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Edited Transcript of MTG earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 MGIC Investment Corp Earnings Call

MILWAUKEE Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of MGIC Investment Corp earnings conference call or presentation Tuesday, July 23, 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 - Senior VP, IR

* Patrick Sinks

MGIC Investment Corporation - President, CEO & Director

* Timothy James Mattke

MGIC Investment Corporation - Executive VP & CFO

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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 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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Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the MGIC Investment Corporation second quarter earnings conference call. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. Mike Zimmerman. Please go ahead, sir.

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [2]

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Thanks, Lisa. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2019 are Chief Executive Officer, Pat Sinks; and Chief Financial Officer, Tim Mattke.

I want to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and 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, which we think you will find valuable.

During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed in 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 our CEO, Pat Sinks.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [3]

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Thanks, Mike, and good morning. I'm pleased to report that during the second quarter, our business performed well as we continued to benefit from the favorable housing and economic environment. We are generating meaningful earnings. Our balance sheet is strong and is continuing to improve as evidenced by the increase in book value per share compared to year-end 2018. We are maintaining our focus on the long-term success of the company, and we are in an excellent position to continue to serve our customers while creating shareholder value.

In a few minutes, Tim will cover the details of the financial results. But before he does, let me make a few comments. The main driver of future shareholder value creation, our insurance in force, grew by nearly 7% over the last 12 months, ending the quarter at $213.9 billion. New insurance written was up approximately 13% in the second quarter compared to last year. The size of the mortgage origination market generally has the largest impact on the volume of business we will insure.

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 a strong demand for homes. As a result, we have seen a steady flow of purchase business.

During the quarter, a good portion of our new insurance written was driven by an increase in refinances. Our refinances don't generally increase our insurance in force and they reduce the persistency rate. The annual persistency on the existing book remained above 80% in the second quarter. I remain optimistic about our ability to prudently grow the insurance in force because we have a compelling business proposition for our customers and consumers continue to feel confident about their future economic prospects and feel very confident of our ability to serve our customers given our capital strength and position in the market.

The quarterly financial results reflect the very low credit losses our post-2008 business is producing and the favorable operating environment we are experiencing, especially as it relates to employment, wage growth and housing fundamentals. Our inventory of delinquency notices continues to decline and is at the lowest levels our company has experienced in more than 20 years. 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.

Before I turn it over to Tim, I want to remind you that our primary business objective is to be a relevant business partner with our customers in order to prudently grow insurance in force, generate long-term premium flows and create book value growth for our shareholders.

We are executing on that objective by offering competitive products and services while maintaining a sharp focus on risk-adjusted returns on capital and expenses. We recognize that our customers do not all operate in a similar manner and that they have individual needs, so we will continue to work with customers to deliver competitive options that meet our return thresholds in a manner that works best for all involved.

With that, let me turn it over to Tim.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [4]

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Thanks, Pat. In the second quarter, we earned $167.8 million of net income or $0.46 per diluted share compared to $186.8 million or $0.49 per diluted share in the same period last year. The primary driver of the difference in net income for the second quarter of this year compared to the same period last year was the level of positive primary loss reserve development.

This quarter, we recognized $30 million of positive development compared to $70 million in the second quarter of 2018. For the quarter, on an annualized basis, we generated a 17.5% return on beginning shareholders' equity. Net premiums earned were essentially flat compared to the same period last year as higher-ceded premiums and lower premium yields offset the increase in premiums from a higher average insurance in force. Premiums ceded were higher primarily due to $6.8 million of nonrecurring termination fees to restructure our 2015 quota share reinsurance transaction.

Additionally, premiums ceded modestly increased as a result of a higher percentage of the insurance in force being covered by our quota share treaties and insurance-linked note transactions we executed in the Capital Markets, including in the quarter. Net premiums earned also reflect a decrease in premium refunds to lower claim activity, an increase of $5 million in accelerated premiums per single policy cancellation compared to the same period last year and a lower profit commission due to higher ceded losses. Beginning in the third quarter, our premiums will be modestly benefited because the 2015 quota share transaction is now ceding 15% versus 30% in prior periods.

Losses incurred consist of reserves established on new delinquency notices plus changes to previously established loss reserves. Total losses incurred were $21.8 million compared to a negative $13.4 million in the same period last year. The increase in total losses incurred reflects the level of positive loss reserve development I just mentioned. The positive development in the second quarter was the same amount we experienced in the first quarter of 2019. As we do each quarter, we review the performance of delinquent inventory to determine what, if any, changes should be made to the estimated claim rates and severity factors of previously received notices. The positive development was driven by higher-than-expected cure rates and delinquencies that are aged 2 years or less. We attribute this primarily to the continuation of the favorable credit cycle we are experiencing.

During the quarter, we received 6% 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 low levels of new delinquency notices (inaudible) are coming into their peak loss years.

Further supporting our view regarding the credit quality is that in the second quarter, we received approximately 5% fewer new delinquency notices than we did in the first quarter of this year and the percentage of the insured loans that we -- were current at the beginning of the second quarter that was subsequently reported delinquent during the quarter continued to be at a very low 1.25%. Additionally, the 2009 forward books account for just 34% of the new delinquency notices, but account for approximately 86% of the risk in force as of June 30, 2019.

The claim rate of new notices received in the second quarter of 2019 was unchanged from the first quarter level of approximately 8%. This estimate reflects the current economic environment and anticipated cures and was lower than the 9.5% claim rate in the second quarter of 2018. While continuing to diminish in number, we expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters.

Net pay claims in the first quarter were $55 million while the number of claims received in that quarter declined by 31% from the same period last year. This activity reflects the continued decline of delinquency inventory. The effective average premium yield for the second quarter of 2019 was 46.5 basis points, down from 47.4 in the first quarter. As I mentioned previously, this quarter we paid 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 and was the primary driver of the sequential change in the effective deal.

The effective deal also includes changes in the recognition of premiums and single-premium policies, changes in premium refund accruals and the levels of premiums ceded to the various reinsurance transactions we have in place and associated profit commission. While there could be some volatility, we expect that the effective premium yield will trend lower in future periods. This decline is expected mainly because the older books of business written in higher premium rates continue to run off and replace the new books of business written in lower premium rates. Of course, these newer books are also expected to generate low levels of losses given the credit characteristics.

Net underwriting and other expenses were $45.7 million in the second quarter of 2019 compared to $44.7 million in the same period last year. We continue to expect that for the full year 2019, expenses before reinsurance will be in line with last year.

During the quarter, MGIC paid a $70 million dividend to the holding company. We expect MGIC to be able to continue to do so for the foreseeable future. The dividend paid

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strong capital position it is in as well as the level of capital we anticipate being able to generate as a result of the high quality of our insurance in force. As a reminder, any dividend payments are subject to approval of our board and we notify the OCI to ensure that it does not object to any dividend payment from MGIC.

At quarter end, our consolidated cash and investments totaled $5.7 billion, including $333 million of cash and investments at the holding company. Investment income increased year-over-year as a result of a larger investment portfolio and higher yield. The consolidated investment portfolio had a mix of 80% taxable and 20% tax-exempt securities, pretax yield of 3.16% and has a duration of 4.0 years. Our debt to total capital ratio was approximately 17% at the end of the second quarter of 2019.

At the end of the second quarter, MGIC's available assets totaled approximately $4.4 billion, resulting in a $1.1 billion excess over the required assets. During the quarter, the PMIERs excess increased due to the recent insurance-linked note transaction. However, that benefit was offset by the quota share restructure and transfer risk from a reinsurance affiliate back to MGIC. The original reason that the business was reinsured by the affiliate was due to the fact that certain states limited the level of coverage that a primary writer could cover. After working with various state regulators, we were able to have that requirement removed. The transfer of risk was done to reduce administrative burdens and really does not change the risk profile of our company.

Regarding the appropriate level of excess Available Assets under PMIERs, it's difficult to actively manage to a specific target given the regulatory requirements for paying dividend. Some level of excess provides a nice buffer against adverse economic scenarios as well as the potential for additional 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 pay dividends from MGIC to the holding company.

Finally, I want to spend a few minutes discussing our capital position and how we are thinking about allocating capital. During the quarter, we utilized the remaining -- $25 million remaining under the 2018 share repurchase program and repurchased 1.8 million shares. We have an additional $200 million authorization to repurchase shares through the end of 2020. I would expect us to continue to be opportunistic in utilizing the additional authorization. When deciding when to repurchase shares, we consider a number of factors, including our internal 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. When we evaluate strategies to allocate and utilize the capital that exists and is being created at the writing company, we first estimate how much capital is needed to support the new business that is being written. This includes both the primary business as well as the GSE risk transfer transaction that require capital support. We expect to remain active in the GSE risk transfer transactions, 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. And of course, we are also sending dividends now at a $280 million annual run rate to the holding company.

So we will continue to analyze and discuss with the Board the best options to deploy capital. Our first priority is to use it to support new business, but if we are not able to find appropriate returns on this capital for shareholders, then we will examine other options that maximizes long-term shareholder value.

With that, let me turn it back to Pat.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [5]

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Thanks, Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain optimistic about the future role that our company and industry can have, but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. We continue to be actively engaged on this topic in Washington. While no actions have been taken to date by the FHFA Director, we remain optimistic that when changes do occur, will include the use of more private capital, including private MI. The U.S. Treasury Department was directed to develop a plan as soon as practicable for administrative and legislative reforms for the housing finance system with such reforms aimed at reducing taxpayer risk, expanding the private sector's role, modernizing the government housing programs and achieving sustainable homeownership. The content of the plan and the timing of its release is unclear at this time. Much like the expected FHFA actions, we would expect it to include the use of more private capital.

Regarding the FHA, we continue to think it is unlikely that it will reduce its MI premiums and that the primary focus by the FHA is on improving its operational policies and procedures. Our company and our industry offer many solutions and a great value proposition for lenders and consumers to overcome the #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 in the capital markets.

I will close my comments where I started. Our business is performing well. We are generating meaningful returns, and our balance sheet is strong. We grew our insurance in force, investment income increased, credit losses remained low, expenses are being held in check and MGIC continues to pay a quarterly dividend to our holding company. We are writing high-quality new business in what is expected to be a low-loss environment. That is being added to our -- an existing book of business that is performing exceptionally well, and we are generating significant shareholder value. Given the economic and labor market conditions, we anticipate that we will continue to be able to generate meaningful increases in shareholder value. Simply put, the company is in great shape. That is why I look -- as I look ahead, I'm very excited and confident about the future for MGIC.

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 Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [2]

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Pat, can you talk about the capital management strategy? You didn't return any capital in the first quarter. The amount was negligible in the second quarter or at least well below the run rate of money that you are getting up from the opco. And from all appearances, the stock looks attractive in the second quarter. So can you just elaborate on how you're thinking about deploying capital? Why you've not deployed much in the first half of the year? And is there any consideration towards a common dividend that might be limiting your appetite on the buyback?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [3]

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I think -- sure. I'd be happy to answer that. First of all, it is top of mind given the capital position that we're in. As Tim alluded to in his comments, we're trying to be opportunistic and very thoughtful. It is a consistent conversation that we have with our board, an ongoing conversation. As we reported, we bought back $25 million of shares during the second quarter. And so it's really a case of trying to make sure we're in the market when we feel it's appropriate. Relative to our discussions with our board, again it's a regular conversation. As we alluded to here, if we don't feel we can redeploy the business back in the business, we will look to return it to shareholders and that would include share buybacks and dividends. Obviously, nothing new to report on that front today, but always part of the discussion.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [4]

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At what point do you get concerned that the lack of buyback is sending the wrong message to the marketplace when you talk about being opportunistic around intrinsic value?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [5]

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That's always, again, top of mind. I mean I don't know if I'd go so far as to say concerned, but it is definitely something we think about.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [6]

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Okay. And then as a follow-up on the credit side, over the last 2 quarters, you've seen a deceleration in the pace of improvement on the legacy new notice development. Is there anything you'd call out there? And I guess, particularly, the 4 and 5 book showed year-over-year growth in new notices. What's created that shift?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [7]

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Geoff, this is Tim. It's tough to say what's created that shift. I would say overall, we didn't see -- there's quite as strong and seasonal benefit on new notices Q2 of this due year as we maybe would see in other years. I don't know if that has anything to do with sort of tax changes and like refunds maybe for some people. But it's really hard to pin down what's specific. I can tell you from looking at it, there's no sort of trends that we're concerned about. And obviously from a reserve standpoint, felt comfortable with releasing reserves again this quarter.

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Operator [8]

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

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [9]

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Are you okay, Jack? You're cutting out, Jack.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [10]

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How about now?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [11]

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Yes. There you go.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [12]

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Sorry about that, guys. I'm curious about a couple of things. Tim, have you done a sensitivity on the investment portfolio as to what 25 bps would look like, number one? And then number two, your singles mix has come down. Obviously, there's a capital incentive for that. You've kind of settled in here in sort of a 15, 16 kind of mix. Is that -- I mean is that the right number to think about going forward where you said you want to be in singles? I know you sort of -- you have to at some level even for customer requirements. But any thoughts on where that single mix kind of goes through from here as it sort of come down to kind of level off?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [13]

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Yes. I will take the second question first, Jack. I mean the singles mix, as you said, it can move over time. And sometime when you have refi activity, that can change it as well. I think with -- kind of like [you] being out there and others having comparable out there that could change sort of competitiveness of how you think about monthlies and singles, too. But when I think of singles, it's going to change a little bit. Sometimes it's going to be closer to 10, sometimes closer to 20. We obviously trend closer to 16. That seems to be where we've been pretty stable for a while now. So I don't read too much into it. But when we project things going forward, assume that's probably pretty close to where we're going to be when something changes in sort of the environment. So to your first question, I guess, as far as a 25 basis points increase in interest rates, we have duration of 4 on the portfolio, and we've been pretty steady around there. And so think about it in terms of [ag]. Obviously, from a long-term perspective with the amount of invested assets that we have, interest rates going up can be beneficial to us. We haven't really had a lot of risk to the portfolios. That's really what makes the difference as far as investment income goes. And so as with everybody, we've been sort of watching and waiting to see if interest rates go up over the last few years, but that has not really come to fruition. But from a business standpoint when we look at the overall picture, it's a good environment for us to be operating in, so sort of looking at it from that angle as well.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [14]

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Okay. So the fed cuts, for example, later this month or for the balance of the year, you think inflows in the 4-year duration can likely offset and you can maybe more maintain investment income at current levels?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [15]

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Yes, I would say more than offset.

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Operator [16]

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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 [17]

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Just going back to the capital question. In terms of the dividend versus buyback, is there a bias in one direction or another? Or is that still part of the work in progress?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [18]

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This is Pat, Bose. No, there is no bias. I mean we're trying to be very thoughtful about how we do it, weighing all the options so there's no one particular preferred method over the other. If we were to declare a dividend, obviously, you want to be very confident in our future and what that means to us. So in that regard, we think about it differently than share repurchase. But I wouldn't say there's a bias one way or the other.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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Okay. And then actually just -- going back to the new notices discussion, just going forward, do you think the new notices will continue to see modest increases year-over-year? Just kind of curious about the trend that you expect there.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [20]

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Yes. I mean I think as we sort of talked about, we're getting into sort of the peak loss here in some of the bigger books that are there from the newer vintages. And so while there's not a lot of losses in relation to those vintages and they're very good credit quality, I think sometimes you just run the dynamic of either -- they're going to throw off losses at some point and with the size of those books, you might see the slight uptick like we saw now. And so I don't think it would surprise us, but I don't think we're worried about that either.

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [21]

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Yes. Bose, it's Mike. I would add, I think it's [emerged] to be maybe a better metric over the last several years. Both year-over-year comps, I think, were a good sign, a good indicator of watching credit quality and how it's been improving and the legacy burning off. But since they're going forward with these larger books, I think the better metric going forward might be looking at the number of new notices as a percentage of the beginning number of loans than current at the beginning of the quarter. And that actually ticked down a little bit seasonally, like 1.2%, 1.3%. And historically, that's a pretty good health. That's a very -- kind of very healthy economy in that 1%, 1.5% of the portfolio rolling delinquent each quarter and then, obviously, with the low claim rate that we're applying to those. So those costs might get a little bit tougher, but I think that's becoming less meaningful of an indicator given the low levels that they are at.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Okay. Good. That's helpful. And actually just in terms of the NIW on the new business or the new NIW rate -- premium rate, can you remind me does that incorporate any of the ILNs or the quota share?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [23]

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No, Bose. No. That's the direct rate that we're showing in the press release.

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Operator [24]

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

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [25]

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I wanted to get your expectations for future ILN issuance. Thinking about the out years, is this now a regular programmatic exercise? Or was it opportunistic with your recent issuance?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [26]

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Chris, it's Tim. I mean I think the way to think about it it's programmatic in nature. For us, where we also utilize the forward commitment nature of the quota share, we have to build sort of meaningful size sort of for more recent vintages. And so this last go around, that meant sort of 15 months of production. So I think it's right to think about it sort of on an annual basis for us in relation to sort of more recent vintages. There's always the possibility you can look at more seasoned books as well. I know some others in the industry have done that. So that's always a consideration too, depending upon sort of what the appetite for the capital markets is at the time.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [27]

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All right. And when is your next option for quota share adjustment that you mentioned?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [28]

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The next option within the contract itself is at the end of 2021.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [29]

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And that's 2015?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [30]

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That would be for the 2017 and I believe also the 2018 quota share, which are separate quota shares. Both have an option at the end of 2021.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [31]

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Okay. Perfect. I just want to follow up one more on the decline in the new monthly NIW premium. Is that -- I noticed that the book was less risky than last quarter. Is that mostly mix related or was that something else?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [32]

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This is Tim again. I mean there's definitely some mix in there. I think obviously with MiQ being out there, it's -- the pricing is in there as well. But there's definitely some mix associated with that. As you mentioned, the credit quality looks better this quarter and so part of that decrease is related to the mix.

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Operator [33]

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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 [34]

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I had a question about price competition and it's -- I guess it's 2 parts. One, there is a report, I think, last week that an originator -- a mortgage originator was offering discounted MI rates. So I was wondering if that's something that affected you or if that's a broader trend you're seeing. And just in general, how'd you characterize pricing competition. I understand that most of the market now is on some sort of black box model. But just generally, in insurance, when losses are low, it can be tempting for underwriters to lower rates. So just wondering kind of how you characterize pricing competition overall in your market.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [35]

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This is Pat. I would tell you first of all that we believe that all of the 6 private mortgage insurers now have their risk-based pricing models into the market. So it's a new way of doing business, generally speaking, for all of us anyway. And I would tell you that the pricing is very competitive. That's not to imply that there's any major issues, just that everybody is sharpening the pencil and trying to stay competitive. Relative to the report to last week, I can't really comment on that. I continue to believe that there are those who will continue to want to pick where they want to win. In other words, MI company may want to win a particular market or win with a particular customer depending on their assessment of the risk, and they will sharpen the pencil. But in a broad sense, we are continuing to see what we've seen here the last 3 to 6 months.

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [36]

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Yes. Randy, this is Mike. I mean as Pat mentioned in his opening comments but -- just to reiterate it, I mean when we look at what we deliver to customers and returns, we're looking at the returns and making sure we maintain our returns for shareholders when establishing those prices. So they may ebb and flow back and forth depending on market conditions, [the second] spot and things of that nature. But it's always with the focus towards maintaining returns that shareholders expect.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [37]

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No. That's helpful. I think -- yes. I think people are sensitive to not so much the 6 companies, but kind of new entrants or new product types as we saw with the initial concerns around IMAGIN, EPMI last year. So -- and then just the follow-up is on those 2 programs from Fannie and Freddie. Those pilot programs are still not -- have they taken a greater role in the market or are they still very marginal?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [38]

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Yes. Randy, this is Mike. Yes. I mean -- correct. They are still marginal. We don't see much interest in those programs. But it's something obviously we continue to watch while we haven't seen much uptake from customers at this stage anyway.

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Operator [39]

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Your next question comes from Mark DeVries with Barclays.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [40]

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I wanted to take another crack at the question Geoff asked earlier around capital. I mean with -- at the rate at which you're growing earnings and capital, even if you were to distribute all of the $70 million a quarter, you'd still be growing capital in excess of the pace at which you're growing risk. And so I guess the question is, is there any reason we shouldn't expect your capital returns to start to converge at least on that quarterly dividend? Because I can imagine a scenario in which you've just got this capital building that's not being deployed.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [41]

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Yes. Mark, this is Tim. I think I know what you're thinking about is one thing, I guess, I'd say is when we look at the $70 million coming at the holdco, we also take in account sort of the interest carrier we have there. And so when I think about the 280 annually, we sort of back off the 60 that we have related to interest carrier at that point. So it becomes closer to $200 million, I think from the standpoint of when I look back and say, the first $200 million authorization we had, it took us 15 months to complete that. So a little bit over a year, so a little bit slower than sort of how the capital is being brought up to the holding company. But that's really where our focus is, recognizing it's important to sort of match the outflows of the holdcos with the inflows of the holdco. And when we think about sort of the writing company being able to deploy there, that's really more of a discussion with our regulator as to what amount of additional dividends we can get up. And if we can get up additional dividends, that could impact obviously how much we're able to give back to shareholders. But we also, as mentioned sort of in my comments, have other levers if we can't get there from a dividend standpoint to the holdco with looking at the reinsurance and what we do on -- what levers we can pull there. So we really think about it at those 2 sort of levels. Can we get the dividend out and then [you guys see] the holdco? And once we're at the holdco, what's the run rate of inflows and outflows?

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [42]

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Okay. That's fair enough. It sounds like there is still considerably more potential for outflows than what we've seen the last couple of quarters. And I think the point that Geoff was trying to make I think, while I understand you're trying to be opportunistic and there's certainly volatility to your stock, I can't actually think of a time in the last decade where it's traded at or above what we think is intrinsic value. So I would just encourage you to be out there and buying as frequently as possible just given where the stock is and the amount of capital you're generating.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [43]

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Appreciate your thoughts.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [44]

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Duly noted.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [45]

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Okay. And then one other thing. I think you said a lot around the average premium. I just want to unpack it a little bit. Tim, it sounds like there is -- you have the one fee associated with renegotiating the quota share, which was a big driver of the Q-over-Q decline. But you also said that you still expect the longer-term trend to be down, but you also get a benefit from the renegotiation of the closure. How should we think about the next few quarters kind of the average premium trend?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [46]

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Yes. I mean definitely, we still think the average premium trended down just highlighting in this quarter. A couple of big things, one, the restructuring that was the 6.8, there was a negative to that. And then -- but then we also had some benefit in the quarter from the accelerated singles, which probably gave us an extra, let's say, $4 million to $5 million this quarter than what we've been getting previously. So those almost offset, especially when you consider that we would have had a little bit of benefit from premium accrual on refunds. And so then you think about it going forward, the quota share, we're down at 15% quota share. With the restructuring, we're able to decrease the cost a little bit. That's probably going to help us maybe somewhere around $4 million a quarter, I would say. And then it's the overall dynamic that you have been seeing in the past as far as the new books come on with a little bit lower premium content because they are higher credit quality replacing some of the older books with higher premium. So that trend still continues and then from the reinsurance standpoint, we get some of the benefits associated with the quota share restructure on a going-forward basis.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [47]

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Okay. But it sounds like if we think about it just one quarter out, assuming rates remain low, refinance activity is high, you still get some kind of a benefit from the singles and then the fee goes away. And then you're also picking up some benefits. So if we think about it on a sequential basis, should we expect average premium to bounce back a little bit next quarter?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [48]

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I think as we mentioned, it depends upon the refi activity. If the refi activity is there and we have more single cancellations, that would definitely be a benefit, especially when you put it in together with sort of the restructuring of the 2015 quota share.

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Operator [49]

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Your next question comes from the line of Mackenzie Aron with Zelman & Associates.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [50]

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I just had one follow-up, Mike, for you on the delinquency rates looking at the [need to] fall to the percent of the beginning current inventory. What's the historical run rate there? Or what would you say is the more normalized level?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [51]

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Well, normalized, I think what's representative of good economic cycles is in that 1%, 1.5% rolling delinquent. This is on account basis versus dollar basis, right? So now that range was also representative of when we go back over time, our average FICO score's -- 10, 15, 20 years ago were 700, 710 versus 750, 760. So I mean I think we're in the midpoint of that range. It was historical. I mean anything in this range, I think under 1.5 can go lower than 1. I don't know right now. That will depend on economic forecast, but this is a good representative indicator of a good economic cycle and good borrower characteristic.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [52]

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Okay. Helpful. And then just another on pricing as well. I know you won't give the percent of the volume that's coming through MiQ, but can you just talk and give a little bit of commentary on is the utilization by your customers ramping higher and just kind of the perception of black box another quarter in to being out in the market?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [53]

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Sure, Mackenzie. This is Pat. The use of our risk-based pricing model or MiQ is in fact growing. The reason we don't hand out a number is because as we said upfront, we want to be responsive to our customers. So if that's the method they want, we'll use it. If it's the old rate curve, we use that. If it's a forward, we'll use that. So it continues to grow. It grew again in the second quarter. I would expect it to grow in the second half of the year and ultimately become the dominant -- I don't know if we'll ever get 100% of the customers there because some of the national accounts prefer forward commitments, but it will become the dominant force of our manner of pricing.

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Operator [54]

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And 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 [55]

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As you are thinking about the $70 million dividend up to the holding company, what are the kind of the limiting factors that would kind of guide what -- how fast that can grow?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [56]

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This is Tim. I mean it's the conversation that we have with our regulator on a pretty regular basis probably more formally annually, but a lot of the conversation is around how do we look at sort of in a stress? How do we look as far as the earnings that we created this year, how do we look in relation to risk to capital and PMIERs excess? So all those things I think go into the conversation and it's grown pretty healthy over the last few years. And so as we get to the $70 million per quarter standpoint, feel good about that. But definitely we'll have discussions about whether that can go higher. I think -- I would say I wouldn't expect us to be paying out dividends sort of on a quarterly basis such that it matches our full earnings by any means. But it's something that we will continue to look at including potentially annual dividends on top of it. It's something we could talk about with the regulator. But that is something that would really come into the context of how do we look on PMIERs, how do we look on risk to capital and how does the regulator feel about sort of the economic environment we're in.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [57]

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Got it. And again, some of your peers have taken kind of larger onetime dividends or kind of what are your thoughts on that as opposed to getting capital out faster versus the more steady dividend that you guys have been employing?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [58]

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Yes. I'm aware of those. Obviously, those come up in conversation with our regulator. We've been definitely focused on the quarterly sort of recurring dividend. But with the ILN transactions having some large benefits sort of immediately, it's part of the conversation. But I wouldn't expect anything in the near future related to -- of us doing a [green trend] transaction and automatically that turning into a dividend as an example.

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Operator [59]

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Your next 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 [60]

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If I could start with just going back to the monthly premium yield on NIW. I think, Tim, you mentioned in your remarks earlier, you mentioned MiQ as one of the factors that was maybe driving it lower, if I understood correctly, and I was just curious as to why is that? Is there something in the MiQ pricing or is that just because it's being rolled out? I guess if you could just expand on that. I just want to make sure I didn't misunderstand that.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [61]

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Yes. I mean I think it's just -- you think about it, as we roll it out as well as sort of being able to price more discretely for different type of risks such that -- gives the ability within that pricing mechanism that you don't have on a standard rate card. And so I think from our standpoint, it was not a surprise to see that be down in the quarter as we've continued sort of more penetration with MiQ with our customers.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [62]

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Got it. So does that imply as MiQ continues being further adopted by your customers, that pressure will continue?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [63]

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It's tough to know exactly obviously what the competitive dynamic will be in the future. As Pat said, we have had success in rolling out MiQ right now. And I don't think we'll ever get to 100% MiQ. And so I think it's tough to really think specific into where it would be a quarter from now because it's too much what the competitive dynamic is in the marketplace and what loans are being originated.

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [64]

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It's Mike. Just to add on that, dimensional mix was a part of it. You can't just solely attribute price point to the delivery about the mix of business that will also influence that. I know you know that. I had to say.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [65]

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Yes. No, no. I appreciate that. And actually on mix itself, I think one of the -- I had a question just in terms of just your risk in force. One of the things that has been happening for the last few years is almost a little bit [about], I don't want to call it full barbell, but it seems that the below 85% LTV is up like 5%, 6% of the risk in force now; and at the same time, the 95%-plus has obviously increased in the last couple of years. And I was just curious, what was driving the increase in the below 85% or what drove like the 5%, 6% from historically? I think it was like below 1% before 2015. So I was just curious.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [66]

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Well, part of it, I mean is the pricing -- through more discrete pricing, those have lower risk profile and lower risk content. So when you move away from average pricing to more discrete pricing, that's going to make it more attractive certainly to utilize. So -- and that leads to lender choice as far as when borrowers are putting down the amount of money that they put down to the incentive. There's less incentive to talk about putting an additional 5% down to avoid the mortgage insurance that the pricing is still very attractive. So there's a number of things out there, but I think those 2 are the main drivers.

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

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Got it. And then just on that same topic, on the DTI over 45%. This year, it's been a little bit lower. Is that partly because of the change in methodology or is that a decision that either you've made from the modest whether it's via discrete pricing or just the pullback over 45%? I think it was down like 3% compared to last year.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [68]

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This is Tim. I mean I think it's a little bit of us being able to be more discrete there, but I think also it's a little bit to do with sort of the GSEs and sort what's actually flowing through there. I think you've seen a drop in some of the above-45 DTI volumes flowing through with the GSEs and that sort of become sort of what's available to the MI. And so I don't think we're necessarily an outlier in that regard. I think MiQ helps, but I think it's also the overall sort of market that the MIs are playing and based upon what the GSEs are bringing indoor.

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [69]

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And certainly the lower rate environment also gives you some benefit to that as well.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [70]

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Right. Okay. No, that makes sense. And then just last question. The litigation, I think last quarter, you all took a litigation charge. Has that actually settled or is that still just pending?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [71]

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No, it's still in process.

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Operator [72]

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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 [73]

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Debt-to-capital ratio is typically something you mentioned 78% now. If -- I think if I recall correctly, around 2 years ago, it's something like low- to mid-20s was how you guys were thinking about what was "right." Has the thinking around that changed at all? Any thoughts on what this looks like as we move forward?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [74]

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Yes, Phil. I mean I think from our standpoint, and there's been a lot of discussion about 20% particular, I think as much rating agency views on anything. And what I'd tell you is my view is below 20 positive from rating standpoint. Anything below that, I don't think makes much of a difference. I think for us, it's really about sort of what benefit leverage can add. I think having some dry powder at the holding company is a good thing. And so I don't think we want to be much above 20%. So it's something we look at and it's good to have capacity there. But I wouldn't say that 20% is necessarily where we are targeting to be at. But it is something that I think we are mindful of 20% as a ratio that the rating agencies would view, and if you are above that for a period of time, that they might look more negatively on.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [75]

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Got it. And can you just give us a reminder on how your -- the latest thoughts are on the 9% convertible to your subordinated debentures? I know they're pretty expensive to take out, but is this part of the conversation? Can you remove some interesting dilution here by maybe doing -- issuing debt that's more standard and taking these guys out? How are you thinking about that?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [76]

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Yes. I mean it's something -- we look at it, quite frankly, every quarter. We start a refreshed analysis on it. As you mentioned, they are expensive to take out. You are effectively prepaying a lot of the interest on it. And the way they trade, quite frankly, and -- it's really -- as the stock price goes up, they become more closer to the money and they sort of stay at the same price or if the stock price trades down, the expectation that you're going to get the 9% coupon for longer keeps the price relatively stable. And so from a -- we really looked at it from as a good economic opportunity to take them out and sort of -- bit of a mindset that you're really just prepaying a lot of that interest and a lot of it through the underlying share and really haven't -- that's why we haven't executed the onetime a few years ago where the price declined fairly significantly unrelated to us, but certainly a more broader market concern and try to take advantage of that at that point.

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Operator [77]

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And there are no further questions at this time.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [78]

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All right. This is Pat again. Thank you, everybody, for your interest in our company and have a great day.

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Operator [79]

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