MGIC Investment Corp (MTG) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation second quarter earnings call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to Mike Zimmerman, Senior Vice President, Investor Relations. Sir, you may begin.

Thanks, Ashley. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 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 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 includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information we think you will find valuable.

During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in 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 party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the 8-K.

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

Thank you, Mike, and good morning. I'm pleased to report that we had another strong quarter, and we continue to make excellent progress in executing our business strategies. In a few minutes, Tim will cover the details of the financial results, but before he does, let me provide a few highlights.

The expanding purchase mortgage market, our company's market share of approximately 18%, the hard work and dedication of my fellow coworkers to deliver stellar customer service, and a higher annual persistency resulted in greater than a 7% annual increase in insurance in force, ending the quarter at $200.7 billion, a level not seen since 2009. 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 written.

In the quarter, we wrote $13.2 billion of new business which, despite a lower overall origination market due to fewer refinance transactions, was higher than the same quarter last year and we are on track to write $50 billion for the full year. The strong purchase market, along with some share gain from the FHA has helped contribute to this result. Total revenue was approximately 8% higher than the same period last year, primarily a result of higher reinsurance profit commission and investment income.

Turning to credit for a moment. Performance continues to be outstanding. A number of new delinquent notices received declined, both sequentially and year-over-year. Further, the percentage of policies that were delinquent as of the end of the quarter has fallen to its lowest level since 2002. The strong credit performance continues to be a tailwind for our financial results. Our expense ratio, while higher than last year due primarily to higher compensation costs, continues to be in the lowest in the industry. The ratio decreased from the prior quarter, benefiting from an increase in net premiums written.

Before I turn it over to Tim, I know many of you have inquired about the competitive environment within the industry. Over the last few months, all the MIs have introduced new premium rates into the market and lenders are incorporating them into their workflow. While there was a meaningful increase in the level of price competition earlier this year, from what we can observe it appears that current conditions have returned to be much like they were before the tax rates changed. From our perspective, our top priority is to remain a relevant business partner with our customers and to prudently grow insurance in force, which generates long-term premium flows and creates long-term book value growth for our shareholders.

With that, let me turn it over to Tim.

Thanks, Pat. In the second quarter, we earned $186.8 million of net income or $0.49 per diluted share, compared to $118.6 million or $0.31 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 disclose adjusted net operating income, a non-GAAP measure. While there were 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.

There are multiple drivers to the improvement of our financial performance for the quarter, including higher earned premiums and investment income, lower losses incurred and lower tax provision. Premiums earned increased primarily due to a higher profit commission. I will go into more detail about the higher profit commission in a moment. The tax provision for the second quarter 2018 reflects the new, lower corporate tax rate compared to the same period last year.

Losses incurred were a negative $13.5 million compared to $27.3 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 rate and severity factors of previously received notices.

We continue to see some positive primary loss reserve development, specifically before considering the impact of our reinsurance treaties, we recognized $70 million of positive development on primary loss reserves compared to $52 million of positive development in the second quarter of 2017. The positive development was driven by higher-than-expected cure rates, especially on notices that have been in delinquent inventory for 12 months or longer. We also saw improvements in the 4-to-11 month category.

During the quarter we received 16% fewer notices than we did in the same period last year. The claim rate on these new notices received in the quarter was approximately 9.5%, which reflects the current economic environment and anticipated cures, and compares to 11% in the second quarter of 2017.

New delinquent notices received from the legacy books continue to generate the majority of new notice activity in the quarter. The legacy books accounted for 74% of the new delinquent notices received, while accounting for approximately 19% of the risk in force as of June 30, 2018. 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 in the coming quarters.

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 36% from the same period last year. Net paid claims in the second quarter were $91 million.

The effective average premium yield for the second quarter of 2018 was 49.6 basis points, which was up a little more than 2 basis points from last quarter. As I have discussed in the past, for a variety of reasons including the follow-up to the old book, changes in premium refund accruals, changes in single premium recognition and loss ceded to the reinsurers, the reported net yield can have some volatility to it.

This increase in the premium yield in the quarter was due primarily to the positive primary loss reserve development we reported this quarter. The positive loss reserve development resulted in a decrease of ceded losses, which in turn resulted in a decrease in ceded premium earned. The positive development also resulted in a decrease of the accrual for premium refunds, as we expect to pay fewer claims from the delinquent inventory.

As a reminder, our profit commission is reported through the net premiums earned line that is directly correlated with the ceded losses incurred. As ceded losses decrease, the profit commission increases; and of course, the opposite is true when ceded losses increase. If you exclude all of the impacts of the positive loss reserve development from the Q2 results, the premium yield was about flat to Q1 of 2018.

So while there will be some volatility at any given quarter from the items that I just mentioned, we expect that the effective premium yield will trend lower in future period, as the old book continues to run off and the impact of the new premium rates take effect over the next several years. However, the exact amount in any given quarter is difficult to predict.

Net underwriting and other expenses were $44.7 million in the second quarter of 2018 compared to $41.1 million in the same period last year. The increase in expenses was primarily due to higher stock-based compensation, which resulted primarily from a higher stock price at the grant date and changes to our nonexecutive compensation.

At the end of the second quarter, MGIC's Available Assets for PMIERs purposes totaled approximately $4.8 billion, resulting in a $980 million excess over required assets. MGIC's statutory capital is $2.4 billion in excess of the state requirement.

As we reported in the press release, during the quarter, MGIC paid a $50 million dividend to the holding company. We expect a dividend of at least this level will continue to be paid on a quarterly basis. Additionally, we repurchased 9.2 million shares of common stock at a weighted average price of $10.88 per share.

In addition to writing new business and exploring new opportunities as they arise, we'll 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 notify and make sure that the OCI does not object to any dividends payment 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, any changes to PMIERs. We will continue to evaluate all capital management options.

At quarter end, our consolidated cash and investments totaled $5.1 billion, including $191 million of cash and investments at the holding company. The consolidated investment portfolio had a mix of 71% taxable and 29% tax-exempt securities; a pretax yield of 2.91%, up nearly 10 basis points from last quarter; and a duration of 4.2 years, which is unchanged from last quarter. Our debt to total capital ratio was approximately 20% at the end of the second quarter of 2018.

Finally, I know many of you are interested in the possible changes to PMIERs or PMIERs 2.0. As a reminder, in December 2017, we received from the GSEs a summary of proposed changes to the PMIERs. In June 2018, we received a revised draft proposed changes to the PMIERs, which we expect will be finalized in the third quarter of 2018 and become effective at the end of the first quarter of 2019. Upon effectiveness of PMIERs 2.0, we expect that MGIC would continue to have an excess of Available Assets over the Minimum Required Assets, although our excess will be materially lower than it was at June 30, 2018, and that MGIC would continue to be able to pay quarterly dividends to our holding company at the $50 million quarterly rate. Since we are bound by a nondisclosure agreement, we do not plan to provide updates on the status of the discussions with the GSEs and FHFA until they are finalized.

Finally, with regards to changes in PMIERs, I think it is important to point out that since we expect the proposed changes would still result in MGIC having an excess, our GAAP return should not be materially impacted by any changes that are being contemplated under PMIERs 2.0.

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 the industry can have, but it continues to be very difficult to gauge what actions may be taken and the timing of 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, either legislative or administrative, may be forthcoming, 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 of 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 recently been confirmed. During interviews following his confirmation, he has stated that it's unlikely that the FHA will reduce its MI premiums this year. He cited the FHA's most recent actuarial report, which he said gives some insight into the health of the FHA's flagship insurance fund as an indication of why no MI cuts are likely coming in 2018. Specifically, he mentioned that had the premiums been lower on the loans FHA insured in 2017, that the fund would have been the below its 2% mandated ratio.

With respect to the new pilot programs that Freddie and Fannie have introduced, we are discussing with our customers their interest in these programs, which has been low to date, versus working directly with an MI company. If successful, both pilots would account for perhaps 2% to 3% of the market opportunity over the next 12 to 18 months, so do not materially change our forecast for NIW or insurance in force growth during the period.

In closing, as Congress and other policymakers debate the future of the housing finance system, there has been much written about the role the GSEs, FHA and the private mortgage insurance industry will have in that future state. I believe this has created unnecessary uncertainty about our company and our industry. Like any company in any industry, there are always strategic issues that need to be monitored and considered that could impact the fortunes of the firm.

We are aware of the issues that could impact our industry and are actively working on them. But sometimes we need to remind ourselves that despite changes that may or may not happen in the future, right now in the present, we have a book of business that is performing exceptionally well and generating significant shareholder value, and we expect that to continue for some time. That is why when I look ahead, I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market.

Our insurance in force increased to more than 7% to end the quarter at $200.7 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 and strong persistency. Further, I anticipate that the number of new mortgage delinquency notices, claims paid and delinquency inventory will continue to decline. I continue to believe that there is a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders, and we remain committed to pursuing those opportunities.

With that, operator, let's take questions.

(Operator Instructions) And our first question comes from Geoffrey Dunn of Dowling & Partners.

Tim, can you start off by maybe commenting on the drivers of the sequential increase in the cancellation rate and also what the accelerated premium number was for the quarter, please?

Yes. I'll take the -- I guess I'll take the accelerated premium question first. I think it's right around 6.5 million for the quarter, which is pretty close to where we were last quarter as well, so not a big driver in the quarter-over-quarter change in yield and basis points. As far as cancellation, really, I think seasonality and NPL deals are really what to point to as far as that goes. Again, it could be lumpy from quarter to quarter, so we look longer term on it. But when you think about certain seasonality and then with some of the lumpiness of the NPL deals, that's what I'd point to for the change in the cancellation.

Okay. And then, Pat, I'm not sure how much you can talk about it, but in terms of this new pilot EPMI, there was a statement that the traditional MIs or the regulated PMIERs MIs are not going to be eligible on the -- at least the first pilot draft here, but it seems like maybe affiliates could be eligible. Can you confirm if any part of MGIC can participate in these deals like you do on CRT or if you were truly blocked from being part of the initial pilot?

Sure. Happy to do so, Geoff. I guess to take a step back, what are these pilot programs all about. What the FHA and the GSEs are trying to do is to explore additional options to transfer credit risk to the private sector of which we're, obviously, that. We're committed to working with the GSEs to identify different ways to explore these options and as well as bolstering the important role of traditional private MI already plays in housing finance, so that's the backdrop. In this particular case, the Fannie Mae EPMI, as you noted, they had said that they would allow affiliates of traditional MIs to be eligible in the pilot. And in that regard, we elected to participate through a subsidiary, a company called MGIC Mortgage Assurance Corporation, or the acronym is MAC, M-A-C. So we can't get into the specifics of it, we're prohibited by confidentiality agreements. But I can tell you that in terms of the financial commitment, it's relatively immaterial. It's not anything we're going to break out in our financials because it's just not big enough, but it does allow us to participate in the transaction in a sense to keep our pulse on the finger of the market. And so while we participated in a small way, it's important also to add that we still think it's important, as new transactions are developed by both Fannie and Freddie, that we still seek a level playing field. So again, this isn't necessary material, but the transactions need to be -- I'm sorry, transparent, we want a level playing field, we need to make sure that one transaction isn't an advantage over to the other. So our participation is relatively small but, again, it allows us to be on the inside and kind of watch what's going on. That said, we continue to believe that the traditional borrower-paid mortgage insurance execution is the best way to go. Best for the GSEs, best for our customers, best for homeowners and best for the housing policy process as a whole. So we remain fully committed to the borrower-paid channel as the best execution, but thought we'd stick our toe in the water here and see how this develops.

And just to round that question out, in terms of what you're lending customers' feedback has been with regard to whether or not they're interested in the program.

It's still very early. I mean, the Fannie Mae program doesn't kick in until August 1. While we're not participating in the Freddie IMAGIN program, the feedback we get is that it's relatively muted. They're still in the conversation stage and it really hasn't been anything material in terms of a move away from a traditional private MI execution.

Our next question comes from Mark DeVries of Barclays.

I have some questions just about what we should expect from capital returns going forward. I think you guys recently indicated that you like to hold a liquidity cushion at the holding company of about 3x your annualized debt service which, I guess, you're kind of at right now. So should we expect, going forward, that your capital returns should be kind of capped out at your dividends up to the holding company from the writing company, less whatever your debt service is? So in other words, something in the kind of the range of $37 million a quarter?

Yes. Mark, it's Tim. It's a good question. I think we're sitting at $190 million -- just over $190 million of capital or cash at the holding company. Interest carry is about $60 million per year. So like you said, just about that 3x multiple. So historically, we want to be 2 to 3x. We're like closer to 3x, so I wouldn't say that we wouldn't dip below the 3x. But obviously, as we implemented the authorization this last quarter, we did take advantage of market opportunity and we'll just continue to look as we go forward and balance sort of the cash that we need at the holding company to make us feel comfortable, as well as what the market sort of presents us from an opportunity standpoint.

Okay. And should we still expect that going forward the dividend up to the holding company is going to be in that $50 million range or is there room for you to continue to request that, that move higher?

Mark, I think those are conversations we always have with our regulators, the OCI. I think as results continue to perform well, it's something we'll have a discussion with them about. We feel very comfortable about the $50 million level and the ability to continue to get that, and we'll continue to have conversation about whether that could go higher in the future.

Okay. And then when might you think about reestablishing a dividend for your shareholders?

That's one of the other tools that we talk about with our board as an option there. I think we've talked about in the past the certainty around the dividend flow up to the holding company. Right now, we do ask the OCI for the dividend and sort of just that ability to see that clearly and to make it meaningful. So it's something we'll continue to talk about, but there's nothing that's on the horizon on that.

Okay. And then, finally, just one clarification about one of the points you made, Tim. I think you still expect the average premium to drift down. Do you mean that relative to where we are this quarter or relative to maybe where we were last quarter before we got this kind of nonrecurring benefit related to the positive developments?

That's a good question. I'd say relative to where we were first quarter. Again, we had some items this quarter that -- they're not onetime items because they can happen in any period, but they're unpredictable. But I say if you look back to where the first quarter was, we still expect it to even trend down from there.

Our next question comes from Jack Micenko of SIG.

This is actually Soham, on for Jack this morning. My first question was on your loss ratio this quarter. So you're at the 70 million in benefit. But as I look at the cure-to-default ratio last quarter and this quarter, they were sort of at the highest levels they've been since we've been tracking the data and that also seems to be coinciding with the hurricanes last year. So do you guys think we might be getting somewhat of a false read on that metric for the past 2 quarters? And how much of that, if any, played a part in the loss ratio reported today?

I think you definitely have to control for the hurricanes and the cure activities that's flowing out because of them, and that's when we look at from a reserve standpoint. That's what we do. I think from a hurricane standpoint, when they happen, we talked about the amount of reserves that we put out for the hurricanes was just short of $10 million. I'd say that we still think it's in that ballpark. And so when we look at the reserves in total, we're really focused on what we believe are non-hurricane related items and are looking at that -- those sort of statistics and data to determine what we should do from a loss reserve standpoint.

Okay. So the cure-to-default ratio reported this quarter is sort of not the core -- that you don't look at it as a core number, it's something lower?

Yes. So this is Mike Zimmerman. I think you had less impact on that, so it's returning closer to be a core number. Certainly, the first quarter we had a lot of the surge game, if you will. In the fourth quarter, relative to those activities, the cure started flowing through; in the first quarter, it started to come down. In the supplement we put out right now in those zones that have been indicated as disaster areas, they have about 7,800 delinquent units in those markets. Going in a year ago, it was about 6,000 or so. So it's still a little bit elevated, but we're getting back closer to a core number.

Okay. Great. And then the other one was on capital allocation. A little surprised to see that you guys used up half your purchase authorization in one quarter, especially given the upcoming PMIERs announcement. But should we take this to mean that if shares continue to remain at these levels, you'd be comfortable using up the entire authorization in the coming quarters, despite the expiration being next year? Just trying to get a sense of the cadence.

Yes. I think it's tough to predict exactly how much we're going to use over the next quarter or 2 quarters. The authorization does go through the end of 2019. We look to take advantage of what the market conditions were. From a PMIERs standpoint, we've talked about even though we'll have a material decrease, we still feel very comfortable with the dividend flow to the holding company, so we took all those things into account. We thought about how much we'd be repurchasing under the authorization this last quarter.

Okay. And then just lastly on the pricing changes that you guys announced last quarter. There were at 3 weeks there in the quarter that you had a lower public rate card compared to your peers. So I was just wondering if you saw any outside benefit in volume in June? And does that change your $50 million (sic) [$50 billion] target of NIW in any way?

This is Pat. I mean, 3 weeks activity was not at all material. It hasn't changed our forecast of $50 billion.

Our next question comes from Douglas Harter of Credit Suisse.

On the new rate card, it appears that some of your peers had a more granular rate card. Just wondering if anything you saw at the end of June or in July has you concerned or has changed any of the mix of the business you're seeing?

This is Steve Mackey. So our new rate card that matched some of our competitors went into effect July 9. We did see some, I would say, noise in the mix in June, but that was expected and nothing that we were concerned about.

Our next question comes from Chris Gamaitoni of Compass Point.

The -- can you give us a sense of the kind of your outlook for the required asset level? It's been roughly flat for a few quarters and it looks like the decline from -- declining delinquencies is being roughly offset by growth. And I know there'll be a step-down from PMIERs 2.0, but I'm just trying to think about the strong profitability levels of the sub and roughly kind of flat recent growth in required assets indicates you're going to be building a lot of excess capital in the future, adjusted for the onetime step down from PMIERs 2.0.

Yes. Chris, I mean, I think, we look at it -- obviously, there's 2 parts of the growth in the actual assets versus the required assets. As you said, the required assets, we have some tailwinds by the default inventory continuing to decrease and obviously, there's some more capital required for the default inventory. So as that comes down, it helps us. But as we continue to grow the book and our in force grows, we have requirements associated with that. So I don't see a lot of, under the current construct, I don't see a lot of change in that. It's really more of the asset growth, quite frankly, that I will call as the difference. And as you said, even though it's cash flow based, the standard earnings ultimately turn into cash flow. And so I think that is the right way to think about how the excess could grow over time, again, keeping in mind sort of a onetime reset when 2.0 becomes effective, which we believe would be end of Q1 of 2019.

How do we think about how you think about capital returns in that construct, assuming you get a step down and you continue to build available assets above the minimum? And is there a level of the stock price that you don't want to buy back shares or just how you kind of view the stock price opportunity versus other opportunity?

Well, I think we look at, obviously, being able to deploy it back to the business from a return standpoint and that's a critical component of what we think about. I think the other parts that we haven't talked about much recently is what do we think the excess needs to be over PMIERs, and we've been waiting a little bit for 2.0., but we also don't control that fully because it depends upon the dividends flowing out of MGIC. But we do have some levers. We'd always talk about the reinsurance and being able to scale back on the reinsurance to bring that more down the line. So I think you have to mix all those in as far as excess we want to hold. We've talked about 10% to 15%. We're obviously far in excess of that right now, and so we have some more flexibility there. When 2.0 comes around, that will eat into some of that excess. We'll look at that. We'll look at deploying into other -- into the business, into the credit risk transfer as other alternatives and try to weigh those returns and think what we're getting the best value from.

Okay. And can you give us a sense of kind of the outlook of what you think the pace of investment income will look like in future periods given asset growth and reinvesting at higher rates or investing the cash at higher rates?

Yes. I think from a yield perspective, we saw a little bit of an increase this quarter. I think with our portfolio, we don't look to move big chunks of it at one time. We normally let things to mature and sort of move for the most part. So that's really going to be something that moves over time as opposed to seeing anything dramatic really happen, I think, from a yield standpoint. Obviously, as we continue to accumulate more cash on balance sheet, that helps. But from a yield standpoint, we'll position over time, and you'll see that sort of move, I'd say, slowly is my expectation.

Okay. And this question is probably for Steve. It looks like the pace of new delinquencies from the pre-2010 vintages, the pace of decline is picking up. Is there anything specific you're seeing? Do you think it's HPA related? Is it just burnout?

Our intuition at this point is that it's HPA related, but that's something we're monitoring and making sure we're trying to get under. But it does look like it's probably driven by HPA.

Our next question comes from Phil Stefano of Deutsche Bank.

I wanted to keep on the repurchases. And I think the last question started to get into the valuation but it was embedded in a bit of a string of questions there, and I wanted to push on that. I guess is there a valuation where it makes sense and you're more active or there's a valuation where you start to, I guess, it feels a bit rich and you dial back on repurchases? Any guidance you can give us there or thoughts around that.

Yes. Phil, I mean, I think it's tough to give you anything overly prescriptive. It is something that we look at and we obviously think about what we think the value of the company is versus that versus other alternatives we have for the cash at the holding company. And I can tell you, I guess based upon our actions this last quarter, we thought that that was the right trade-off to make, to repurchase the shares, and that's the consideration we'll go through in the future when we think about that as well.

Okay. And if I heard it correctly, the pace of new notices improved or it feels like it accelerated in second quarter '18, and that was partially driven or maybe mostly driven by a moratorium in the hurricane states, is that right?

Are you talking about the notice activity or are you talking about the collective standpoint?

Yes. Correct, the notice activity.

This is Mike. Phil, this is Mike. Sequentially, we saw fewer notices go through. But on a year-over-year basis, the hurricane -- I mean, I'd say there's very muted impact there. So as Steve just said, we did -- we had been kind of trending around 9% or 10% year-over-year improvement ex the hurricane activity. It took a step better improvement year and that's -- in our intuition this is HPA related, but we're going to continue to monitor that to see.

But the number of new notices was down mid-teens year-over-year?

Yes.

Was that related to the moratorium of foreclosures in the hurricane states?

Not -- that wouldn't affect the notice activity. That would -- yes, foreclosure and pays, but not new notice activity.

Our next question comes from Mackenzie Aron of Zelman.

Two questions for me. First, is this quarter's tax rate a good run rate for the rest of the year?

Yes. I think we're just right above 21%. I think the right way to think about it is that, that being the new federal tax rate, we're going to be in that ballpark for the rest of the year.

Okay. And then, Pat, one for you, just kind of more big picture. Is there any updated thoughts that you can provide us on how the company is thinking about the pros and cons of a black box system? And now that another competitor is out in the market, just any updated thoughts on whether that's something to look into.

Well, I think you picked up on it. The market seems to be moving in that direction where 2 MI companies are already out there, and I think we know at least one other who's done a filing. So directionally, we think that will continue to evolve and that the black box pricing will come to fruition. I can't comment on the timing of that, where we always start is with our customers and what their needs are. And if our customers demand that we need to go that way, we will be prepared to go there. So it's clearly a great risk management tool. Steve and his team love the capabilities, but we're monitoring it closely. We'll evolve to that as the market does. And again, we'll do so in conjunction with our customers.

Our next question comes from Bose George of KBW.

In the press release, you guys noted that if the price cuts had been in place in 1Q, the premiums would have been down by 8.5%. And initially when you'd given -- you had announced the price cuts, you had noted the impact would be 11%. So I mean is the difference really be some of the adjustments you guys made in your pricing since then or -- just curious about that.

Bose, this is Mike Zimmerman. The 11% refers just to the borrower-paid monthlies. And the reverse is the 8.5% that we reported in the Q is the weighted average basis of the entire mix of business. So that's really the difference between those 2 numbers.

Okay. That makes sense. And then the percentage of the loans with the DTI over 95, just ticked down a little bit to 19%. And I guess last quarter, the GSE made some changes in that. Is that percentage -- do you expect that percentage to go down further?

Yes. This is Steve. If -- the DTI is greater than 45, has come down a little bit, I would anticipate that the pricing changes that the MIs have in the market now where in BPMI it's being priced directly, will continue to push -- put pressure downward on that percentage. I do believe that Fannie Mae is looking at additional updates to DU that would also put downward pressure on that percentage. We continue to believe that it's too high and we're monitoring it very closely.

Great. I did mean above 45, thanks for that.

Our next question comes from Randy Binner of B. Riley.

Just a few cleanup items. So Pat, in your opening comments you mentioned your market share had something to do with FHA share gain, I think.

Yes.

Could do you expand upon that a little bit, please?

Well, our indications are that we are gradually -- we as an industry, are gradually winning share back from the FHA. I think if you go back a year or so, it was probably in the 14% penetration rate. It's evolved to 15. We think it's moving closer to 16%. So it is gradual. But in that regard, we have more available to us and we're winning.

But nothing yet as far as terms and being changed there potentially as they look to the credit quality of their book?

No. No. We have not seen anything. I mean, I think with the new commissioner now finally in the chair, those decisions, if at all, are on the calm. So nothing so far in that regard. The way we've been winning it is just day-to-day business, no major changes.

Great. And then you mentioned pricing conditions have returned to your pretax [cut] level. And I think that comment is in regard to earlier in July that the MIs published rate cards. We can see that and it got to kind of a more consistent level, but is that comment also true for the black box writers? That you think what they're doing from a pricing perspective, from what you can see, is kind of back to the pretax cut level?

We haven't observed anything different. Meaning, that it's just pretty much where it's been. It's kind of as I said in my opening comments, it's kind of settled in.

Yes, yes. Okay. Sort of back to equilibrium there. And then I guess the last one is just the net investment income was a little more meaningful. Just want to make sure there was nothing unusual or onetime in nature on the better yield you picked up on the investment portfolio.

Nothing onetime in nature. The one thing, again, as I mentioned earlier, we looked to reposition the portfolio. There's probably some geography as we go forward that we're a little bit going to be more overweight taxable versus munis, which means that we get a little bit more benefit on net investment income line and have to pay for it on the tax line, but nothing as a onetime item there.

Our next question comes from Mihir Bhatia of Bank of America Merrill Lynch.

If I could just follow-up real quick on the FHA comment and gaining market share. Now this is before the price cuts came into being. So do you expect the private MI, obviously, have lowered prices and the FHA, at least the initial comments as you indicated are, that doesn't seem likely that they'll lower prices. So do you think that will help with this continuing to gain market share? Do you think that pace accelerates? Just want to see how you guys are thinking about that.

This is Pat. There's opportunity for us on the margin. I think when we looked at the price adjustments over the course of the last couple of months, the private MI execution became more attractive in certain cells, certain segments, if you will, and we think that's on the margin. I don't think there'll be a major shift, but it is moving in our direction.

Okay. And then just was curious, some of your competitors have been a little more active in the capital market transactions, if you will, to layoff risk. How do you guys think about that? Is that something you've looked at, something you'd be interested in?

Yes. It's something that we've looked at over time and continue -- we'll continue to look at potential execution there. We have traditional reinsurance program in place. And so I think as we think about it, we think about the potential to use -- I think you're referring to insurance-like notes as full of capital management as well as some risk management and want to make sure it can sort of, I guess, coexist with our existing. But it's something we'll continue to look and obviously, pay close attention to what the others in the industry are doing. I think it's a positive for the industry that people are able to layoff in various forms the risk that we have, whether it's through more traditional reinsurance market or through the capital markets. So that's something we'll continue to keep an eye on.

Got it. And then just my last question, we've seen in the last year with IMAGIN and then Fannie's EPMI program, alternative products, if you will, to lender bid. Can you talk about the potential for something like that, that the GSEs could do on the borrower bid side? Obviously, there's some charter implications there too, but just the lender-paid stuff, so I was just curious. And some of that, if you will, the risk around that or have you heard anything? How you would think about that?

This is Mike. I mean, relative to the programs that they both introduced, they do appear to be interested in the singles market, whether it's lender or borrower-based singles. We have not heard anything about them looking at monthly premiums and rolling out programs for monthly premium plans and similar cases. At the end of the day, it's going to be about the product, the terms and the conditions and offering that the industry and the lenders and the GSEs collectively offer to borrowers. So again, back to one of Pat's comments why we are participating not only in CRT but all of these other pilot programs with Fannie Mae, is we need to stay close to that while continuing to bolster the traditional borrower-paid monthly. So we haven't heard anything about either agency rolling out monthly -- borrower-paid monthly programs.

And I'm showing no further questions in queue at this time. I would like to turn the call back over for any closing remarks.

This is Pat. I will just close by thanking everybody for your interest in the company and participating in the call today. Thank you.

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