MGIC Investment Corp (MTG) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Third Quarter Earnings Call. (Operator Instructions) It is now my pleasure to turn today's program over to Mike Zimmerman. Please go ahead.

Thank you. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the third quarter of 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've 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.

Thanks, Mike, and good morning. I'm pleased to report that while we continue to position the company to achieve our long-term strategic goals, we are also generating and delivering shareholder value on a quarterly basis. In a few minutes, Tim will cover the details of the financial results, but before he does, let me provide a few highlights.

First, PMIERs 2.0 was finalized in late September with an effective date of March 31, 2019. While there were several operational items addressed, the biggest financial requirement change that impacted us was the elimination of the credit for premium related to the pre-2009 books. This is an amount that was already diminishing as the legacy book ran off, and while it lowered our excess over the minimum PMIERs requirement, for all practical purposes, it does not impact the execution of our strategic plan. The good news is that the rules are now published, and while they certainly could change in the future, we expect some period of stability, which allows us to more confidently execute our business and strategic decisions.

The quarterly financial result reflects the favorable operating environment we are experiencing, especially as it relates to employment, wage growth and housing demand and the very low credit losses of recently written business. The main driver of our future revenues, insurance in force, grew nearly 8% over the last 12 months, ending the quarter at nearly $206 billion. The increase was driven by higher annual persistency plus the addition of new business.

While the decline in refinanced transactions has resulted in a smaller overall origination market, on a year-to-date basis, our new business writings are up about 6% to over $38 billion compared to $36 billion last year. Of course, I would like to do more, but whatever business we write must generate appropriate returns for the risk we are taking.

In addition to the great effort of the MGIC team, one of the reasons we have been able to outperform last year's writings is because the purchase market continues to show durability. I believe that this durability reflects the strong demand for housing as consumers, especially those below the age of 45, continue to feel confident about their future economic prospects. Absent any major policy shift in Washington, which I will discuss later, I think the bigger near-term challenge to the size of the origination market and, therefore, increased NIW, is housing supply.

Moving on to credit for a moment. Performance continues to be outstanding. The number of new delinquent notices received declined both sequentially and year-over-year. Further, the number of policies that were delinquent as of the end of the third quarter has fallen to its lowest level since 1997. The strong credit performance continues to be a tailwind for our financial results.

Before I turn it over to Tim, I know many of you will have questions about the competitive dynamics within the industry. Suffice it to say, we are a very competitive industry. After all, there are only 6 private mortgage insurers. We are, I believe, the only company that provides the market insight about premiums on new business each quarter. We provide this information along with delinquent and claim activity by book year to help you better assess the complete risk and return profile of our company versus treating premium rates and loss expectations as discrete activities. This information, when combined with market share data, can provide meaningful insights into the primary mortgage insurance market both periodically and over time, including potential returns on capital.

When it comes to competing in the market, our strategy is fairly straightforward. We want to remain a relevant business partner with our customers in order to allow us to prudently grow insurance in force, generate long-term premium flows and ultimately create long-term book value growth for our shareholders.

Recently, we have seen competitors introduce or discuss the introduction of a more robust pricing approach, often referred to as a black box. When economic conditions and housing markets are strong like they currently are, then premiums can be lower because expected losses are lower, but the reverse is also true.

To date, black box has often been viewed as a price tool, and our view of black box is best thought of as a more granular risk-based pricing tool that assists in managing risk and shaping the insured portfolio. While premiums are, of course, important, at the end of the day, we are an insurance company who acquires and manages risk, and our focus in doing so is to maximize returns and, thus, shareholder value.

In terms of deploying a black box into the market, we have consistently said that we start with our customers. It is apparent to us that the market is moving in this direction, and we will be ready to compete regardless of how premiums are delivered. In terms of a broad market adoption, I see it to be a 2019 event.

With that, let me turn it over to Tim.

Thanks, Pat. In the third quarter, we earned $181.9 million of net income or $0.49 per diluted share compared to $120 million or $0.32 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. 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 were multiple drivers of the improvement in our financial performance for the quarter, including lower losses incurred, higher earned premiums and investment income and a 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 third quarter of 2018 reflects the new, lower corporate tax rate compared to the same period last year.

Losses incurred were a negative $1.5 million compared to $29.7 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 reviewed 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.

As Pat mentioned, we have been experiencing a favorable credit cycle. This continues to benefit us as credit performance continues to outperform our expectations and, again, resulted in positive primary loss reserve development during the quarter.

Specifically, before considering the impact of our reinsurance treaties, we recognized $59 million of positive development on primary loss reserves compared to $38 million of positive development in the third quarter of 2017. The positive development was driven by higher-than-expected cure rates in all age groups.

During the quarter, we received 15% 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%, which reflects the current economic environment and anticipated cures, and compares to 10.5% in the same quarter last year and marginally lower than the 9.5% we used last quarter. New delinquent notices received from the legacy books continued to generate the majority of new notice activity in the quarter. The new books accounted for just 28% of the new delinquent notices received while accounting for approximately 82% of the risk in force as of September 30, 2018.

As evidenced by the quarterly results, the new delinquent activity from the larger, more recently written books remains quite low, reflecting their high credit quality as well as both recent and current economic conditions. While continuing to diminish in number, 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, the number of claims received in the quarter declined 33% from the same period last year. Net paid claims in the third quarter were $87 million.

The effective average premium yield for the third quarter of 2018 was 49.3 basis points, which was approximately flat to last quarter. As I have discussed in the past, for a variety of reasons, including the fall-off of the old book, changes in premium refund accrual, changes in single premium recognition and losses ceded to reinsurers, the reported net yield can have some volatility to it.

The premium yield this quarter, like last quarter, had a benefit from the positive primary loss reserve development we reported this quarter. The positive loss reserve development resulted in a lower level of ceded losses, which in turn increased our profit commission.

As a reminder, our profit commission is reported through the net premiums earned line that is directly correlated with ceded losses incurred. As ceded losses decrease, the profit commission increases; and of course, the opposite is true when ceded losses increase.

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.

If you include all of the impacts of the positive loss reserve developments, the premium yield would be approximately 2 basis points lower than the 49 basis point run rate. While there will be some volatility in any given quarter, we expect that the effective premium yield will trend lower in future periods as the old book continues to run off and the impact of the new premium rates takes effect over the next several years. However, the exact amount in any given quarter is difficult to predict.

Net underwriting and other expenses were $46.8 million in the third quarter of 2018 compared to $42.9 million in the same period last year. The increase in expense was primarily due to higher stock-based compensation, which resulted primarily from our higher stock price at the grant date and changes to our nonexecutive compensation.

As we reported in the press release, during the quarter, MGIC paid a $60 million dividend to the holding company, which is an increase from the $50 million level for the last few quarters. This increase reflects the fact that MGIC is generating meaningful capital and that we expect to be able to continue to do so for the foreseeable future. We expect a dividend of at least this level will continue to be paid to the holding company on a quarterly basis, subject to the approval of our board. As a reminder, before paying any dividends, we notify the OCI to ensure it does not object to any dividend payments from MGIC.

At quarter end, our consolidated cash and investments totaled $5.2 billion, including $261 million of cash and investments at the holding company. The consolidated investment portfolio had a mix of 77% taxable and 23% tax-exempt securities; a pretax yield of 2.98% and has a duration of 4.2 years. Our debt to total capital ratio was approximately 20% at the end of the third quarter of 2018.

At the end of the third quarter, using PMIERs 1.0, MGIC's Available Assets totaled approximately $4.8 billion, resulting in a $1 billion excess over the required assets. If PMIERs 2.0 were effective, the excess would have been $600 million. Under PMIERs 2.0, as of the end of the third quarter, we have approximately a 15% cushion over the required assets. Now that PMIERs 2.0 is finalized, we are in the process of determining what level of cushion would be appropriate on a going-forward basis. At the end of the third quarter, MGIC's statutory capital is $2.5 billion in excess of the state requirement.

Before turning it back to Pat, I want to provide some insights on how we think about capital allocation. When we discuss strategies to allocate the capital that is expected to be created annually, we first estimate how much capital is needed to support the new business that is being written. We have also started to become modestly more active with the GSE risk transfer transactions that require capital support, and we expect to remain active in this area. Of course, we are also setting dividends, now at a $240 million annual run rate, to the holding company.

So when we take a step back and think about the uses of capital, these items account for the substantial majority of capital that's being created annually.

Regarding the appropriate level of excess to PMIERs, it is difficult to actively manage to a specific target, given the regulatory requirements for paying dividends. Some level of cushion provides a nice buffer against adverse economic scenarios that are bound to occur at some point in the future as well as the potential for additional capital requirements from the GSEs.

We do have periodic options to adjust the level of quota share reinsurance we utilize, which could impact the amount of excess, but the level of reinsurance we have today creates a level of excess we do have, plus it helps with our dividend capacity.

In addition, PMIERs is more restrictive than the state capital standards, we believe. Having an excess, not unlike reinsurance, is beneficial to our dividend paying discussions with the OCI.

So where does that leave us on the topic? Currently, we have $100 million remaining under a share repurchase program that does not expire until 2019. While we were not active in the third quarter, as we are waiting for PMIERs 2.0, I would expect us to be opportunistic in the future. We will continue to analyze the best options to deploy capital that maximizes long-term shareholder value.

So as Pat mentioned, we are happy that PMIERs 2.0 has been published and are hopeful that they remain stable for some period of time, as it makes analyzing our business and capital decisions a bit easier.

Finally, I know many of you have seen the 8-K we filed announcing the insurance-linked note offering. For legal compliance reasons, I cannot comment further about the transaction at this time.

With that, let me turn it back to Pat.

Thanks, Tim. Before moving to questions, let me quick -- let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain optimistic about the future role that our company and industry can have, but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. We continue to be actively engaged on this topic in Washington.

While it is possible that proposals to change the GSEs either legislatively or administratively may be forthcoming, we do not expect anything substantial to occur in 2018. Perhaps after the midterm elections and as a new FHFA director is nominated, you will all get more clarity. But meanwhile, 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, we continue to think it is unlikely that the FHA will reduce its MI premiums and that the primary focus by the FHA is on improving the operational policies and procedures in the reverse mortgage business. The next FHA actuarial report is due in mid-November, which should give some insight into the health of the FHA's flagship insurance fund and may provide some clues as to the direction of FHA in 2019.

With respect to the new pilot programs that Freddie and Fannie have introduced, based on our discussions with lenders, the interest in these programs has been low to date and have gained the attention of Congress. The lack of interest could be a result of existing LPMI pricing from MIs being reasonably competitive as well as the fact that more singles business has migrated over to borrower-paid over the last several months. We will continue to monitor both pilots as they run their course over the next 12 months or so, but currently, they do not materially change our forecast for NIW or insurance in force growth during this period.

In closing, like any company, in any industry, in order to build on past success, you must be aware of strategic issues that could impact the fortunes of the firm. We are aware of the issues, whether they are legislative, competitive or credit-related, that could impact our industry and are actively working on them. While we do not know exactly how these issues will or will not impact our future, we do believe that currently, we are writing high-quality new business in what is expected to be a low loss environment, and that this business is being added to a book of business that itself is performing exceptionally well, and we are generating significant shareholder value and we expect that to continue for some time.

Our company and industry offers many solutions at a great value proposition for lenders and consumers to overcome the #1 barrier to homeownership, which is the down payment. And in spite a lot of the media coverage to the contrary, mortgage credit is available and remains affordable for many consumers.

I believe that our company is well positioned to acquire and manage mortgage credit risk in a variety of forms, supported by a robust capital structure that includes our strong balance sheet and where appropriate, reinsurance treaties and the capital markets. That is why when I look forward, I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force increased by nearly 8% to end the quarter at $205.8 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 the 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's a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders, and we are committed to pursuing those opportunities.

With that, operator, let's take questions.

(Operator Instructions) You have a question from the line of Mark DeVries from Barclays.

Tim, I know you said you can't comment on the ILN transaction, but I was hoping you could comment on kind of the expected benefits from doing that. And what I'm getting at is, are you doing this mainly because you just view it as attractively priced reinsurance that helps reduce tail risk? Or do you also expect this to really kind of help with your capital flexibility or ability to take capital out of the writing company?

Mark, it's Tim. Unfortunately, anything related to the ILN, I can't comment on specifically.

Okay. What we'll then -- just bringing it back to capital then. Can you update us on your thoughts around establishing a dividend here? I mean, I know you've said before you consider that, you want to make sure that you've got a reliable, sustainable dividend from the writing company. It seems like you've gotten that. Obviously, they continue to allow you to increase that. Just updated thoughts on the dividend versus buybacks here.

Yes, Mark, it's something we always have discussions with -- internally, the management with the board about our options for any sort of capital return. Dividend is definitely one of those things that we consider on top of the share repurchase plan we have in place. You're right. I think our view is that we want to have more certainty around if we establish a dividend to shareholders, sort of the size of it, that it'd be meaningful and that it would be something that we'd be able to sustain and potentially grow over time. And to do that, I think we have to have a good amount of comfort that the dividend is flowing out, as you said. We've been able to increase it up to $60 million. That helps in the discussion, but we still have discussions with the regulator about it. So we'll still have those discussions internally about dividends back to shareholders, but at this point, we're not ready to announce anything.

Okay. And then just one more question for me. Has the FHFA given you any sense of when they will next revisit PMIERs? How stable will these standards be?

It's Mike Zimmerman. No, look, the only clues we have for that is what's in the announcement when we put them out is that the FHFA has put out the Capital Conservator Framework (sic) [Conservatorship Capital Framework], or the CCF, as they mentioned that the PMIERs could be revisited once CCF is finalized. But we don't have any timing as to when CCF will be finalized. So like you, we do expect some period of stability with these, but exactly when they revisit them, next -- I guess the next milestone is when CCF is finalized.

Next question is from the line of Phil Stefano from Deutsche Bank.

So we got the second quarter where new notices have declined pretty substantially year-over-year. And last quarter, when we talked about it, I think there was some speculation it might be home price appreciation driven. But it felt like it was early days in the process and you didn't have a great feel for if there was something more secular happening, I guess. Did you have an update on the thoughts around that? And the extent to which maybe this larger-than-expected new notice declines could persist?

This is Steve. We've seen this trend continue into Q3, but it hasn't been anything that has been -- I'm able to isolate to a particular segment of our portfolio. So don't really have a lot more color to add. It's just coming through. It's a nice trend and it's coming through across a bunch of different sectors. We just can't isolate it.

Got it, okay. And so we have the FHA director earlier this week talking about the potential for -- I don't know if fraudulent is the right word, but that's the word I'm going to use, fraudulent home appraisals. To what extent, if this was more epidemic, could this impact the mortgage insurers? To what extent is this a risk for your business?

Yes, this is Steve again. I view this more as an operational risk because it would have to be a credit event happening and that there was a fraudulent appraisal. I do think that the tools that the GSEs have in place, the collateral that evaluate appraisals are really strong tools and they help minimize this kind of risk. But I see this as -- it's a potential problem needs to be rooted out, but I don't think it's one of significance that would cause us to take any additional action than managing our underwriting and quality control program, which we do today.

Got it. Understood, understood. And one quick one on capital management. Is there anything that's being in the negative on the (inaudible) position that would prohibit you from having a normal and common shareholder dividend?

Anything from a negative at the writing company, you're saying, Phil, that would prevent us? No, I don't view that as being one of the things that would be a requirement or a barrier.

Our next question is from the line of Bose George from KBW.

Actually, let me just try one more on the ILN. Once it's issued, there's obviously going to be the premium impact. I mean, could we assume that there will be an offset through some capital management or some other change?

Bose, this is Mike. I mean, I appreciate the attempt, but unfortunately, we're just not going to be able to make any comments about the ILN or potential implications of it.

Okay. No problem. It's worth a try. Actually, let me switch to a couple of other things. The percentage of loans with DTI over 95 ticked up again. It's up at 20%. Given the GSE changes, I'd have thought that number would have trended down a little. Any sort of color on that?

Yes, this is Steve, and I think the DTI is over 45. It's something that we continue to monitor. We've seen it start to trend down since we are pricing for it in our rate card and many of the others are pricing for it in their rate card. We continue to be engaged with the GSEs and specifically, Fannie Mae on this topic and have encouraged them to take action in their upcoming releases of DU 10.3, but we continue to look at our mix and decide what other actions similar to the actions that we took in January with the FICO overlay that may be appropriate to continue bring that volume down because I think we still believe it's too high.

Okay. And then, just on the percentage at 95, as that ticked up a little bit as well. I mean, do you think that could continue to go up? Or has that kind of reached a more stable level?

I think it could continue to grind up. This is Steve again. There's a couple of factors here. There's the purchase market and the strong home price appreciation that we've seen in many sectors of the economy. So that puts a little bit pressure on LTV. And then, the GSEs have affordable programs that they're working on to use to meet their housing goals and scorecard metrics. That's another component in the mix. And actually, some depositories have similar programs that help meet their CRA requirement. So all of those things, I think, could continue to drive 97s or above 95s up marginally like we've seen over the last year.

Our next question is from the line of Randy Binner from B. Riley FBR.

My question is on the expense ratio, which is better than we had expected in the quarter. So could you outline, I guess, one, if there is an impact favorably there from the reserve activity. I'm not clear on that. But if not, if there was other items in there that might have been onetime or if this is a level of expense we can expect going forward.

Randy, this is Tim. I think it is really driven by the reserve release. When we release reserves, we get a couple of benefits there. We get a benefit to the profit commission, which we disclosed in the additional information. So that is a help to the line. Similar level to the last quarter. But then we also get benefit to we estimate accruals for premiums we might refund on claims that we have paid, so when we have a lower estimation of the number of claims we paid, we get that. So I view the ratio much more of a function of some strength on the revenue line as opposed to anything with the expenses.

And then, I guess, a follow-up there, is there -- I mean, you mentioned claims are down 33% year-over-year and you want to keep a good claims [staff] for the future. But is there -- are there any other initiatives we can think about how you could kind of scale better to what you're seeing from a business perspective for expenses looking at 2019?

Yes, just to be -- from an expense standpoint, our claims department, for the most part, flows through the loss line. So that as that comes down, we really don't [get it] on the expense line.

I meant, just more broadly, yes.

Yes. That being said though, I mean, it's something we're always focused on. And we think with the scale of business -- this business scales well with volume on the front end, in particular, but that doesn't mean that we shouldn't be looking to how we can be as cost-conscious as possible but making sure that we deliver the right value and have the right people and processes in place. And I think that's something we've always been committed to and we'll continue to be committed to.

Next question is from the line of Jack Micenko from SIG.

Tim, in your capital priority commentary in the prepared remarks, you didn't mention the convert. And so -- I'm going to try to say this the right way. In thinking about a theoretical capital event, with the cost of around 3% and a convert of around 9%, plus the added benefit of share reduction, am I thinking about that the right way, from a -- or are there considerations that I'm not factoring in around a theoretical thought process?

Yes, I think we always have to think about capital. And we've talked about the 9% in the past. We've talked about sort of the economic trade on those. And to a large extent, the trade was in a pretty narrow range. And as stock price goes up, there's more value from the equity and the value of the 9% on them diminishes. And when stock price goes down, sort of the inverse happens. And really, the cash -- for the most part, that we'd use to do anything there would be at the holding company as opposed to the writing company. We just have the one, I'd say, it was an unusual circumstance where we were able to use some of the capital [on JC] that the regulators were nice enough to let us to do, that's before we really return dividends on to the extent that we have at this point. So I view that as cash at the holding company that would be used for anything we do with the 63s. And we look at it on a regular basis, and it's something that we will continue to look at but haven't thought it to be something that was be sort of right economic trade for us from what we see other than that one time that we saw it.

Okay. That's right. The difference from where it's at, and the holding and the writing is a big piece I left out. I think Pat, you had talked earlier -- and we're hearing rumblings that the FHA is probably going to tighten as the HECM book continues to be problematic. And are you hearing anything broadly about what that could look like? Is it pricing? Is it standards? Maybe non-qualitative standards? Is there anything that you're hearing, you're seeing that could -- where they could lead to charge on the FHA side into the end of the year?

Candidly. No. I mean, I haven't -- I know they're looking at HECM hard. But we don't play in that world, so it's hard for me to give you an intelligent answer on that.

Okay. But on the flow business, thinking about tightening on the flow to protect the...

Yes, I'm sorry. I misunderstood. On the flow business, I think again, their focus is operational and HECM. And as a result, I think Brian has said publicly they don't expect to take premiums down, which is good news for us. So I think they're just trying to wrap their arms around what they have. They've been public in their comments about the operational issues they're having, their back office, their systems and things like that. They continue to seek money, funding, if you will, to improve their technology. And I think until they get their arms around that, relative to how they compete with us will remain relatively static.

Next question is from the line of Jordan Hymowitz.

Can you talk about why the pricing for premiums continues to go down? Or singles, rather. I'm sorry.

You said about the effective yield?

The average premium rate on new interest written for the singles is 1.53%, and it was like 1.65%, 1.67% in the past couple quarters. I would have thought with the increased capital allocated to that a couple of quarters ago, that would have stabilized to their level.

Jordan, this is Mike. I mean, so both -- the singles for us is a pretty small percentage of the portfolio or of the new writings, about 15%. There's a mix of about half and half lender-paid and borrower-paid. But on the majority of the business, the 85%, the borrower-paid monthly, that's down in the quarter about 6.5%. And that reflects the pricing changes that would have took place earlier in the year. So I think as we've talked over the last several quarters on these calls is that we expect that to continue to drop -- lower as the whole business -- as that business comes in with lower premium rates reflecting the higher credit quality of the portfolio.

So I understand why the volume is down because of the capital. But why is the premium rate down as well? That's what I don't understand.

This is Steve. Just to emphasize what Mike was saying, I think most of this is just subtle changes in the mix between LPMI and BPMI -- or borrower-paid singles, and then just slight change in the mix of business that we've seen come in. We've seen a big drop in LPMI singles over the last 6 to 9 months so the mix has shifted. So I think that's how we're seeing there's a little bit of noise in those numbers due to the shift in the mix.

Next question from the line of Doug Harter from Crédit Suisse.

Can you just sort of -- with the question on the reserve releases. Can you talk about kind of the assumptions you have in your current reserves and how that -- how those loss assumptions compare to -- or claim assumptions compare to kind of the new notices that you're experiencing?

Yes, Doug. It's Tim. I mean, from a new notice standpoint, as we mentioned, we're putting the notices on at a 9% claim rate, which is down from 9.5% last quarter and down from the 10% level last year. I would say that's probably as low as we've seen it, obviously, in quite some time. But obviously, the credit environment reflects sort of what's happening there. And then, when you get to the reserves, it's really much more about how long the loans have been in the default inventory that really impacts that from an aging standpoint. So with the reserve release, obviously, we've continued to see favorable results compared to where we've estimated. I'd say it's been across the board. I'll give the example of, we said that on new notices, we're putting them out 9% now. That's informed by recent history that we've seen. And a year ago at this point, we were putting them on, I believe, at 10.5%. So obviously, that has given us some favorable development. But also, on some of the older loans that have been around in the inventory for a longer period of time, we just continue to see them resolve at a much better sort of cure rate than what we would have expected.

Next question is from the line of Geoffrey Dunn from Dowling & Partners.

Tim, just first, could you give the refunded premium number for the quarter, please?

Yes, from an accelerated singles, it was 6.6 this quarter, which is pretty much in line with where it was last quarter.

All right. And then, following the, I guess, June, July repricing, any sense of a market share shift away from the FHA as a result of the better execution in GSE MI?

This is Pat, I'll take that one. It's a gradual shift. We continue to win business back from the FHA EMI industry to us in a broad sense. So directionally, yes.

But nothing noticeable from the pricing shift?

No.

No.

Okay. And then lastly, how are you thinking -- I think you alluded to this in your comments, but how are you thinking about your '19 QSR ceding level? Given the different options you have for reinsurance right now, it seems like maybe 30% doesn't necessarily make sense going forward. But at some level of QSR, it seems -- it sounds like you want to maintain. So can you just elaborate on that?

Yes, Geoff, this is Tim. I mean, I think we like having the quota share in place, the forward commitment nature of it, the relationships we have there and some of the flexibility we've had to be able to change things as the rules have evolved from PMIER. One of the things we've tried to build in is flexibility, and it's one of the advantages of using traditional reinsurance market because flexibility as far as really cancellation, early termination of the agreements, which we disclosed we are coming up on sort of our first option associated with that on the '16 and prior business. So I think for us, it's always looking at sort of the mix of what loans are covered, the capital benefit we're getting from them, what we might want to put on, on new business and sort of seeing where we are from an excess standpoint and how that really impacts a number of things, not least of which is our regulator's view on dividend capacity. So I think it's a very good question. It's something we talk about every year quite frankly, the size we want it to be. But there's a number of variables to consider, including debt, which is already in place, and what we can do with that.

And what -- can you just remind us what exactly your first option as of year-end on the existing QSR?

We have an option to terminate the '16 and prior QSR, it's at our option at the -- starting at the end of this year and then every 6 months after.

(Operator Instructions) Our next question is from the line of Mackenzie Aron.

Just one, Pat, I think it's for you, on the black box pricing and the pilot program. Is there any more you can elaborate on how far along you are in the pilot program and just what's changed recently that gives you the confidence that's the direction that customers are moving in? And are you seeing a change from the big money center banks that have traditionally preferred the rate card for various reasons?

Sure, Mackenzie. It's just more of an evolving situation. We stay very close to our customers. We do business with just about everybody in the country. We know the other MIs or many of the other MIs are out there talking about the black box. So in terms of market intelligence, there seems to be a greater acceptance of that. There's already 2 of our competitors that are in the market with those types of pricing mechanisms. There's probably more of them to come, perhaps even this quarter. But it does take a while to adopt it. You can't just make the announcement and say yes, we're there. And I'm talking about from a customer perspective, not the MI perspective, for them to actually get it through, particularly the big banks, as you referred to, to get it through their operation. So we're confident that we're not -- we may -- we haven't announced it yet that we're actually in the market doing it. That said, I'm not worried that we're losing any business or going to lose any business relative to that execution. So I think we continue to keep our ear to the market, talking to those big banks that you referred to as well as everybody else. There are still those that are not a big fan of it, but they see the handwriting on the wall. And so I think we'll be ready when we need to be ready. And again, in the broader sense in terms of actual adoption, you may see announcements, but in terms of a broad adoption, by that, I mean, across a spectrum of lenders, I think that will be into 2019.

Our last question is from the line of Mihir Bhatia from Bank of America.

If I could just quickly follow up on that one on the black box pricing and the deployment. Would it be -- I think you said that you -- if you needed to deploy it, you could. So does that mean that you guys have already spent the expenses or what have you to start -- to develop that solution? Or would there be like some kind of incremental onetime expense as and when you were to announce such a thing?

No, it's a gradual evolution, and we've been working on the black box for a while. So there's not going to be any onetime expense charge relative to that. We just continue to work on it, tweak it. And when we're ready to be -- ready to introduce it to the market and the market calls for it, that's the most important thing, when our customers say, yes, you've got to compete, we'll be ready.

Excellent. And then if I can ask, just at a higher level, if you will, just on the housing market. Clearly, right now, in general, credit has been very favorable, but I was curious with the back up in rates, and if you will, the lower origination volume, are you seeing anything from the originators, maybe where they're trying to expand the credit box a little bit that gives you concern? Or maybe you're seeing -- you're rejecting some more applications or what have you of geographies that you're maybe a little less excited to participate in? Is there anything at all across that picture that you're starting to see that gives you pause at all?

This is Steve. I'll take that. Generally speaking, other than the DTIs greater than 45 and the 97s that we've talked about a little bit, those are areas that we're monitoring closely. But other than that, no. Still have very favorable views about housing in general across the country, and originators in this cycle do not control the credit box. The GSEs do, and most of our business goes the GSE route. So the GSEs are the ones controlling the credit box. The mortgage market is not competing on credit at this point in time, which is different than prior cycles. And I think that's very favorable. So we feel very good about where the market is right now both from a credit standpoint and from a housing standpoint.

Great. And then if I can -- just along those lines, I think the MIs, in general -- at least, I'm not sure if you have, but at least some of your competitors have talked about through the cycle loss rates of 20%, if you will. Given that originators aren't competing as much on credit and credit is tighter, is there any update to that view that you could share? Or is 20% still the right way to think about loss rates through the cycle?

This is Tim. I mean, I think our view is you have to think, in general, through the cycle that times are very good right now and we have to be thoughtful about what can happen. I think you're right, credit is outstanding right now and we're not seeing anything related to that. But we're an insurance company that -- we'd expect that there could be something in the economy that could be a hiccup at some point, that will cause some incremental losses. But I think from a pricing standpoint, we still like to think through the cycle, and we still zero in to sort of loss rates that we historically sort of zeroed in on.

We have a follow-up question from the line of Phil Stefano from Deutsche Bank.

Maybe I missed this from the prepared remarks, Pat. Last couple of quarters, you had talked about a $50 billion NIW number for the year and a, let's call it, a high teens market share. Any changes to the thoughts around that?

No, we still think we'll be about $50 billion. I mean, we're seeing a slowdown in the fourth quarter, which is seasonally I'm talking about the origination market would ultimately translate down to us, or find its way down to us. But we're still at the $50 billion mark.

There are no further questions. You may continue.

Okay. This is Pat. We'll close up the call. Thank you for your interest in our company. And with that, I'll say go Brewers, and we'll sign off.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.