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Edited Transcript of MTG earnings conference call or presentation 22-Oct-19 2:00pm GMT

Q3 2019 MGIC Investment Corp Earnings Call

MILWAUKEE Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of MGIC Investment Corp earnings conference call or presentation Tuesday, October 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael J. Zimmerman

MGIC Investment Corporation - SVP of IR

* Nathaniel H. Colson

MGIC Investment Corporation - Executive VP & CFO

* Timothy James Mattke

MGIC Investment Corporation - CEO & Director

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Conference Call Participants

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* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Edward Christopher Gamaitoni

Compass Point Research & Trading, LLC, Research Division - MD & Head of Research

* Geoffrey Murray Dunn

Dowling & Partners Securities, LLC - Partner

* John Gregory Micenko

Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research

* Mackenzie Jean Aron

Zelman & Associates LLC - VP

* Mark Anthony Palmer

BTIG, LLC, Research Division - MD & Financials Analyst

* Mark C. DeVries

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Mihir Bhatia

BofA Merrill Lynch, Research Division - Research Analyst

* Philip Michael Stefano

Deutsche Bank AG, Research Division - Research Associate

* Randolph Binner

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the MGIC Investment Corporation Third Quarter Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Michael Zimmerman, Senior Vice President of Investor Relations. Thank you. Please go ahead.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [2]

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Thanks, Lee. 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 2019 are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. Nathan, welcome to the call.

I want to remind all participants that our earnings release of this morning, which may be accessed on our MGIC's website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures.

We have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information we think you'll find valuable. I also want to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may find valuable as well.

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 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 Form 8-K. At this time, I'd like to turn the call over to Tim.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [3]

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Thanks, Mike. Good morning. I'm pleased to report we continued to succeed in executing on our business strategies and our third quarter financial results reflect that. In a few minutes, Nathan will cover the details of the financial results. But before he does, let me take a few preliminary comments.

As a result of strong credit characteristics on our insurance in force, and the favorable housing and economic environments, we are generating meaningful earnings and GAAP return on equity. Our balance sheet continues to get stronger as evidenced by the increase in book value per share compared to the end of 2018.

Our insurance in force grew by 6% over the last 12 months and ended the quarter at $218.1 billion. Reflecting the continued strength of our purchase mortgage origination market and increased refinance volume, new insurance written was up approximately 32% in the third quarter compared to last year.

The size of the total mortgage origination market has a meaningful impact on the volume of business we'll ensure. I would characterize the overall mortgage origination market as healthy. Consumer confidence remains strong and mortgage rates remain attractive. So while the supply of homes available for sale is still tight, there is strong demand for homes and refinances.

The 6% growth rate in insurance in force year-over-year reflects a modest slowdown in the growth rate of our insurance in force, in part due to the increased refinance activity. However, let me explain why the slowdown is not as pronounced as it has been in other refinance cycles. The majority of policies that are most exposed to refinancing were written in 2018 and early 2019. Given the relatively short period, these policies have been on the books, the underlying homes have likely experienced only a modest level of price appreciation. Therefore, many of the loans being refinanced need mortgage insurance.

I remain optimistic about our ability to prudently grow our insurance in force because we have a compelling business proposition for our customers and consumers continue to feel confident about the future economic prospects. I feel very confident about our ability to serve our customers given our capital strength and position in the market.

Turning to credit quality. Our inventory of delinquency notices continues to be low and the strong credit performance of the existing insurance in force continues to be a tailwind for our financial results. In addition, the new insurance we are writing has strong credit characteristics and is expected to generate meaningful returns for shareholders.

Now, I'll share some thoughts on our business objectives. We are focused on the long-term success of the company by offering competitive products and services while maintaining a sharp focus on risk-adjusted returns on capital and expenses. We recognize that our customers operate in a dynamic marketplace so we will continue to work with our customers to deliver competitive options that meet our return thresholds in a manner that works best for all involved. Staying focused on these things will allow us to prudently grow insurance in force, generate long-term premium flows and create value for our shareholders.

With that, let me turn it over to Nathan.

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [4]

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Thanks, Tim. Before turning to the financial results for the quarter, I wanted to take a minute to thank Tim and the Board for the opportunity to serve MGIC as its CFO. I'm really excited to lead such a talented finance team and be a bigger part of such a great management team.

Now onto the numbers. In the third quarter, we earned $176.9 million of net income or $0.49 per diluted share, which is the same diluted earnings per share as the third quarter of last year. This quarter, we recognized $27 million of positive loss reserve development compared to $59 million in the third quarter of 2018. The accelerated premiums from single policy cancellations increased $12 million compared to the same period last year. For the quarter on an annualized basis we generated 17.5% return on beginning shareholders' equity.

Net premiums earned increased 7% compared to the same period last year, primarily due to higher insurance in force and the increase in accelerated premiums from single premium policy cancellations, partially offset by lower premium rates on insurance in force. Losses incurred consist of reserves established on new delinquency notices plus changes to previously established loss reserves.

Net losses incurred were $34 million compared to a negative $1.5 million in the same period last year. The increase in net losses incurred primarily reflects the level of positive loss reserve development I just mentioned. As we do each quarter, we reviewed the performance of the delinquency inventory to determine what if any changes should be made to the estimated claim rate and severity factors associated with previously received notices. The positive loss reserve development was primarily driven by higher-than-expected cure rates and delinquencies that were aged 18 months or greater. We attribute this primarily to the continuation of the favorable credit cycle we are experiencing.

During the quarter, we received approximately 3% more new delinquency notices than we did in the same period last year. In our view, this year-over-year increase is not an indication of deteriorating credit, rather it reflects that our larger, more recently written books of business, while having very low levels of new delinquency notice activity are coming into their peak loss years.

While continuing to diminish in number, we expect that the pre-2009 books will continue to be the majority of new notice activity in the coming quarters. The percentage of the insured loans that were current at the beginning of the third quarter, but subsequently reported as delinquent during the quarter continues to remain below 1.5%, a level achieved in the first quarter of 2018. This further supports our view regarding credit quality.

The post-2008 book accounts for just 39% of the new delinquency notices and 27% of the delinquent inventory, but account for approximately 87% of the risk in force as of September 30, 2019. The estimated claim rate on new notices received in the third quarter of 2019 was 8%, which is consistent with the first and second quarters of 2019. This estimate reflects the current economic environment and anticipated cures and was lower than the 9% claim rate in the third quarter of 2018. Net paid claims in the third quarter were $55 million, while the number of claims received in the quarter declined by 29% from the same period last year. This activity reflects the continued decline in the delinquency inventory. The effective average premium yield for the third quarter of 2019 was 49.6 basis points, up from 46.5 in the second quarter and 49.3 basis points in the third quarter of 2018.

As a reminder, last quarter, we incurred a nonrecurring fee of $6.8 million associated with the restructuring of our 2015 quota share reinsurance transaction, which was recorded as additional premium ceded. The change in effective yield also reflects changes in premium rates, changes in accelerated premium from single premium policy cancellations, changes in premium refund accruals and the level of premiums ceded to our various reinsurance transactions and the associated profit commission.

While there could be some volatility, we expect that the effective premium yield on the insurance in force will trend lower in future periods. This decline is expected mainly because the older books of business written at higher premium rates continue to run off and are replaced with new books of business written at lower premium rates. Of course, these newer books are also expected to generate low levels of losses and meaningful shareholder returns given their credit characteristics and the presence of the reinsurance coverage that has been placed on these books.

Net underwriting and other expenses were $48.3 million in the third quarter of 2019 compared to $46.8 million in the same period last year. The increase is primarily attributable to lower ceding commissions resulting from the restructuring of the 2015 quota share agreement.

During the quarter, MGIC paid a $70 million dividend to the holding company. We expect MGIC to be able to continue to pay dividends at an annual rate of at least $280 million for the foreseeable future. The dividend payments demonstrates the strong capital position we are in as well as the level of capital we anticipate being able to generate from our insurance in force.

As a reminder, any dividend payments are subject to approval of our Board, we notify the OCI to ensure it does not object to any dividend payments from MGIC.

Finally, I wanted to spend a few minutes discussing our capital position and our capital management activities.

We continue to analyze and discuss with the board the best options for deploying capital. Our first priority is to use capital to support new business and prudently grow our insurance in force. But if we are not able to find appropriate opportunities, then we will evaluate other options to maximize long-term shareholder value, such as share repurchases and common stock dividends.

We have been participating in the GSE risk transfer transactions and expect to remain active provided the returns meet our thresholds. We also have periodic options to adjust the level of quota share reinsurance we utilize, like we did with the 2015 quota share transaction, and we will evaluate those options as they present themselves.

At quarter end, our consolidated cash and investments totaled $5.8 billion, including $308 million of cash and investments at the holding company. Investment income increased year-over-year primarily as a result of a larger investment portfolio. The consolidated investment portfolio had a mix of 81% taxable and 19% tax-exempt securities and a pretax yield of 3.12% and a duration of 4 years.

At the end of the third quarter, our debt-to-total capital ratio was approximately 17%, and MGIC's available assets for PMIERs purposes totaled approximately $4.5 billion, resulting in a $1.2 billion excess over the minimum required assets. As we have previously discussed on these calls, it is difficult to actively manage our excess available assets to a specific target given the regulatory requirements for paying dividends. Some level of excess provides a nice buffer against adverse economic scenarios as well as the potential for increases in capital requirements from the GSEs should they occur in the future. An excess of available assets under PMIERs also positions us to take advantage of new business opportunities as they occur and provide some support for our ability to continue to pay dividends from MGIC to the holding company.

During the quarter, we utilized approximately $70 million under our 2019 share repurchase program and repurchased 5.5 million shares. We have an additional $130 million authorization remaining under that program, which runs through the end of 2020. I would expect us to continue to be opportunistic in using the remaining authorization. When deciding when to repurchase shares, we consider a number of factors, including our intrinsic valuation using discounted cash flows as well as market-based metrics, like price-to-book and price-to-earnings ratios, but also recognize that historically our share price has been volatile. As we announced in July, we initiated a common stock dividend of $0.06 per share. After considering the payment of the dividend and our share repurchases, the total amount of capital returned to shareholders in the third quarter was approximately $91 million.

With that, let me turn it back to Tim.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [5]

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Thanks, Nathan. Before moving to questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain encouraged about the future role that our company and industry can play. But it continues to be difficult to gauge what actions may be taken and the timing of any such actions. As directed by President Trump, the U.S. Treasury Department issued a plan that outlines administrative and legislative reforms for the housing finance system. The reforms are aimed at reducing taxpayer risk, expanding the private sector's role in housing finance, modernizing the government housing programs and achieving sustainable homeownership. The plan did not contain any detailed directives, so the impact of the plan and our company and industry is still under uncertain. The plan did indicate that FHFA and HUD should develop and implement a specific understanding as to the appropriate roles and overlap between the GSEs and the FHA.

Additionally, the treasury plan calls for the FHFA and CFPB to continue to coordinate their efforts to avoid market disruptions. HUD also released its housing reform plan, which calls for the FHA to refocus on its mission of providing housing finance support that cannot be fulfilled through traditional underwriting. This reinforces our belief that the FHA is unlikely to expand its presence in the mortgage market. While the FHFA has begun to review various pilots and programs that GSEs are involved in and even eliminated some, there have been no updates regarding the IMAGIN and EPMI programs.

However, as we have previously reported, these programs have not gained significant traction with lenders to date. The FHFA has also begun to turn their attention to the creation of a plan for the eventual end of the GSE conservatorship. This includes finalizing the capital model for the GSEs and allowing them to retain more capital. The FHFA has issued a request for proposal for financial advisers to assist in developing this plan. We believe this pathway to end conservatorship is complicated and will take time to develop and implement.

Finally, the CFPB has requested comments about the definition of qualified mortgage or QM. This request relates to their intent to let the so-called GSE patch expire in January 2021. The GSE patch expands the definition of QMs to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the DTI ratio limit of 43%. In the request, they asked for comments about the patch and how best to judge the creditworthiness of borrowers and how to draw a bright line safe harbor for lenders. The commentary closed in September and the CFPB is reviewing these comments, including our own and the comment of our trade group USMI.

Although the initial market reaction to the CFPB's request for comments was negative for mortgage originators and insurers, considering the other initiatives to make homeownership affordable and available, we believe the intent of the CFPB is to eliminate temporary provisions, create a permanent definition of qualified mortgage and help increase the role of private capital in the mortgage market.

We do not believe that the intent of the CFPB is to restrict access to credit for deserving homeowners or make homeownership more expensive or unobtainable. We continue to be actively engaged on this topic in Washington and we remain opportunistic and what changes do occur will include the use of private capital, including private MI.

Last week, recognizing our industry's improved credit profile and evolving business model over the past several years, while pointing to stronger net income, improved capital adequacy and the use of excess of loss reinsurance to insurance-linked notes issued to investors, as well as traditional reinsurance coverage, Moody's upgraded our and other monoline mortgage insurer's financial strength ratings. They mentioned that could lead to further upgrades, we believe, are all very achievable. This supports our view that as more private capital is sought to transfer risk away from the taxpayers that our company and industry will be able to play a role.

Our company and industry offer many solutions and a great value proposition for lenders and consumers to overcome the number 1 barrier to homeownership, the down payment. I believe that our company is well positioned to acquire, manage and distribute 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. Our business is performing well and we are generating meaningful returns.

In the quarter we grew our insurance in force and investment income, credit losses remained very low, expenses were held in check and we returned $91 million to shareholders.

We are writing high-quality new business in what is expected to be a low loss environment, that new business is being added to an existing book of businesses performing exceptionally well, and we're generating significant shareholder value. Given the economic and labor market conditions, we expect that to continue. I am very excited and confident about the future of MGIC.

Before I open up the line to questions, I want to take a few minutes to say how honored and humbled I am to be CEO of a company with a reputation of MGIC and one that has been serving the mortgage market since 1957 through many economic cycles.

I feel very fortunate to have a team of coworkers at MGIC that everyday demonstrate the commitment and dedication to our customers and company. I know that if it was not for these coworkers and the coworkers that preceded them over the past 60-plus years, our company would not be in a position that it is today.

I'm going to focus my energy, not only maintaining that legacy of dedication and service to the housing market and homeownership, but I'm doing all that I can to ensure that coworkers who come after me can experience the same success that I have been able to enjoy.

Finally, I want to say a few words about Pat Sinks, who recently stepped out from his role as CEO. Pat is someone who I have looked as a great success story in this organization. He spent his entire career at MGIC after responding to an ad in the newspaper for a position of a staff accountant and worked his way up to lead this organization and did so while gaining the respect of his team and the industry. While many thought the industry would not survive, he and our entire company worked tirelessly to get the company through a difficult period in 2007 to 2014.

When Pat assumed the role of CEO, everyone questioned the relevancy of our company and industry. Pat spent much of his time as CEO in Washington, with customers and coworkers having them understand and appreciate how the company and industry had learned from the financial crisis and emerged stronger and the critical role MI can continue to play in the mortgage finance industry. He led the charge to restore the financial strength of our balance sheet and helped instill the discipline to maintain that in the future.

He led MGIC as the industry evolved from a buy and hold concept of managing risk to one that now acquires, manages and distributes risk.

Pat led the team that has further advanced MGIC's ability to provide access to affordable and sustainable homeownership to consumers, create a rewarding environment for myself and my fellow coworkers and positioned the company to provide meaningful returns to shareholders.

Pat, I am sure you're listening and hopefully not in a call queue, so on behalf of myself and the rest of the company and our shareholders, thank you for the 41 years of service.

With that, operator, let's take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Aron Mackenzie.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [2]

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Congrats on the strong quarter. First question, just around pricing, the premium that we've seen on the new business has continued to come down. Clearly the risk of business has also shifted. Can you just talk about was there anything specifically going on during the quarter, any adjustments within MiQ that were also driving that shift and when should we expect to see the average premiums starting to stabilize?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [3]

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Mackenzie, this is Tim. I think as we look at the premium in the quarter, obviously, there is some -- from a mixed shift, you can see less 97. We have the ability to make tweaks within MiQ on a regular basis, although we try not to do it too often. I think from our perspective, want to make sure that we're competitive in the marketplace. It's really difficult to know when that might level off. Obviously, it's the credit of marketplace, but feel very good about sort of the risk return that we're getting on new business at this point.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [4]

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Great. And Tim, would you say that competitive environment is stable right now, or how would you characterize, just any changes during the quarter to what you're seeing with a MiQ and the other pricing engines being out in the market for another quarter now?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [5]

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Yes. I guess I would just -- true, it's always a competitive marketplace, and so I view it as that. And from that standpoint, like I said, I haven't noticed anything that was exceptional about the quarter from a competition standpoint, but it's a competitive marketplace with a lot of good-quality business.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [6]

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Great. And then just last one, can you quantify the amount of single premium cancellations during the quarter?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [7]

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Yes. I think it was $18.5 million in the quarter. So it was up $12 million from the prior quarter or the year-ago quarter.

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Operator [8]

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Your next question comes from the line of Douglas Harter with Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [9]

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Just following up. Tim, you said that the returns are still very attractive on the business you're writing. If you could just quantify whether there was any kind of change in returns if you were to kind of look at the business you wrote this quarter versus last quarter or kind of over the past year, how that kind of expected return has changed given the credit quality mix and the pricing changes?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [10]

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Yes, Doug, it's Tim. I mean I'd say it's been relatively consistent from a return standpoint. Again, as we write a little bit higher quality, which we thought might happen as a MiQ came on board, a little bit less capital held against it. And so we view even as the premium comes down we're getting very comparable returns to what we have been getting.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [11]

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Great. And then if you could just talk about kind of now that you've had MiQ for a while kind of how you see the different pockets of opportunity within the market and kind of where -- kind of where you see the best risk-adjusted returns kind of within the marketplace now that you can more granularly price?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [12]

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Yes. I mean, I guess from my perspective, I wouldn't say there's any one pocket that we are targeting. I think we're trying to get a good cross-section of what's available out there. I think returns are pretty comparable across that spectrum still. So I would say that there's not one area that we're particularly targeting from that standpoint, but rather trying to get a good cross-section of the market for good returns across that.

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Operator [13]

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Your next question comes from the line of Randy Binner with B. Riley FBR.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [14]

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I wanted to ask if you could provide more color on the commentary that refis are now less likely to have individuals moving out of mortgage insurance. Is there a regional aspect to that? Is there a certain home value skewed to that dynamic? Just would be interested to hear more about that development. And I presume that was a -- that's an incremental driver to the NIW growth in the quarter?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [15]

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Yes, Randy, this is Mike. Yes, you're right. Those incremental driver refis are up pretty substantially year-over-year and even sequentially. So clearly that's helped on the NIW front. So there's -- from a -- the 2018, early '19 book, sort of the ones right there are really prepaying the most, given the coupons that they were originated at versus the prior years. And so nationally right, home prices have been relatively that's -- call it, 3%, 4%. There are certainly some markets that have accelerated more than that and some that have been less than that. So but I wouldn't say there's any large geographic skew to that, a few minor average loans that we're insuring, it's what -- you called it '90ish, '93, '94-type LTV, $240,000, $250,000 is the loan amount. So you're talking purchase price that's under $300,000 nationally. Clearly, there's regions that are going to be higher than that.

So that's from a geographic (inaudible) say, no, not a lot of skewing. But you can look into specific home markets probably and see some markets that have gone up certainly more than the national average. But we're really speaking about that more generally across-the-board as to what's been the driver to it is that they haven't had the time as a whole to get that price appreciation to refi out mortgage of insurance, which is if you go back in the past, refinance cycles, when you had coupons driving from 14 down to 10, or from 8 down to 5 or 4, you had a lot more build -- took longer time and then more buildup in the equity.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [16]

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That's helpful. The follow-up I guess is, do you have any sense of how much of those out of the cohorts you mentioned, how much has been refied? Is there any sense you have of kind of how developed that processes is? I know that's a tough question.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [17]

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Yes. That's right. Completely, to follow -- I mean as far as the -- I mean you're talking about like month by month or by coupon or by region?

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [18]

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No, of that group who has been in there mortgage for a relatively short amount of time so they didn't get the HPA, but they are moving to refi. Do you have any sense of how much of those cohorts has moved to refi versus who may still?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [19]

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I guess not with the great specificity to -- I mean, you can look at the quarter-to-quarter decline of the insurance in force by the 2018 book year. So there's -- it was pretty rapid prepayments on those particular book years. But as far as how much is left to be refied, I think it's kind of difficult to get a real accurate sense of that.

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Operator [20]

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Your next question comes from the line of Mark DeVries with Barclays.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [21]

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Thanks for all the comments on what you're seeing out of Washington, but was hoping to get a little more color on the QM patch and kind of what you're hearing is the most likely outcome there?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [22]

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Yes Mark, it's Tim. I guess it's tough to really put odds on what the most likely outcome is. Obviously, there's a lot of discussion about APOR, as well as compensating factors. I can tell you from the conversations I have been part of, I haven't heard one clear direction of where it's going to go. I can hear basically the positives and negatives associated with APOR as well as compensating factors. I think what I've heard from a lot of constituencies is they want something that's durable, that doesn't change regularly. They can't -- it doesn't change necessarily just as the administration changes. And so I think there is -- I think there's a good amount of work that probably still needs to be done to figure out how to sort of thread that needle. So I guess I -- it's tough to -- can't capture exactly where it's going to fall out now other than say I think we're pretty convinced that the goal isn't to shrink and make housing less affordable, it's really to get rid of the temporary patch and make something that's more permanent in structure.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [23]

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Okay. That's helpful. And just to clarify it, APOR, whether it's APOR, or one of the other solutions, your sense is that it's not necessarily going to kick out any kind of meaningful portion of the market that's currently getting finance today, it's just to create a more consistent definition of QM that applies to both conforming and nonconforming mortgages? Is that fair?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [24]

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Yes. That's very fair.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [25]

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Okay. Great. And then next question, I know it's not an easy question since you guys are -- for the first time I -- to report, but based on what you saw in terms of like customer activity during the quarter, do you have a sense for whether you may have regained some of the share that you lost over the last couple of quarters as you were rolling out MiQ?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [26]

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Yes, Mark, it is tough to know until everybody reports. I mean our sense is that we probably gained some share, but it's really tough to quantify how much.

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Operator [27]

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Your next question comes from the line of Bose George with KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [28]

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Your high DTI volume, the percentage was down, continues to decline. Do you think that's something specific to you? Do you think industry volume there is also declining?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [29]

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Yes, Bose, this is Mike. Yes. No, I think this industry, remember a few -- well a quarter or 2 ago, the GSE -- we commented that the GSEs have made some changes to their engines relative to what they were accepting as that level was starting to go up. So I think you're just seeing more of a broad-based approach. No, I don't think it's necessarily anything specific to our organization.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [30]

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Okay. And then actually just one on capital. Just given the level of capital, the $280 million you guys have coming back to the holding company, is there a way to think about how much of that you're targeting to distribute to shareholders?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [31]

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Yes. Let's say, the way that we've talked about in the past, I think, is still pretty consistent today. Of that $280 million, about $60 million of it is interest carry for the debt at the holding company. And then the remaining $220 million is returnable to the extent that we don't have other options for that money and to date, as we've evaluated other things, it felt like dividends and share repurchases are the best use for those funds. Implementing the common stock dividend does provide a use for about $85 million of that remaining $220 million. So at the current $280 million dividend run rate after paying interest and after paying the common stock dividend at the current level then you're left with something in the $140-ish million range of kind of funds that are available to think about things like share repurchases and other.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [32]

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Okay. Great. That's helpful. And then actually just one on -- back to the premium. Can you give me the number for the benefit to the profit commission from the positive reserve development?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [33]

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I think it's -- this is Michael. I don't have that one rate specific, but that premium refund accrual adjustment there is fairly -- I think it's pretty consistent because we've added small, $30 million some-odd positive dollar last quarter. I don't have a specific number up right in front of us here, but pretty immaterial, I would say.

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [34]

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Yes. This is Nathan. I would say, one of the things when we restructured the 2015 quota share, the absolute level of profit commission is lower as it -- than it has been in the past as well. And most of the loans that are in the delinquent inventory that have been there for a long time that were driving some of that reserve development just weren't included in some of those transitions. So like Mike mentioned, I wouldn't look at the reserve development as being a big driver of the profit commission in the quarter.

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Operator [35]

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Your next question comes from the line of Jack Micenko with SAG.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [36]

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Tim, looking at the buyback, looking at the dividend up and thinking through this being your first quarter as CEO, I mean, how much of all this is a coincidence? And how much of this is maybe a change in mentality? I know you bought small in 1Q in 2Q, the environment's a lot different price valuation-wise from where we were on your 4Q buyback. Just how do we sort of connect all the dots on that?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [37]

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I guess, Jack. I'd probably -- if you're going to ask me between coincidences or a change in philosophy, I think it's more of a coincidence. If you look at where the stock was trading this quarter, we felt like we could be more active. If you look at the cash we had at the holding company that had built up, felt those things all combined, as well as sort of having clarity as to what we were going to do from ordinary dividend to shareholders sort of created a corridor where we thought it was a good opportunity to deploy what we did as opposed to any change in sort of philosophy is what I would say.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [38]

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Okay. And then following on Mark's question, and maybe a suggestion that maybe you took a little bit of share back this quarter, how much of that was sort of planned? I mean how important is regaining some market share to you in your new role?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [39]

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I guess, from my perspective, I still don't view market share as the end all metric by any means. It's really return on capital and making sure that we're competitive in the marketplace. And I guess that's the one thing that we talked about a lot here is making sure we're competitive in the marketplace. And so I think, generally feeling, that as our share has slipped a little bit, maybe we weren't as competitive in the marketplace mainly from a pricing standpoint. We think we add great value across a number of other options and that all things being equal on price, we should do very well from a market share. But return on capital has to take sort of the main priority. But we want to make sure we're winning our fair share of the good-quality business that's out there.

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Operator [40]

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Your next question comes from the line of Chris Gamaitoni with Compass Point Research.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [41]

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Most of my questions have been answered. Following on the market share question, was there any types of clients that you saw increases in volume above what market expectations would have been?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [42]

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I wouldn't say there's any type of clients. Again, we rolled out MiQ at the beginning of this year. So you think about the volume that's flowing into (inaudible) now, plus getting our feet under just a little bit more with how that's sort of operating in the marketplace and how it's competitive, obviously plays into it a little bit. But I wouldn't say from any one type of customer really was the -- I guess the focus or what made a difference if we did pick up anything from a market share standpoint.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [43]

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All right. And then can you give us any outlook for persistency maybe in the near term as you look at more details of your vintage data versus what we have?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [44]

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This is Mike, Chris. I mean I think given where the 10 year is at and where mortgage rates are at and refi activity is still quite high, I think there's still going to be, near term still, some headwinds to that. So I'd expect lower prints on an annual basis going forward. The precise level, don't know obviously -- even though you have the rate environment, you are getting into the typical -- traditionally slower part of the year from activity perspective. So -- but I would expect it to trend lower here in the near term, but specific level, don't know. But I don't think it's enough that we were getting overly concerned about a long-term drift down in persistency like we've seen in past refinance cycles.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [45]

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Okay. And I was wondering if there's any additional commentary you have on thoughts of how you'll approach your subsidiary or excess capital to -- in your conversations with regulators at the end of the year?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [46]

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Yes. This is Nathan. I think the conversation is really -- starts with what do we think an appropriate level of capital is, how do we think we handle stress scenarios and what do the regulators use on that? And then the one thing that we've started to talk a little bit more about is if we feel like the absolute level of dividends should be higher than the $280 million, the current kind of annual run rate, what's the best strategy to achieve that? And is that in the form of kind of annual type dividends or in the form of -- if it's quarterly dividends or a combination thereof? So I think, all those options are on the table as we think about having that conversation, which I expect will happen sometime either in the fourth quarter or in early January of next year. But I think it starts with looking at our overall capital position, our position relative to PMIERs, stress testing results and making sure that everyone is comfortable that we have enough capital in the business to handle a wide range of potential future economic scenarios.

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Operator [47]

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Your next question comes from the line of Mark Palmer with BTIG.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [48]

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A lot of my questions have been answered, but very quickly, I wanted to get your sense of what the timing may be in terms of additional ILN issuance and reinsurance transactions going forward?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [49]

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I guess -- this is Nathan. I'll take the reinsurance question first. We've done over the past several years, we've kind of programmatically issued 1-year forward commitment quota share agreements. I expect that we will have something similar, a forward commitment quota share agreement. Our plan has always been to be programmatic about that. We've been at the 30% quota share level for a while. We've continued to evaluate whether that's the right level. So I think, that's been working really well for us. On the ILN side, for us, it was really about we've covered up until the end of the first quarter of 2019 production. So through March by our 2019 1 ILN. So then it was a warehousing period for us as we build enough risk to do another transaction.

I can tell you given the volumes that we've written in the second and third quarters relative to what we would have forecast and the level of refinance activity, we're getting there a little bit faster than we would have thought. So our intent was always to be programmatically issue into the ILN markets as well. So when we have sufficient mass of risk in force there I would expect us to continue to execute on that strategy as well.

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Operator [50]

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Your next question comes from the line of Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [51]

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I wanted to follow up on Chris's question about talking to the regulator about special dividends. And you say the conversation could start in Q4 '19, and it seems like the conversation should have started a while ago. The shift in the model, the treatment of risk, the distribution of risk, et cetera, has been around for a while. Is this more the regulator taking time to get used to this change and understand it better or is it more that the company hasn't been in a position where it felt like it -- we needed to more aggressively go after excess capital at the subsidiary?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [52]

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Yes, Geoff. Just to touch on it, I mean I guess I'd say the conversations will start in relation to sort of 2020 dividend level, and so I think that's sort of what Nathan is referring to. I think it's an evolution. I would tell you that from our standpoint, we have a very good relationship with the regulator. And I think from our standpoint we want to make sure they feel comfortable with specific level of targets, and those are things that they feel are sustainable over time. And that's really where we started with the quarterly dividend, making sure we cover the interest carry, and stepping that up over time. As Nathan said, I think as we've had conversations with them even over the last year, we've talked to them about other forms other than quarterly dividends that might make them more comfortable to have larger potential specific targets of dividends that we'd be able to get out. And we've had those conversations, but I think there'll be more meaningful conversations in the fourth quarter and first quarter here. I would tell you that we always try to I guess, tow the line of making sure that our regulator understands where we're coming from, understands the demands of the marketplace, but making sure that we push them appropriately where -- to where we feel comfortable, they feel comfortable with the size of dividends that will be coming out.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [53]

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Okay. On pricing, has the impact of ILNs on the cost of capital affected your approach to what you consider acceptable return levels or are you seeing that maybe at competitors at all?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [54]

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I think it's really tough to know how others are exactly viewing it. I can tell you that as things have become real programmatic, I guess we take a step back and look and say we assume that others are pricing that in. From our standpoint, we've always thought that things -- along with reinsurance, whether it's traditional reinsurance or ILNs that the pricing on that can change over time. And so we've been very leery to put that into our pricing methodology. But I would tell you that as you can see the programmatic nature of some things happening, it wouldn't surprise me if others are viewing that as part of the capital structure and part of how they view sort of the pricing strategy because it takes out some of the volatility of the risk. It takes out some of the volatility of the earnings. So I think that's natural for others to potentially view it that way. And our view has always been, let's look at things on a direct basis. Let's be aware of they would be if we consider our traditional reinsurance. It's on a forward-commitment basis. We write the business and also to consider what it looks like with the ILNs added on to really have a good appreciation for how the marketplace may look at it.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [55]

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Okay. But today, you haven't changed what you consider -- how you think about acceptable returns?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [56]

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No. I think when we talk about pricing and when we actually go through our materials we're focused on what that direct return is on it. I'll tell you, we're always cognizant of what the -- sort of the capital leverage that gets from insurance standpoint. But we haven't really changed the philosophy of how we're pricing that.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [57]

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Okay. And last question is, what is -- when is your next option to consider a quota share reduction on one of your past deals?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [58]

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At the end of 2021, we have options on both our '17 and '18 quota share agreements.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [59]

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And that's a go from 30 to 15?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [60]

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That would be to early terminate at that time. And just -- no, I was just going to say the -- the 2015, the option at that point was to terminate. We used that as a launching point for a renegotiation discussion. So I would say contractually on the '17 and '18, we have the right to terminate at that time, but obviously, if a restructured agreement works for all parties, that's certainly an option too.

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Operator [61]

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Your next question comes from the line of Phil Stefano with Deutsche Bank.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [62]

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I wanted to just go back to -- Nathan walked us through kind of the cadence of the dividend up and then having $140 million for repurchases and other. But I think on the call it was mentioned earlier, you still want to be opportunistic. Has the definition of opportunistic changed over the past of a couple of years or has ILNs or anything else kind of helped to change how you think about being opportunistic?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [63]

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I would say that we've used a consistent methodology now for several years in terms of how we evaluate intrinsic value and what we think opportunistic means. But obviously, the performance of the business, the growth in book value, the earnings we've generated, the absolute level of what we feel is kind of attractive price to transact that has evolved over time. I think you're seeing some of that this quarter as well that we felt like the price was very attractive in the third quarter and wanted to be -- get a little more active than we had been in previous quarters.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [64]

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I mean part of the question is have the ILNs helped change how you see intrinsic value because most of the tail has been severed off and maybe you feel comfortable buying either -- for example, instead of 3 years forward book value 4 years or something along those lines? I mean has the calculus for intrinsic value been updated?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [65]

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I would say, the way that I would think about ILN potentially impacting -- have intrinsic value in that way is maybe less about the tail scenarios or feeling like -- that we need to hold extra for those tail scenarios and more about what is the ability to potentially get money out of the writing company given that profile now at the writing company level that doing these ILNs and mitigating that tail risk just means that we need less capital at the operating company level all else equal. And does that ultimately help drive some of the discussions around increasing dividends to the holding company, which I think that would -- the way that we think about value and the way we think about cash flow, that would be -- those things are where I think the ILN could be a big benefit.

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Operator [66]

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Your last question comes from the line of Mihir Bhatia with Bank of America.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [67]

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Firstly, let me congratulate Tim and Nathan on your new roles. And why don't we start with -- I had a question on just the claims and your pre-crisis vintages. Those obviously continue to drive a significant portion of your new notices. But I was wondering is there a -- couple of questions on that. One is, is there a point at which this starts to fall off? We're getting 14 years I think, from 2005 and then already passed the 10-year mark, I think, on like you know, the 2008 vintages. So just to understand with HARP and some of that, there's been some renewals. But will those start dropping off at some point where they get the 78% or are those not subject to that 78% requirement? Or is it -- or it's just going to be a gradual process for each of them just getting to it?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [68]

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Yes, Mihir, this is Mike. That's a question we've been asking for a number of years. When do those go away? So part of it, some of the legacy business that's left, was written without that calculation through the bulk channel. That stuff doesn't have -- isn't subject to Homeowners Protection Act. You mentioned some of the other things about HARP and others. So -- and then also there's some credit performance that needs to take place for a lot of those borrowers underneath HOPA. So, our expectation is it's going to continue to be a gradual process, would be the short answer to your question. When I say we -- it is pretty extended on a number of those book years out the '07 book, we're talking 12 years out. But it is a small population, but it is still -- the fine share of the delinquencies that are being generated.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [69]

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What about on severity? Does -- are those like less severe just given the time or no, not really?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [70]

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Yes. Well, there's getting relative improvement on the severity because they've had some HPA recovery, but there's still markets that are still underwater from the 2007 -- if you had a loan taken out in some Central Florida markets, just as an example, it would still have quite a bit of negative equity on those. So -- but it's gotten relatively better, but it's still -- there's still -- we're still pretty much paying out full claims on the majority of that business.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [71]

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Got it. And then just a question, I guess, on just capital structure. Really, I guess more for the sake of stay away from it. I think we've talked about buybacks and the cadence a bit on this call. So maybe just talking generally in terms of your managing your capital structure. A few years ago, when this was I think, a little bit more -- it was more -- in full case, we used to talk about a 20%-ish debt-to-capital ratio. Given the changes in the business, more of with the risk being laid off and taking out some of the tail risk, if you will, are there any -- is that still the target you all are thinking? Or I guess the reason you're thinking of -- maybe not -- target is not the right word, but is that still the 20% or any thoughts to changing that maybe business can support more debt?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [72]

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This is Tim. I guess I would say from a 20% I think we always view that as a key mark for at least one of the rating agencies to be under that. Otherwise, you get into double leverage ratio issues. I'd say from a target we want to make sure we're under it. Obviously, as we've continued to have earnings we've continued to fall under it. I think we like the ability to have some dry powder. If we felt we needed any additional leverage in the capital stack, but I would tell you with where we sit right now I don't think we'd look to lever back up to 20% just to lever back up. I think we get a lot of good leverage from a returns standpoint with the reinsurance, which is in the insurance company and don't need to sort of get that same type of leverage from -- at the holding company, especially with our methodology of holding back 2x to 3x interest. Even interest rates where they are right now, we get some leverage from an ROE standpoint, but it's not a significant amount even by having it at 20%, for example. And so I like being below it right now. And it gives us -- if we have something we need it for, we can use it at that point and hopefully not get penalized by the rating agencies too much. But I guess I'd say in short, I wouldn't expect us to lever back up to 20% as a target. It's more to do with -- to make sure we got below 20% to make sure it wasn't an issue for the rating agency standpoint.

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [73]

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Just one thing I would add to what Tim said, so Moody's put out their revised press release on ratings upgrade late last week. And in the factors that could lead to an upgrade, they introduced another leverage target at 15%. That's the total cap as a threshold that might be considered for -- or may be necessary for an upgrade. So we haven't had extended discussions on whether that's a bright line or we're very close to that at 17% currently. If we feel like the rating is important from the business perspective and 15% is the line that Moody's -- it may have -- now the rating agencies may have created a new threshold where it was (inaudible), it might be 15% in the future.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [74]

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Got it. Appreciate that. And just from a business perspective, can you help us? What are the business imperatives, if you will, in the current environment to have higher Moody's or S&P's ratings?

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Nathaniel H. Colson, MGIC Investment Corporation - Executive VP & CFO [75]

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I think from our current business standpoint, as far as the flow business that we write every day, it's not meaningful. I would tell you that when you start to talk about us being involved in the GSEs laying off risk and CRTs, the ratings could matter. And I think in the broader dialogue about housing finance reforms, the MIs being higher-rated can be beneficial as well. Our view has always been that it's something that if rating agencies make it available, then it's -- we really want to be in a position that we can take advantage of it if we think it's meaningful from the business model. And so again from a flow business standpoint right now, I'd say it's not a differentiator. When you start to talk about being able to be active in GSE, CRT and we talk about how people look at it from mortgage finance standpoint I think it something we have to take into consideration.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [76]

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Got it. And then just my last question just as you get to the end of the year and we get the FHA MMI Report. There's been some talk this year in terms of just moving -- about moving to risk-based pricing or FHA adjusting prices. I think in Congress there was a push -- a couple of months ago, the FHA Loan Affordability Act. Just what are you hearing from regulators or from the FHA on just that FHA mortgage insurance piece? Any concerns that they -- what would be like the implications of moving to risk-based pricing and any concerns that they would lower prices this year? Because I think the last year it was telegraphed pretty early on that they weren't going to write, so I was just curious about this year's, any thoughts this year?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [77]

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So Mihir, this is Mike. Suddenly you're asking more about the GSEs capital model and the implications that they would have internally and that's something that is really underway right now. We don't have great insight as to where they're going to land. They certainly had some comments out there. The question that I think is waiting to be answered is will they -- the FHFA, take the comments that have been already fed in and then issue a final rule or will they re-propose something that's more in line with what Director Calabria is thinking about the long-term solution for capital and risk-based capital. I mean I think it's a safe bet to say that they will move to some type of risk-based capital within their structure. But how that rolls into MI given the presence of PMIERs that already exist that's risk-based, it's -- we have little insight there. They have been really (inaudible) at FHFA's level. So we'll have to wait and see how they come out when they do their reveal, if you will, whether it's a reproposal or issuance of a final rule, which we think will be yet this year, but that's up to them. We'll wait and see. So the implications, can't tell you because we don't know what direction that would take.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [78]

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Well, appreciate everybody's interest in the company and have a good day.

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Operator [79]

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