NMI Holdings Inc (NMIH) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NMI Holdings, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. John Swenson, you may begin.

Thank you. Good afternoon, and welcome to the 2018 third quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Chairman and CEO; Claudia Merkle, President; Adam Pollitzer, our Chief Financial Officer; and Julie Norberg, our Controller.

Financial results for the quarter were released after the close of the market today. The press release may be accessed on NMI's website located at www.nationalmi.com under the Investors tab.

During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that the guidance of such statements as current at any time other than the time of this call.

Also note that on this call, we refer to certain non-GAAP measures, and in today's press release and on our website, we've provided a reconciliation of these measures to the most comparable measures under GAAP.

Now to our conference call. Brad will open with an overview of the quarter. Claudia will provide an update on customer development and Rate GPS. And then Adam will discuss the financial results in detail. After some closing remarks from Brad, we'll take your questions.

With that, let me turn the call over to Brad Shuster.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter, National MI again delivered record financial performance and continued momentum in customer development and portfolio growth. We also achieved notable success with Rate GPS both from a customer and risk management standpoint.

Adjusted net income for the quarter was a record $31.8 million or $0.46 per diluted share. And our GAAP net income was $24.8 million or $0.36 per diluted share. Adjusted return on equity for the quarter was a record 19.7%. And GAAP ROE was 15.4%. In the third quarter, we wrote a record $7.4 billion of new, high-quality mortgage insurance, including record monthly NIW of $6.7 billion. We achieved strong NIW growth while maintaining our risk management focus and remaining disciplined from a risk-return perspective. Primary insurance-in-force was a record $63.5 billion, up 47% compared to the third quarter of 2017 and 9% over the second quarter of 2018. We continued to deliver the fastest rate of growth of insurance-in-force in the industry.

We have been pleased with the early success of Rate GPS across the board. Customers are excited and adoption has been rapid and seamless. The granularity of the engine has quickly proven its impact as a risk management tool in the credit mix of our third quarter NIW. In addition, the expected returns on our Rate GPS production are strong and in line with our long-term goals.

Rate GPS is an important tool in our comprehensive and industry-leading risk management framework. Our approach to credit risk management has 3 foundational pillars: granular pricing through Rate GPS, individual risk underwriting of the policies we ensure and comprehensive reinsurance coverage of the in-force portfolio. Rate GPS allows us to dynamically consider a far more granular and expansive set of risk attributes in our underwriting and pricing process. In doing so, we have the ability to actively manage the flow of risk into our portfolio, quickly adjust to any changes that may emerge in the market and ensure that we are appropriately paid for the full range of risks we are insuring.

As an insurance company, we believe it is critical to know each of the risks in our portfolio. It is one of our founding principles, and it's why we individually underwrite or validate the overwhelming majority of the loans we insure. Over time, we expect that our approach will allow us to achieve better loan-level loss performance and more quickly identify emerging trends in our production. The third pillar of our credit risk management framework is reinsurance. We have the most comprehensive reinsurance program in the industry and have secured coverage through our quota-share and ILN transactions on nearly all of our in-force portfolio. These structures provide us with low-cost PMIERs funding capacity as well as real loss absorption under stressed scenarios. In doing so, they work to enhance our return profile and significantly mitigate the impact of credit volatility on our future results.

Credit risk management is at the core of what we do, and it is why we have invested in deeper underwriting, Rate GPS and comprehensive reinsurance solutions. In the immediate term, these tools are driving the growth and quality of our in-force portfolio. Over the long term, we believe they will insulate us from stress events and improve our return profile across all market cycles.

Shifting to Washington matters. The FHFA and GSEs published revisions to PMIERs last month. As we indicated on prior calls, the new rules will take effect on March 31, 2019. We expect to remain in full compliance upon effectiveness of the revised framework and estimate that our excess PMIERs position will increase modestly under the new rules. We continue to engage with policymakers on a range of topics from the FHA's footprint to housing finance reform and continue to believe that any near-term administrative or legislative developments would be benign to positive for our industry.

Regarding the IMAGIN and EPMI programs, we don't believe they have gained any traction with lenders and we have not seen any impact from the pilots on our business.

Now for a few comments on the broader market. We have seen equity market volatility increase in the last month tied to rising interest rates, trade tensions and slowing global growth. The private mortgage insurance market, however, remains healthy, and we are optimistic as we look forward. Industry NIW is on pace to exceed $300 billion in 2018, a post-crisis high and private MI penetration in the purchase market has been trending up as more and more first-time homebuyers are relying on us for down payment support. Recent forecasts indicate continued purchase market growth through 2019. The long-term market opportunities for private mortgage insurance and National MI is compelling. More and more Americans are reaching the age when they typically buy their first home, and we believe the American dream of homeownership is alive and well. Employment and household incomes are growing and credit quality remains strong.

As I wrap up, I'd like to take a moment to discuss the succession plan we announced in early September. I'm delighted that Claudia Merkle will take over as CEO and join our board effective January 1. I will take on a new role as Executive Chairman. As CEO, Claudia will run the company with responsibility for day-to-day management, financial performance and the execution of our operating strategy. As Executive Chairman, I will continue to lead the Board of Directors, oversee special projects and communications with key stakeholders and collaborate with Claudia to define the company's long-term strategy and goals.

Claudia was part of our founding team and has been a close partner as we built National MI over the last 6 years. This transition fulfills a succession plan that we have been working on for some time and is part of a broad and robust governance structure at National MI. Claudia is taking on this new role at an exciting time for us. We are delivering exceptional financial performance, driving value for more and more customers every day and doing so with an industry-leading risk management approach. I'm excited about the opportunity ahead for our organization and expect Claudia and our broader team will continue to build on the tremendous success we've had to date.

With that, let me turn it over to Claudia.

Thank you, Brad, for the introduction and kind words. I'm looking forward to working with you, the rest of our management team and the board to continue building on the strong foundation and success we've achieved at National MI.

When I reference our strong foundation, I'm talking about our people, our customers, our portfolio and our financials. We have an incredibly talented group and a winning culture built on integrity, accountability and mutual respect. We are a great place to work, recognized nationally by Fortune magazine for 3 years running. And our people come in every day energized and excited to help our customers and their borrowers. Lenders feel this and respond to it. They trust us. And we have been able to grow our relationships day-by-day, quarter-by-quarter. We have consistently grown our wallet share with existing customers and attracted new lenders with our value proposition of certainty and service. We're proud of what we've achieved to date, and there is still a substantial market opportunity in front of us. We believe that we can leverage the advantages of our certainty of coverage, sensible servicing approach and technology platform to continue building a durable and valuable customer franchise. At the same time, we will remain disciplined in our approach to credit risk management, policy pricing and overall expenses. We will prioritize high-quality risk and aim to continue building our insurance portfolio in a responsible manner to seed future financial results.

With that, let me turn my comments to the third quarter. We generated record NIW of $7.4 billion in the third quarter, up 13% over the second quarter and 20% over the third quarter of 2017. Our monthly NIW of $6.7 billion was even stronger, up 17% over the second quarter and 38% compared to the third quarter last year. We're proud of our ability to deliver record volume while maintaining our risk-return discipline. The strong growth that we achieved in the quarter was organic, driven by strong customer engagement from our sales force, lender recognition of our value proposition and real excitement about Rate GPS in the market. Our team continues to deliver by activating new customers, providing them with superior high-touch service and winning an increasing portion of their MI business loan-by-loan.

In the third quarter, we activated 35 new customers. Year-to-date, we have activated 84 new lenders, including 14 from the top 200, representing nearly $9 billion of NIW opportunity. This expands our active customer base to well over 950 lenders. Rate GPS continues to be a standout success. More than 95% of our customers are currently using the platform and more than 80% of our volume is coming through Rate GPS. We continue to see keen interest from lenders in how Rate GPS can benefit them and their borrowers. Rate GPS was conceived as a risk management tool, allowing us to price for a far greater set of risk variables than can be considered on a rate card, and in doing so, more actively shape the credit profile of our new production. The impact can be seen on our third quarter credit mix. Our mix of 97% LTV volume declined to 9% in the third quarter compared to 15% in the first quarter of the year. Our mix of greater than 45 DTI volume declined to 17% in the third quarter compared to 23% in the first quarter. And our mix of below 680 FICO volumes declined to just over 4% compared to 7% in the first quarter. In the last few weeks, a number of our competitors have indicated they are actively piling their own rate engines or signal their intent to do so in the near term. We believe this is positive for the long-term health of the MI industry and reinforces our decision to be a leader in the development of risk-based pricing technology.

With that, I'll turn it over to Adam.

Thank you, Claudia, and good afternoon, everyone. We had another strong quarter and achieved record results across a number of key financial metrics. We generated record quarterly NIW of $7.4 billion and continued the rapid growth of our high-quality insured portfolio. This drove record net premiums earned of $65.4 million, record adjusted net income of $31.8 million or $0.46 per diluted share and record adjusted return on equity of 19.7%. These results reinforced our strong outlook for our business and financial performance.

Now to the details. Primary insurance-in-force was $63.5 billion at quarter-end, up 9% from $58.1 billion at the end of the second quarter and up 47% compared with the third quarter of 2017. At quarter-end, monthly products 74% of our primary insurance-in-force, up from 72% at the end of the second quarter and 66% at the end of the third quarter in 2017. We expect that monthly product will continue to increase as a percentage of insurance-in-force. 12-month persistency in the primary portfolio was 86.1%, up from 85.5% in the prior quarter. This is to be expected in a rising rate environment and is a positive for us, given the pricing and credit profile of our in-force portfolio.

Total NIW volume was $7.4 billion. Monthly product represented 91% of NIW compared to 88% in the second quarter and 79% in the third quarter of last year. Purchase originations represented 95% of our volume in the quarter. Net premiums earned for the quarter were $65.4 million, up 6% from the second quarter and up 47% compared to the third quarter of 2017. We earned $2.6 million from the cancellation of single premium policies in the quarter, down from $3.1 million in the second quarter. Reported yield for the quarter was 43 basis points compared to 44.2 basis points in the second quarter, reflecting the impact of our most recent ILN transaction, which closed in late July and a decreased contribution from cancellations. We expect that net yield will trend between 41 to 42 basis points in the fourth quarter as we see a full quarter's impact from the second ILN and cancellation revenues slows seasonally.

Gross premium yield, which is before the impact of reinsurance, was 49.8 basis points compared to 50 basis points in the second quarter. Weighted average rate on NIW across all products in the third quarter was approximately 45 basis points, down from 51 basis points in the second quarter and consistent with our expectations. Our rate on NIW reflects the industry-wide changes that went into effect in June and the meaningfully higher credit quality of our new production in the third quarter. Our current pricing continues to support our strong mid-teen return goals. Investment income was $6.3 million, up from $5.7 million in the second quarter. We expect investment income will continue to increase as our investment portfolio grows and we realize the benefit of higher new money rates.

Underwriting and operating expenses in the third quarter were $30.4 million compared to $29 million in the second quarter. As discussed on our last call, expenses in the quarter included $1.9 million of costs related to our ILN offering in July. Our GAAP expense ratio in the quarter was 46.4% compared to 47.1% in the second quarter. Adjusting for ILN related costs, our expense ratio was 43.6% in the third quarter. We have the lowest absolute expense footprint in the industry and continue to focus on efficiently managing our cost base. We expect that our expense ratio will continue to trend down in future periods. Claims expense in the quarter was $1.1 million, benefiting from strong performance in our default population. The underwriting environment remains healthy and our in-force portfolio continues to perform better than initially expected and priced.

We had 746 notices of default in the primary book as of the end of the third quarter. This compares to 768 notices at the end of the second quarter. Our third quarter loss ratio, defined as claims expense divided by net premiums earned, was 1.7%. We continue to expect that our loss ratio will be in the low to mid-single digits over the next few years. Interest expense in the quarter was $3 million, reflecting the full benefit of spread savings that we achieved through the refinancing of our term loan in May.

Moving to the bottom line. Net income for the third quarter was $24.8 million or $0.36 per diluted share. Adjusted net income, which excludes periodic transaction costs, warrant fair value changes and net realized investment gains or losses, was $31.8 million or $0.46 per diluted share, up from $27.4 million or $0.40 per diluted share in the second quarter. Effective tax rate for the quarter was 22.1%. We expect our effective tax rate will increase modestly to approximately 22.5% in the fourth quarter.

Cash and investments were $893 million at quarter-end, up from $855 million at the end of the second quarter. As of September 30, we have $51 million of cash and investments at the holding company. At quarter-end, total available assets under PMIERs grew to $702 million, which compares to risk-based required assets of $399 million. Excess available assets at quarter-end were $303 million. Excess available assets would have been $326 million under the revised PMIERs framework if applied at the end of the third quarter. Shareholders' equity at the end of the third quarter was $660 million, equal to $9.96 per share, which compares to $630 million or $9.58 per share at the end of the second quarter.

Our GAAP return on equity was 15.4% in the third quarter. Our adjusted return on equity was 19.7% in the quarter compared to an adjusted return of 17.8% in the second quarter. The embedded earnings potential in our $63.5 billion primary portfolio is significant, all the more so as persistency increases. We continue to expand our NIW footprint and grow our insurance-in-force at by far the fastest rate in the industry. Our loss performance is favorable. We continue to scale into our fixed expense base and an accelerated pace. And we're realizing an increasing contribution from investment income as our portfolio grows and new money rates increase. We pair this with pricing and risk management discipline, the demonstrated power of Rate GPS to manage our credit mix and comprehensive use of reinsurance funding solutions to provide PMIERs capacity and mitigate volatility in our results. Our the long term, we expect that all of these factors together will allow us to continue to deliver strong mid-teen returns that are significantly in excess of our cost of capital.

With that, I'll turn it over to Brad for his closing remarks.

Thank you, Adam. We are excited about our record performance in the third quarter and our continued momentum in terms of new customer activations, Rate GPS success and insured portfolio growth.

Private MI market conditions remain strong, both in terms of volume and credit performance. We have final clarity on PMIERs 2.0. We get a modest boost and expect to continue funding our growth capital needs efficiently. And we have a great team in place, with Claudia taking the helm next year. I'm optimistic about the opportunity ahead for National MI and our ability to continue to outperform.

With that, I'll ask the operator to come back on, so we can take your questions.

(Operator Instructions) Your first question comes from Mark DeVries with Barclays.

So first question, interested to get your thoughts on kind of the size of the PMIERs cushion you want to hold here. And what your capital needs look like just given your expectations for growth and insurance-in-force the -- your expected capital generation from earnings and future reinsurance? And also kind of what you currently hold in excess of what you think that buffer needs to be?

Yes, sure. Mark, it's Adam. Why don't we about the long-term cushion expectations and then bring it back to current. So obviously as we're in growth mode. We're holding significantly in excess of what we would view as an appropriate cushion over the long term when we're self-funding. I think our goal at all times is to manage our capital structure conservatively and make sure that we've got enough to satisfy our regulatory needs. Most importantly, to honor the obligations that we're making to our customers. Over the long term, we think that translates to operating with roughly at 10% to 15% cushion above our minimum required amounts. But obviously as we've seen in the most recent period, when we're executing transactions like the ILN it bolsters, our funding position in a meaningful way, and that puts us far above that 10% to 15% cushion target for a period of time. In terms of what that translates to for our capital expectations in the near term, all the success that we've had this year in the markets and the equity market, the debt market, establishing our revolver, our quota-share the second ILN, it gives us a lot of runway. And importantly, when we post a 19.7% ROE, we're also organically generating capital at an accelerating clip every day. So as to a specific pipeline through the end of next year, call it, we've got an important decision to make on our quota-share for 2019. We have the ability to flex the cession rate between 20% to 30%. And so that's an election we have to make by December 1. It's something that's in focus for us now. Beyond that, we really need to see how our volume develops, how persistency develops and what the opportunity is for us in the market. But our current thinking is that we don't have a specific need to be back in the market through 2019 as a growth capital matter. We may choose to do something in the ILN market as a risk management matter, but that's likely a decision that would come at the back end of '19 or perhaps early '20.

Okay, that's helpful. And then next, could you just give us a sense of what type of customers are pushing back on Rate GPS and why they are?

Yes, Mark, most of the customers that are pushing back have a proprietary system and they just can't operationalize it. With that said, they're working on it. Many of them are looking to go on to Rate GPS, and we're also helping them to get through the quotes that they need to achieve. So that's the key reason.

And our next question comes from Chris Gamaitoni with Compass Point.

The -- could you give an updated amount for the ILN cost moving forward with the second deal? It was $1.5 million in the third quarter?

Yes, so even though we executed the deal at the end of July, we picked up, I would say, greater than proportional amount of the cost in the third quarter, because there's an offset that comes through in the form of investment income of the assets that are held in trust. And so those assets weren't fully deployed in the earliest days of us closing that transaction. So we'd expect something like 80% to 85% of the cost that we would expect to incur in -- sort of on a peak quarterly basis came through in the third quarter. So assume roughly $1.8 million coming through in the fourth quarter as a peak amount.

Okay, and is that -- with that disclosure, is that the entirety of the deduction to the premium revenue? Or is that like a net number, excluding the impact from the investment carry?

That is -- it's all netted together. That -- we are -- our reinsurance premium is the net amount. So it's $1.8 million sales will be coming through.

Perfect. And then moving to the investment portfolio construction. I was just wondering if you could update us on the duration of that portfolio and what type of new money yields you're putting on.

Yes, the duration on the investment portfolio was 3.53 years at quarter-end. The pretax book yield for the quarter was 2.9%. New money rates we're seeing north of 3.5%, probably about 3.6% at this time.

And our next question comes from Jack Micenko with SIG.

Looking at the NIW trends over the last, let's call it, I guess, year-to-date, it seems like on the FICO side, you're moving sort of mid-band, let's call it $720 million to $759 million, at the same time, LTVs are coming down. And I'm curious if that's more what of what the market is giving you, or if that's, I guess, the response to GPS and sort of picking your spots on the market?

Yes, it's exactly that, Jack. It's Adam. This is -- we are actively targeting the pockets of risk that we think yield the best risk-adjusted returns, and that factors in our view of how loss experience will develop over time. I mean, so we've made a conscious decision that we're able to express the Rate GPS in a very precise way to target certain bands of business. And that's why you've seen our 97% LTV volume and our greater 45% DTI volume come down in such a notable way. That's an NMI-directed outcome.

Okay. And then you're big in California. California is obviously a big housing state anyway and it's home also. But with top line sales slowing and price appreciation slowing and some headlines over the last several months, any thoughts proactively about the risk mix as it relates to state exposure?

No, we're broadly diversified nationally. In terms of our California concentration, California in any given period represents about 11% to 12% of the total U.S. housing market. I think for us, it's about 13% of our portfolio. So we're not outsized, I mean, our concentrations in California. We do actively consider MSA-level risk trends. Through Rate GPS, we have the ability to actively target certain bands not just in terms of borrower profile, but also in terms of geolocation of properties. And so we will consider that on a continued basis. But as to where we sit today, there's nothing specific about California that we view as a whole different from our broader views.

And our next question comes from Mackenzie Aron with Zelman & Associates.

First question on operating expenses. Adam, is there anything -- just trying to remember year-on-year, I know I think it was 4Q '17 there was some onetime expenses. Is there anything we need to be aware if you're thinking about kind of the full year run rate for operating expenses?

No, there's nothing of note that's going to come through in the fourth quarter of '18. Fourth quarter '17 we didn't have any one-off expenses per se. I think we just noted that there were some timing differences that shifted items between the third and the fourth quarter. Yes, there's always the potential for small amounts like that to come through. But the guidance that we provided at the outset of the year, which is take the second half of '17 and annualize that and grow that by about 10% still holds for our expectation for the full year '18.

Okay, perfect. And then just one more going back to the Rate GPS. Just curious, the industry is moving pretty quickly to follow along with the Black Box migration. Are you seeing any change in the appetite among some of the large lenders that historically, have been more resistant to adopting more granularity across different MI providers? Is that stand starting to shift at all among some of the customers?

Yes, Mackenzie, it's Brad. Yes, we agree with you. You're seeing an increasing migration of our industry to providing fully integrated risk-based pricing. I think others are in various stages of development. But we expect that evolution to occur. And we think that even a large -- some of the large lenders that may not have been able to implement initially, I think, through our conversations with them, they understand the benefits of what something like Rate GPS can provide and how it can get the best rate for their borrowers. So I think they are working on ways to be able to utilize this and basically improve their business. So we think that evolution is well underway and it won't take long to get to where it will be the norm.

And our next question comes from Randy Binner with B. Riley FBR.

I have a couple of follow-ups. I guess, just going back to expenses, because they are progressing well. I'm trying to understand, I guess, the cadence of how that might improve in 2019 off of that 43.6% number, that quick core number Adam that you mentioned.

It's on the expense ratio, yes.

Yes, on the expense ratio. So did that -- is that -- I mean, we kind of start from there and we go down how much in 2019? I'm just trying to get a sense of how much that can improve moving ahead?

Yes, I don't think we're at a point where we're going to provide guidance either on expense ratio or what we envision for full year expenses in 2019. But suffice it to say, the discipline that we've demonstrated this year is something that we continue to be focused on. We would absolutely expect that the pace of our operating expense growth itself, dollars of growth will slow. As we go forward, we wouldn't expect that we'll be delivering or incurring 10% growth in our operating expense base year-on-year. So the continued discipline in terms of the dollars that we're spending coupled with the growth in our portfolio and the growth in our net premiums earned, we should see continued benefit through 2019 in our expense ratio. So the longest term we expect that as you look out several years will ultimately land with an expense ratio that's, call it, approximately 25% or so.

That's helpful. And then I also have a follow-up on Rate GPS. So I appreciate all the proof points on higher credit quality that you've been able to capture via this pricing tool. And I'm just trying to reconcile that. So you've captured lower risk. Ostensibly, that means you collected a little bit less premium, I would think. I'm just trying to square that with the comment that most of the participants out there, the lenders who didn't participate is because of operational issues. So in other words, is it really operational issues? Or are you kind of selecting out lenders that produce kind of lower credit quality business?

Yes, the operational issues are real on there, because they have proprietary loan origination systems, and it's just a little bit harder to get into the queue and make some changes and connect with us. So that's the key reason why they are not moving over to our Rate GPS system. But many have indicated that they would like to. They recognize that as all the MI companies roll out their Black Box, everyone has a little bit of different risk approach. And that's sort of good, especially good for the lenders that have a great manufacturing process. So it's truly their own system operations.

Yes, Randy, what we're selecting with Rate GPS is the pockets of production from all of our lender customers that we think have better risk-adjusted return characteristics and will yield better loss performance. So you -- of course, as you do in the market, you see differences between different lenders in the overall production processes. But there's opportunity and we're able to support all of our lenders, but we're able to select and target the pockets of business that we prioritize at this point.

And our next question comes from Geoffrey Dunn with Dowling & Partners.

Claudia, I just want to follow up again on the Rate GPS. With respect to those proprietary systems, I would assume that's a retail side of their business. Are there any broader issues related to the lenders that are pushing back on wholesale channel?

The wholesale channels would have a very similar issue if they are using the same LOS or if it's proprietary. So there's not much of a difference between retail wholesale channel there, Jeff. If they're out, they're trying to amend the entire system in order to be able to connect with the rate engines.

Okay. And then Adam, a longer-term question with respect to the ILNs. If ILN becomes a recurring credit risk management strategy, given what you know about the capital model for MI and the regulators, will it be -- will MIs be able to officially manage their capital base with their PMIERs cushions?

I think the ability for each MI to, I'll call, more efficiently or actively manage their capital positions will depend on each company, their position, their dividend capacity and their relationship with their regulators. We are certainly focused over the long term. It's not going to be over the next few years, but over the long term and making sure that we can continue to execute what we view as valuable risk transfer transactions, especially when the market offers us what we believe are favorable terms to do that and balancing that with a need to efficiently manage the overall build of capital in the system. It's something we're focused on. It's something that will be an area of priority over the next -- the first 6 years of our development, we're focusing on bringing in the business, establishing our footing in the market and figuring out where we're going to efficiently fund our growth. All of those things still matter. For the next 6 years, we'll layer on how do we efficiently manage the capital position perhaps more actively.

Do you think regulators would ever allow companies to operate with negative surplus, given the -- what is now a third source of capital with ILNs?

We've not had that conversation, Geoff, so I wouldn't want to venture a guess. I think the regulators will look at the overall capital profile, and they'll do some modeling. But as you would expect, hard dollars of capital on the system are always going to be prioritized over the potential for capital support in a downturn. And so I think there's a process to go through for those discussions.

And our next question comes from Bose George with KBW.

Adam, I just wanted to go back to the -- your comments on the premium. I don't think you gave the split. Can I get your premium margin on the NIW this quarter?

Yes, our premium rate on NIW this quarter was 45 basis points -- weighted average rate on NIW was 45 basis points in the quarter. Then in the remarks, that compares to 51 basis points in the second quarter.

Okay, great. And then just a housekeeping question. When you calculate the $0.46 of adjusted EPS, the tax adjustment, it looks like that's not using a 22% for that $365,000, I guess? So just curious about that.

It is the -- but the treatment and application of taxes against our warrant is different. The changes in fair value of the warrant are not deductible. And so we carry that through when we're calculating adjusted net income as well.

And our next question comes from Phil Stefano with Deutsche Bank.

I guess, taking back to the second half of '17, we had some quirky reporting issues because of the 3 hurricanes that we got. And now this year, we have Florence and Michael. I was hoping you could just give us an update on how these 2017 hurricanes are still showing in the financials and should we expect anything from Florence and Michael this year that's coming in fourth quarter, maybe first quarter?

Sure. Why don't we -- I'll touch on the most recent storms and we could talk about what's still there from Harvey and Irma. In terms of Florence and Michael, it's really still just too early to see any impact on our financials. Recall that we define a default as a loan that's missed 2 consecutive monthly payments. So Michael made landfall, I think, was on October 10 and Florence hit on September 14. So there just hasn't been enough time for defaults to develop and then be reported to us as defaults by servicers. Our initial view, though, on what these storms mean for us is that we'll actually see far less coming through related to Florence and Michael than we did for Harvey and Irma. Our coverage density and the potential population of policies that could be affected is just much lower in those areas than it was particularly in the Houston metro area for Harvey. In terms of Harvey and Irma, at peak, we reported 533 NODs related to those storms. We didn't break out the number this quarter, because it's so small they've all cured out by and large. We have 91 related NODs left at September 30 for Harvey and Irma. So we do still carry a modest reserve position against those NODs that are still on the books. We've seen the cure rates come through at the levels that we expected if not better than we had expected when we set our reserves for those storms initially.

At this time, I'm showing no questions in queue, and I'd like to turn the call back over to management for further remarks.

We'd like to thank you all for joining us on the call today, and we look forward to seeing you at our Investor Day in New York on November 15. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.