3 million to $4 million over where we were running last year as we move through the rest of this year.

Got it. Got it. And then in the K, there was an implication that reinsurance treaty for 2018 would probably be placed sometime in the first quarter. It feels like that was done, I guess. Is that right? And were the terms significantly different than the previous treaties?

No. I think -- yes, we're finalized with that and then putting our '18 originations onto that treaty. Terms were very similar. I think we made some tweaks around the edge as far as what's included as far as what we thought made the most sense from a capital standpoint to include. And from a margin standpoint, we think we got a little bit better pricing on it with a discussion with the reinsurance panel. But for the most part, the structure looks very similar to what we've been doing before.

Your next question comes from Randy Binner.

On FHA, you noted that you expect to pick up market share there, but I just wanted to clarify. Did you see any of that in the first quarter? Is that more of a prospective statement?

Randy, this is Mike. So (inaudible) was more prospective when talking about the premium adjustments that we made. Again using the securitization data lag, it appears because the purchase market is strong, we typically do better there than FHA. But until all the statistics come out, we won't know that definitely, but it was really more of a prospective statement to that we -- with the premium adjustments that we have made that we have become more competitive in a couple of cells that had been mentioned. So we'll -- and we'll see how that plays out.

Then on persistency, I don't know if this has come up. It was a little bit higher this quarter. Was that -- is that -- was there any onetime issues in the persistency being higher this quarter?

No, yield was like 1/10 higher. So no, it's just, I mean -- I'd say, it's in line with where we thought it would be. And some -- in order to think that we can get higher bit -- or upper 80s. And we've been kind of consistent thinking 80, 82 is probably the best as we get at a portfolio level.

Okay. And then one more little one. I think just looking at the PMIERs 1.0 disclosure in the press release, I think your required capital ticked down just a little bit. Is that just a function of the legacy business winding off? Or was there any change that was notable and in the old required 1.0 capital?

No, I think the probably the biggest driver of that from a PMIERs standpoint was, when loans go delinquent, you have a pretty sizable increase in your requirement. So with the hurricane last year into the fourth quarter, we had a lot of loans move from being current to being delinquent that we thought they would eventually cure and not pay a lot of losses on. But under PMIERs, that doesn't matter. And so that's probably the biggest delta is that those hurricane notices are starting to come out in the inventory and so that reduces our requirement.

Your next question comes from Mihir Bhatia.

I guess, my first question, just, I want to go back to IMAGIN for a second, just wanted to confirm. Was there any impact on your single premium pricing from IMAGIN? I understand that you typically do a discounted pricing off your rate card, but just so -- like was there any demand from any of the lenders, if you will, to lower pricing or more discounts?

Mihir, it's like, no is the short answer to that.

Okay. Great. Then moving on to PMIERs, you guys have been, again, not specific to PMIERs 2.0, but historically, you've run a 10% to 15% buffer. I think you've talked about having materially lower excess assets. Would we expect -- is your expectation you want to build back up to that 10% to 15% buffer? Or was some of that because of uncertainty around PMIERs 2.0 so maybe you don't need to build up like as much as excess capital? Any thoughts around just how you're thinking about that if it's -- as PMIERs 2.0 is implemented?

Yes. This is Tim. I think that is the right way to look at it. We obviously said we were targeting PMIERs 1.0 at 10% to 15% sort of excess. We're higher than that now, recognizing that we don't fully control being able to release that excess depending upon what dividends we get out. But the uncertainty around where PMIERs 2.0 will turn out was part of the reason why we'd want to hold a little bit excess, just the uncertainty there. So it's something once we know the final rules of PMIERs 2.0, I think we'll take a look at what we think is an appropriate excess to hold after that and that will be our target. That won't mean that we won't get down there right away necessarily, but we do have some options with our reinsurance contracts, for example, as far as early cancellation features on that, that we would take a look at as well. So I think once we know the final rules of PMIERs 2.0, we'll be updating where we think we should target above that from an excess standpoint.

Got it. Shifting gears a little bit just on in terms of the mortgage market and some of the business you are writing. I noticed the DTI over 45%, I think it's around 20% for this quarter -- last quarter, I guess, 2018, which is 4x what it was in 2016. Is that just a function of the market changing? Or I guess, what is driving that? And what -- how high you would be comfortable getting that? Because I assume you don't want to get back to the 40% -- 35%, 40% that you had in 2007?

Yes. This is Steve Mackey. So that change was driven in the market by changes that Fannie Mae made to their DU scorecard and what they'd allow back in July. And it really ramped up as we went through really Q4. So it's much higher than what we are comfortable with, and we've had discussions with Fannie Mae about that. That's one of the reasons why we announced the guideline changes in January to reduce that and limit greater than 45% to anything about 700 FICO. And then subsequently to that based on Fannie Mae's own evaluation, they've tightened up their rules around DTI greater than 45% and limited it further. So we expect that to come down from that 20% level, which is well above what we are comfortable with. And then, we will continue to monitor where it is and if we need to take further action, we will.

Got it. And then just last question on, now that you had a little bit of -- I guess not a little -- a quarter of tax reform under your belt, any -- are you seeing any impact in the mortgage market, maybe different impacts just from states, particularly SALT versus -- states that -- where SALT versus non-SALT is going to make a difference? Or is that just your loan sizes mitigate that impact. You don't see that?

This is Steve Mackey again. We're not seeing any change in mix of our flow business that we could attribute to tax changes. There is such strong demand and such shortage of supply across many, many markets that debt dynamics is still -- it seems to be very firm in the market and it seems to be driving things more than anything else.

Your next question comes from Chris Gamaitoni.

I'll start with the -- an easy housekeeping one. The percentage of NIW being covered by reinsurance fell to 77% this quarter. Should that be -- is that what we should think about from the new treaty?

Chris, this is Tim. I think that's probably a good level to think about. As I mentioned, as we looked at the '18 treaty, we excluded some loans that we didn't think gave us as much capital relief. So you should expect to see a little bit less from an NIW coverage on the reinsurance on the '18 treaty that you'd have seen on previous treaties because of that.

Okay. And I'll go back to the ROE question. With the rate -- the BPMI rate card change, you said it gets back to ROEs that were previously underwritten under PMIERs 1.0. Doesn't that imply that ROEs will be lower under PMIERs 2.0? So tax reform is a net negative?

Chris, this is Mike. All things being equal, yes, that's right. The more capital we'd have to hold, that would put some downward pressure on it. The question, I think, that unfortunately we can't answer because of the NDA is give you some guidance as to the level of the -- of what that incremental capital requirement would be. We hope to be able to do that yet this quarter, but that's totally dependent upon the GSEs and FHFA completing the PMIERs.

Can you give us a sense of where you think underwritten ROEs are heading in the future? I think in the past you had said kind of unlevered mid-teens returns. Just any type of rough sense would be helpful.

I think -- yes, I mean from a -- from where we were, 1.0, we said unlevered, but with reinsurance sort of mid-teens returns, and so based upon, I think, what we've seen from a marketplace perspective, I think that's the right way to sort of think about things right now as we move forward too.

Okay. And was there any -- can you give us any color of the types of lenders that were pushing for kind of lower premium rates? Was it broad-based? Was it national lenders that were nonbanks versus banks? Any type of color would be helpful to think about the future.

Yes -- sorry, go ahead.

I'm sorry. This was -- this is Pat. When we first got them, and I described them as kind of one-off deals, they typically come from larger lenders, where a competitor or 2 of ours was offering a deal in that regard. But again, as that blog became public, then the calls started coming in from customers of all different sizes. Again, we do business -- given our history and the strength of our sales organization, we do business with just everybody in the country. And so the calls were coming in from large and small. As an example, smaller customers were asking, they are very concerned about a level playing field. If you hear some of the rhetoric coming out of Washington D.C. under Dodd-Frank and things like that or changes to Dodd-Frank, it's all about making sure that the community banks get the same terms that the larger banks get. It was similar in this vein where small customers were also calling, saying, "What about us? Don't leave us behind." So it really did range the spectrum from large to mid-size to small.

Okay. And then, just another housekeeping. You said that the premium rate on -- from the BPMI card would be 10% to 11% lower. So if we just took your mix from Q1 and put the new BPMI card on it, does that get us to around 50 bps?

Yes. I think, just is slightly higher than that. But yes, that's directionally right.

Your next question comes from Geoffrey Dunn.

Tim, with respect to the mix issue of pressure on the premium yield, can you provide a rough idea of the legacy premium yield versus the '09 plus yield, so we can see where this current rate might settle out before we think about the new pricing impact?

I don't have that mix in front of me, Geoff. I think the right way, or I guess the way I think about it is we obviously saw a pretty big drop in '07 or in 2017 and that was primary the result of -- if you think about the '07 sort of book falling off and also hitting its sort of 10-year reset. Then we had a little bit of volume beginning of '08. So I think we are getting to the point where we're getting close to where we thought that the premium yield would start to stabilize. And I think to your question of, so where does it go with the rate sort of that we put out recently. That puts more pressure on it going down. So I think we can think about what we might be able to put out, but that's the way I guess I would sort of think about it is without anything from a change perspective, we still had a little bit more to go, but obviously the change in rate card will put additional pressure on that going forward.

Okay. So I think if we strip out the reinsurance impact in refunding, I guess it was about 53 bps on the core basis without adjusting for accrual, maybe bottoming 52, 53 range and then thinking about the rate card on top of that?

Yes, I think that's probably a good way to think about it. Yes.

Okay. And then, Pat, you mentioned, obviously, the pickup in call volume in March and the thought process of having to remain relevant at a certain level. Do you think your market share was hurt by the discounting in the first quarter?

Too early to tell, and the reason I say it is, I'm not dodging the question, it's more of a case of it really revolves around how often our lenders evaluate their MI partners. In other words, the phone calls start coming in to say, "Someone’s offered me a better deal, can you match it?" That doesn't mean the lender takes immediate action. I mean, some will, some will just say, "I've got to evaluate." They got to work through their own processes. So we'll know market share here in the next few weeks, but at this point in time, it's a little early to tell. But our clear view was, and my clear view was, that going forward, it had become widespread enough that, that relevance was going to be put at risk.

Is it fair to say that you could be at risk in your April, May production since we're not effective on the new rates till June?

It's fair to say that could happen. I can't tell you it will happen. But that's what when you start to see it, yes.

Your next question comes from Ed Groshans.

Similar on the market share question that was just asked. Pat, when you say relevance, like, is that relevance -- you mentioned that the calls started coming in from the smaller lenders as well as the larger lenders. Can you kind of gauge that term of how much relevance would have been at risk?

Well, I'm not going to hang a number on it, but I will give you some examples. We have been down this road in the past, where our competitors will cut prices. We had an example a few years ago, where, I believe it was Radian, and this is public information, cut their premiums by 5 bps. And I think by the next day or the next week, everybody had matched them. We -- but a more dramatic example, for those of us who've been around for a while, would be when you go back to the captive reinsurance in the early 2000s. We had competitors offering high seed captives, you may remember 40% seed captives. And we played in that market for a while and came to realize that was untenable. And we stopped doing [unhigh-seed] captives. We pulled our number back from 40% to 25%. We immediately saw a dramatic drop in our market share. Our national market share dropped inside of 12 months from in the range of 20% to just north of 19%. So I can't say that, that would happen in this case. It is a judgment call, but our experience is, and we went through this in the great recession with customers also reallocating market shares. If you suddenly see your market share drop from 20% to 5%, it is harder than all get out -- to get it back to 20%. They just -- the customers just don't look at their MI allocations every month. They look at it every 6 months, every year. And so you're sitting there. In some cases, you might find yourself on the outside. And one thing we've learned over the years is that when you're on the outside, you may be able to come back to that customer with a great case as to why you should be on the inside, but their answer is, I've already got 4 guys who are doing this or they brought the deal to me and I need to reward them. So I can't hang a number on it. It is a judgment call. But we've had this experience in the past where, if we don't take action in certain circumstances -- the way I describe it is, if -- our national market share is 18%. If we were going to lose a 0.5% of share or 1% share, I wouldn't like it. Our sales organization wouldn't like it. And we'd fight like all get-out to win it back. But I wouldn't lose any sleep over it because that's just the day-to-day ebbs and flows of the market. However, when we start to get the volume of calls that we had that say, "this is the way the market is now going to be. What are you going to do?" Then it becomes more widespread and again, that relevance gets called into question. Now in this case, one of the key things that drove our decision was the fact that we could still generate excess returns. It was not a case where we had to say, "Well, gosh, our returns are excellent. We're picking up the tax benefit and now we got to cut them by 50% or something like that." It was not that at all. We were able to make this decision, which we, obviously believe in and have the courage of our convictions and still bring the returns back to after-tax mid-teens. So it's kind of like in a sense and not to be cavalier about it, if people liked the returns in 2017, December 31, they ought to like the returns today. So again, you're asking the right question, but again, I can't give a specific number. It's a judgment call based on many years of experience and lot of dialogue with our customers. It's just so hard to get material market share back.

Fantastic, and I appreciate that color. So I was going to ask a different question, but based on your response, maybe I'll broaden it out. Corporations in the U.S. received a big benefit via the tax cut. I'm unclear why in the MI industry, the competition wound up going to a level that basically erased the vast majority, if not all, of the benefits of the tax reform. Do you have a sense of what was driving your competitors? And I know that's probably a difficult question. But what was driving the competitors to say, "This is great. We have all these excess returns that we could drive for shareholders, and we're just going to whittle them away via competition," knowing what happened in 2013 is that everyone is going to match at some point in time and so the whole industry suffers and all the shareholders in the industry suffer as opposed to receiving the benefit of tax reform?

That's a great question. And I ask that question myself all the time. And you really have to direct your questions to those who did it. I'm not sure...

You didn't mention them, Pat. So I don't know who they were. I'm kidding.

Well, you can probably guess. But it became more than widespread -- more widespread. It was not just one MI. But that is a question we ask ourselves. So again, I'm not trying to dismiss your question. I'm not sure what their motivations are. Our motivation is long term. We try to think long term. We're not trying to buy market share for the next 90 days because exactly to your point, if we drop share -- premiums 5 bps today, everybody's going to match this by tomorrow. I mean, that's the way these things happen. Now I don't know what they're going to do with this particular move, but I cannot speak to their motivations. You have to ask their management teams.

Right. And so the question I was going to ask before I got to that was, when tax reform came into place and you were looking out into the future, you had some expectation of capital generation and capital returns and maybe capital actions to, one, improve ROEs and then maybe take actions that could be beneficial to shareholders whether that's initiation of a dividend or buybacks because you mentioned capital returns is one of your -- of capital management returns is one of your target. When you -- can you -- and this is probably not fair, but I'll ask it anyway. Can you give us a sense of what you may have been thinking about under tax reform and the returns that were coming? And how much of a delta that is versus what now you'll be doing with basically 2017 returns?

Well, I think, the -- what we did was take a very cautious approach, and that was -- as an example, you talked about Corporate America. A lot of announcements in December and January about bonuses and doing different things for employees and buying back stock across Corporate America. And so we naturally looked at that to say, "Hmm, what we should we do?" But we -- it was -- we felt it was premature to take any specific action. Now we realized it was a possibility that those that look at the business differently than us may try to compete away, if you will, that increase in income due to the tax cut. So we were very, very cautious, and fortunately, we were. So I think it was more of a case of us being very thoughtful. Now to the extent that it influences our capital planning, again, we're in the same position that we were back in December in terms of returns. The cash flows, as Tim alluded to in his comments, at the holding company remained very strong. The dividend we're getting out of writing company at a $50 million run rate, we feel good about that. So those fundamentals have not changed. And so from a capital management perspective, we still consider -- or still weigh our options. We work very closely with our board in this regard, and we'll monitor things as we go forward.

(Operator Instructions) There are no further questions at this time.

This is Pat. I realize full well as I said in my comments that the last 4, 5, 6 weeks have been challenging, and I hope what we did this morning was to provide a deeper explanation as to why we took the steps we did, why we're thinking the way that we did. We always want to be transparent. We are most definitely thinking for the long term, which sometimes can cause some pain in the short term, but we believe in the long-term value of the business. We have been at this for 61 years and that's what drives us. So I thank everybody for participating on the call. And management is always available to take calls as you continue to follow up. Thank you.

This concludes today's conference call. You may now disconnect.