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Edited Transcript of MTG earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 MGIC Investment Corp Earnings Call

MILWAUKEE Apr 27, 2017 (Thomson StreetEvents) -- Edited Transcript of MGIC Investment Corp earnings conference call or presentation Thursday, April 20, 2017 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 - Mortgage Guaranty Insurance Corporation

* Patrick Sinks

MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director

* Stephen C. Mackey

MGIC Investment Corporation - Chief Risk Officer and EVP

* Timothy J. Mattke

MGIC Investment Corporation - CFO and EVP

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Conference Call Participants

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* Bose T. George

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

* Douglas Michael Harter

Credit Suisse AG, Research Division - Director

* Edward Christopher Gamaitoni

Autonomous Research LLP - Partner, Mortgage and Consumer Finance

* Mackenzie Jean Aron

Zelman & Associates LLC - Senior Associate

* Mark C. DeVries

Barclays PLC, Research Division - Director and Senior Research Analyst

* Mihir Bhatia

BofA Merrill Lynch, Research Division - Research Analyst

* Philip Michael Stefano

Deutsche Bank AG, Research Division - Research Associate

* Randy Binner

FBR Capital Markets & Co., Research Division - MD, SVP and Senior Analyst of Insurance Research

* Ronald David Bobman

Capital Returns Management, LLC - Founder, President, and Analyst

* Soham Bhonsle

Susquehanna Financial Group, LLLP, Research Division - Associate

* Vivek Agrawal

Wells Fargo Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the MGIC Investment Corporation First Quarter Earnings Conference Call. (Operator Instructions) I'd now like to turn the conference over to Mike Zimmerman, Senior Vice President of Investor Relations. Sir, the floor is yours.

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

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Thanks, Holly. Good morning. 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 first quarter of 2017 are CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Steve Mackey.

I'd like to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our risk -- 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 on the call are contained in the Form 8-K that was filed earlier this morning.

If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current any time other than the time of this call or the issuance of the 8-K. At this time, I'd like to turn the call over to Pat Sinks.

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [3]

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Thanks, Mike, and good morning. I'm pleased to report that we had another strong quarter and we are off to a great start for the year. In a few minutes, Tim will cover the details of the financial results, but before he does, let me provide a few highlights.

First, insurance in force, primary driver of our revenues, increased by nearly 5% year-over-year, ending the quarter at $183.5 million. This growth reflects the expanding purchase mortgage market, our company's market share of approximately 18% and the hard work and dedication of my fellow coworkers to deliver stellar customer service. The 2009 and newer books now comprise 73% of our risk in force and continue to generate a low level of losses, accounting for just 17% of the new notices received in the quarter.

The increasing size and quality of our insurance in force, the runoff of the older books and our strong financial performance positions us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers. While mortgage rates have come down from their postelection highs, they are still meaningfully higher than they were before the election. As a result, we saw a decrease in refinance transactions in the first quarter, dropping to 17% of our new insurance written from 24% in the fourth quarter of 2016.

Year-to-date through mid-April, refinance applications accounted for just 13% of total applications compared to 19% for the same period last year. With higher mortgage rates and less refinance activity, we saw an increase in persistency during the quarter and expect to see the annual persistency metric we report each quarter increase in subsequent periods. Additionally, year-to-date purchase application activity compared to the same period last year is 8% higher, which is a net positive for our company and our industry.

For the quarter, we wrote $9.3 billion of new business, up 12% from the same period last year. Given the current market environment, we expect to write about the same amount of business that we did in 2016. This amount of new business, which is consistent with the last several years, combined with an expected increase in persistency, should result in insurance in force increasing in 2017.

In late March, we announced that we would be redeeming our 2% senior convertible notes, which accelerates the holders' decision to convert their notes to shares of our common stock. The conversion will improve our leverage ratios and decrease our interest expense. Tim will discuss this transaction when he discusses the financial details for the quarter. Tim?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [4]

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Thanks, Pat. In the quarter, we earned $89.8 million of net income or $0.24 per diluted share versus $69.2 million or $0.17 per diluted share for the same period last year. To make the year-over-year comparison of financial results more meaningful, we also disclosed net operating income, a non-GAAP measure. A reconciliation of GAAP net income to net operating income is included in the body of the press release.

With that said, our net operating income for the quarter was $117.1 million or $0.31 per diluted share compared to $76.1 million or $0.19 per diluted share for the first quarter of 2016. The primary driver of the improvement in our financial performance was lower losses incurred. Losses incurred were $28 million versus $85 million for the same period last year, primarily due to a lower estimated claim rate on both new and existing delinquencies and fewer new notices received compared to the same quarter last year.

We updated our expected claim rate for previously received delinquent notices because the actual cure rate experience has outperformed our previous estimates. As mentioned in the press release, this resulted in the benefit of approximately $47 million to our primary loss reserves. Also in the quarter, there was a $2 million benefit primarily relating to IBNR.

In the first quarter, we received 11% fewer new notices versus the same period last year and reflecting the current economic environment and the typically -- typical seasonally strong first quarter, we used a claim rate of approximately 10.5% on these notices. As a result of seasonal factors, we would expect the claim rate for new notices received in subsequent periods of 2017 to be modestly higher than the rate used in the first quarter but lower than the rates used in comparable periods of 2016. As we have previously discussed, we view a 10% claim rate as a long-term average.

The pace of improvement in the claim rate continues to be difficult to project, given the atypical performance of the pre-2009 books. The new delinquent notices from the larger, more recently written books remain quite low, reflecting the high credit quality, and new delinquent notices from the legacy book continued to decline at a steady pace. We expect that the legacy books will continue to be the primary source of new notice activity for the foreseeable future. During the quarter, the legacy books generated nearly 83% of the new delinquent notices received while comprising just over 27% of the risk in force.

Reflecting the declining delinquent inventory, the number of claims received in the quarter declined 22% from the same period last year. Net paid claims in the first quarter were $128 million. Primary paid claims were $130 million, down 22% from the same period last year. The effective average premium yield for the first quarter of 2017 was 50.1 basis points, which compares to 50.7 basis points for the first quarter of 2016.

As I have discussed in the past, there's going to be a variability in this rate each quarter for a variety of reasons. We expect that the effective premium yield will trend lower in future periods, however, the exact amount and timing is difficult to predict, but we expect it could be 2, perhaps 3 basis points over the course of the next year.

At the end of the first quarter, MGIC's available assets totaled approximately $4.7 billion, resulting in a $700 million excess of the required assets of PMIERs. MGIC's statutory capital is $1.7 billion in excess of the state requirements.

Reflecting the profitability and quality of the new books of business as well as the improved performance and runoff of the legacy books, the excess over the PMIERs required assets was slightly higher than the range we are currently targeting. In addition to writing new business and exploring new opportunities as they arise, we try to manage the amount of excess by continually reviewing our use of reinsurance as well as continuing to seek and pay dividends out of the writing company.

Regarding MGIC's ability to pay quarterly dividends, we previously disclosed that the Wisconsin insurance regulator approved a $20 million dividend that was paid to the holding company in the first quarter. We continue to be optimistic that these quarterly dividends will continue and are planning to ask for and receive a higher dividend in the second quarter. We are hopeful that the dividends can grow in the future, especially if the difference between Available Assets and Required Assets under PMIERs grows, as we expect. As a reminder, OCI authorization is sought before MGIC pays any dividend.

On March 21, we issued an irrevocable notice of redemption of our 2% convertible senior notes due in 2020 with a redemption date of April 21, 2017. As of April 18, 2017, approximately 89% of the holders have elected to convert their notes to shares of our common stock, and we expect that the remainder will also elect to convert their notes to shares of our common stock by the redemption date.

As a result, earlier this month, we repaid $150 million that was previously drawn on the line of credit as those resources will not be needed to settle the redemption. This transaction, combined with the upcoming maturity of the 5% senior notes, will lower our debt to capital ratio and reduce our debt service obligations.

At quarter end, our consolidated cash and investments totaled $5.1 billion, including $451 million of cash and investments at the holding company. The investment portfolio had a mix of 68% taxable and 32% tax-exempt securities, a pretax yield of 2.6% and a duration of 4.6 years. The holding company cash position includes $150 million that we drew from the credit facility in March.

Also included in the holding company position is approximately $145 million that will be used to pay the remaining portion of our 5% senior convertible notes that mature in May of this year. After considering these 2 items, the remaining cash at the holding company provides approximately 2 years of debt service coverage.

When we analyze various options to deploy our capital resources, we need to take into account that the holding company's primary source of capital is the writing company, so while capital is being created at the writing company level, its ability to pay dividends to the holding company is subject to OCI review and approval. We also consider the resulting leverage ratio, the ability to continue the positive ratings trajectory and the debt serviceability of the holding company. With that, let me turn it back to Pat.

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [5]

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Thanks, Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. The review and updating of state capital standards by the NAIC continues to move forward, albeit slowly. At this time, we do not expect the revised state capital standards to be more restrictive than the financial requirements of the PMIERs.

In regards to housing reform, we remain optimistic but it continues to be very difficult to gauge what actions may be taken and the timing of such actions. But the message that private capital can play a greater role in housing policy is being heard and is a positive for MGIC and our industry. As an individual company and through various trade associations, including USMI, we continue to be actively engaged in Washington, hoping to shape a greater role for private mortgage insurance.

Regarding the FHA, the previously announced rate cut was reversed in mid-January, which was welcome news, but we are still waiting for Dr. Carson to announce his choice to run FHA. So meanwhile, the status quo remains. Many lenders remain concerned over legal risks associated with FHA lending and servicing, and we have been more actively promoting the GSE 95% and 97% LTV programs, which require private mortgage insurance.

We continue to believe that it does not make sense to change FHA pricing without first addressing the larger question of the government role in housing at a time when private capital, primarily in the form of mortgage insurance, is ready, willing and able to take risk and lower tax payer exposure.

In closing, we got off to a great start to 2017. Our insurance in force continued to grow, persistency has started to rise, new delinquent notices declined as the newer books of business continue to generate low levels of new delinquent notices and the legacy portfolio continues to run off.

Further, the anticipated claim rate on existing delinquencies declined. We maintained our traditionally low expense ratio. The writing company was upgraded to BBB+ by S&P, and the holding company received a $20 million dividend from MGIC. I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market.

I firmly believe that there is a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders, and we are committed to pursuing those opportunities.

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) And our first question is going to come from the line of Bose George with KBW.

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Bose T. George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Just first one on -- a question on insurance in force. On your last call, I thought you guys had said that insurance in force growth probably starts out a little slower and then for the full year, you do something like 4% to 5%. For the first quarter, it looks like it was 4.5-ish percent year-over-year. Are those trends stronger than expected? And do you think there's upside to that full year number?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [3]

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Bose, it's Mike. No, I think we would reiterate that guidance. I mean, so it's a couple of times here or there but for the full year, that we would still expect that to have a growth.

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Bose T. George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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And then in terms of the market share from any fallout from Arch, United Guaranty, are you seeing that already or is that still to come?

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [5]

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Bose, this is Pat. I would tell you that it's still early. We're seeing a little bit on the margin but nothing significant, but we would expect those decisions to be made throughout the course of 2017, perhaps as late as the second half of the year.

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Bose T. George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. And then just actually one on persistency. You noted persistency has increased -- it was flat quarter-over-quarter, so I was just curious where it was like in March and then where you could see that going later this year.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [7]

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Bose, this is Mike. So it's -- the statement's right so it was flat, you're right, flat quarter-over-quarter that's 76.9 %, but then what that does imply is that during the quarter, it went up because that's the annual measurement. So I don't -- I don't want to stress -- I want to make sure that we don't overstress, I should say, the quarterly run rate but the quarterly run rate was in the 80%, 82% range. I wouldn't say that that's going to be the annual number but for the quarter, that's where it came in but I'd say that's 1 quarter.

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Operator [8]

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Our next question is going to come from the line of Doug Harter with Credit Suisse.

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

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It looked like the premium rate on new insurance in force was up a couple of basis points this quarter. I wanted to square that with the commentary around that premiums could -- rate could fall by a couple basis points over the course of the year.

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [10]

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Yes; this is Tim. I mean, I think obviously in the quarter, we saw a little bit of uptick just on the NIW on its own from what we've seen in the prior quarters, so probably a little bit higher from an LTV -- from a mix standpoint. But if you looked that's still lower than probably where we were a year ago. And so I think our view is the general trend downward as some of the older books of business fall off with a higher premium rate still holds true. Although that's obviously something that we continue to look at, depending upon how the mix changes going forward.

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

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And I guess in that mix, I mean, one of the things you had talked about in the past behind kind of your move to more tiered pricing was some feeling of being adversely selected into lower FICOs. Was there anything about the mix that kind of makes you uncomfortable? Or is that -- are you kind of happy with the way that the mix is moving in terms of credit quality?

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Stephen C. Mackey, MGIC Investment Corporation - Chief Risk Officer and EVP [12]

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This is Steve. I think we're very happy with the way the mix is with credit quality. I'd say any movement we've seen over the last couple of quarters has been minor. But overall, the credit quality of the book remains outstanding.

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Operator [13]

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And our next question is going to come from the line of Vic Agrawal with Wells Fargo Securities.

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Vivek Agrawal, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14]

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Tim, I think in your comments, you mentioned that you had a higher excess PMIERs capital than you like, and then you had mentioned that you were going to evaluate new opportunities as they arise. Can you maybe expand on what some of those potential new opportunities could be?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [15]

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Well, I think the thing we have to keep in mind is that we have the excesses building at the writing company, and that the key to being able to deploy the capital is we like to deploy it back to the MI business to the extent we can, but we are growing that PMIERs excess. And so then to get it out of MGIC, it requires dividends, and so I think that's we're focused on is being able to get dividends out of MGIC to the extent we can't deploy it in MGIC. And that will give us more flexibility at the holding company. But right now, if you look at the holding company cash at the end of -- once we get past paying back the 2017 in May here, we're going to have effectively 2 years of interest carry, which is amounts that we'd like to have at the holding company at that point. But then obviously, if we continue to get dividends out of MGIC, that'll create more opportunity and options for us as we move forward.

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Vivek Agrawal, Wells Fargo Securities, LLC, Research Division - Senior Analyst [16]

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Okay. And then as some mortgage originators' gain on sale margins and volumes have been declining. and I guess if that persists, how do you see that potentially affecting premium rates and/or potential product mix that they use?

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

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Vic, this is Mike. I mean, as you know, mortgage bankers, when volume declines are going to start looking for other avenues to increase their production, whether that's expanding the credit box or lower credit criteria remains to be seen. But we have our guidelines and our pricing, and if it meets our -- meets those parameters, we will take that. Now whether -- how it plays out within the origination community, that remains to be seen. But we've got our guidelines out there and if they meet them, we'd be glad to take the product.

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Operator [18]

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Our next question will come from the line of Jack Micenko with SIG.

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Soham Bhonsle, Susquehanna Financial Group, LLLP, Research Division - Associate [19]

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This is actually Soham Bhonsle on for Jack. Last quarter, you guys had said that you expect 5% to 10% impact on NIW, were the FHA to cut pricing. But now that that appears to be off the table, do you guys sort of look at that as incremental opportunity for the industry? Or how should we think about that?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [20]

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Yes, Soham, this is Mike. It's right. And I think we mentioned that in our Ks that our expectations now is we would be flat year-over-year so in that $48 billion range. So unfortunately, timing was everything last quarter. It was 24 hours before the inauguration when we had our call, and that was the statement that FHA made and they reversed that 24 hours later, we'd expect our to be flat. And I think similarly for the industry as we have less refinance activity taking place, that's going to be the big driver to the total origination pie.

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Soham Bhonsle, Susquehanna Financial Group, LLLP, Research Division - Associate [21]

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Okay, yes, that makes sense. And then shifting gears, Pat, wanted to get your thoughts on the VA market where we've seen quite a significant share creep over the last couple of years, which is probably taking away more from FHA than PMI. But just curious to see where do you think that share eventually balance out, especially given the backdrop of the current administration and the level of defense spending expected over the next couple years?

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [22]

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Well, I think relative to the VA, it's growing, to your point, tremendously. And we would expect it to grow a little bit more but certainly not at the same pace. It's a very attractive program, Veterans, and so I think that will grow a little bit more but then it comes down to how we compete more with the FHA and the VA with 0 down percent -- 0 down payment program is obviously very difficult for us to compete with so then it becomes us and the FHA.

And I think we continue to line up there very well. We are anxious to hear who Dr. Carson selects as the new FHA Commissioner and we are optimistic that is somebody we can work with and we can play a greater role. So VA could grow a little bit more on the margin and then the rest is left for us and the FHA, and I'm optimistic about our chances.

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Soham Bhonsle, Susquehanna Financial Group, LLLP, Research Division - Associate [23]

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Is it fair to say that you don't really see them as your competition today?

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [24]

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Well, we do see them as our -- the VA we're talking about, we do see them as our competition in that they play in the high LTV space. That said, the product differentiation between what we do and what they do is stark enough that in a sense they are not a competitor, if you know what I mean. They take some business, but for them to do -- they are offering a 0% down payment product, which is just something that we're not comfortable with.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [25]

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This is Mike. I just wanted to add when you look at the VA volume, especially over the last 1.5 years and there's been a number of reports out on this from Ginnie Mae, that there's some very aggressive originators that are churning the VA production within 3 to 6 to 9 months after it was originated, which is outside of the VA guideline. So some of that could be -- some of the increase, it's hard to pinpoint exactly what mix -- what percentage, but some of that was the result of that very aggressive origination strategy on the parts of some large originators. So I think that's right, we have more veterans, so you would see more transactions from that side but you could see some balancing because of more enforcement from Ginnie Mae about making sure that originators don't churn the portfolio.

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Operator [26]

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And our next question will come from the line of Mackenzie Aron with Zelman & Associates.

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Mackenzie Jean Aron, Zelman & Associates LLC - Senior Associate [27]

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First question, can you just help quantify what the single premium impact on the effective premium yield this quarter was relative to 4Q?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [28]

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Mackenzie, this is Tim speaking. I think from a pure dollar basis, there was about -- we had about $5 million in accelerated singles in this quarter versus $11 million last, so that's probably somewhere around 1, 1.5 basis points on the average premium yield.

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Mackenzie Jean Aron, Zelman & Associates LLC - Senior Associate [29]

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Okay, perfect. And then just can you provide an update on what you're seeing in the judicial states and where these late-stage defaults have just been stuck in the process? Any kind of incremental progress that's being there and just kind of give us an update on how you think some of these late-stage defaults will get cleared this year?

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Stephen C. Mackey, MGIC Investment Corporation - Chief Risk Officer and EVP [30]

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Yes, this is Steve. I think that we are seeing some improvement in New Jersey, so it's modest at this point but we're seeing some better flow coming through New Jersey. Florida still seems to be kind of a tale of old versus new foreclosures, so things that were hung up in the process due to other -- a multitude of reasons are still slow in Florida but newer foreclosures are moving through. The big slowdown still seems to be New York -- or the big sticking point. So some modest improvement in New Jersey, Florida continues to make progress but New York just seems to be sitting there.

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Operator [31]

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Our next question will come from the line of Mark DeVries with Barclays.

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Mark C. DeVries, Barclays PLC, Research Division - Director and Senior Research Analyst [32]

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I was hoping you could help us think through how much more runway we may have to see continuation of these double-digit year-over-year declines in new notices. When you just think about the facts that you're still getting 83% of your new notices from the legacy loans and it's only 27% of your risk in force. That not only implies you're getting almost no losses from the new stuff, but clearly all of it's coming from the legacy. And as that continues to burn down -- the fact that it's still at 83% makes me think we've got several more years of this type of decline. Is that a reasonable assessment given those numbers?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [33]

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This is Tim. Yes, I think that's exactly what we would predict and I think you're spot on in that thought process.

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Mark C. DeVries, Barclays PLC, Research Division - Director and Senior Research Analyst [34]

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Okay, great. And then finally, could you just discuss how lapse rates have really been trending over the course of the quarter and now into April? Are you starting to see persistency just kind of gradually improve?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [35]

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Mark, this is Mike. Let's get to in -- I don't want to overemphasize a quarterly run rate. But for the quarter, it was -- it continued to drift up. I think we ended for the full quarter around 82%, I think, I don't know, I'd have to go back and calculate for the actual month of March itself but that's even -- I think that's even a less reliable number just because of it's only one instance, but it's definitely trended higher and that's why we made that comment in both the press release and Pat's comments that we are seeing it drift higher, we still, though, would tell you that from a -- over time, we wouldn't expect the portfolio to get above the 84%, 85% type of persistency level. It's somewhere in the low 80s is kind of a normalized rate.

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Operator [36]

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And our next question will come from the line of Phil Stefano with Deutsche Bank.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [37]

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It looks like the fallout from the Arch UGC deal is the primary focus when people talk about market share shift in the space. I was wondering why another MI who potentially has some concerns in their overall business and maybe they might be acquired, maybe it won't be, is there a potential for market share shift to come out of them as well? Why does this seem like no one's talking about that?

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [38]

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Well, I think as much -- this is Pat and I think as much as anything everybody's kind of got a wait-and-see attitude, wait-and-see approach to see how things develop in the case of the Arch and United Guaranty merger as well as I assume you're referring to Genworth and their potential acquisition by China Oceanwide. So I think lenders are just trying to wait and see how things develop, what that means to them as counterparties. Both organizations, all the MIs continue to be formidable competitors. So it's still early in the year and we'll see how it plays out.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [39]

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Okay, okay. And changing gears a little bit, it feels like the potential regulatory changes -- the timing in which they're going to happen is unknown but could be beneficial for the space or at least slanted in that direction. How should investors be thinking about this inherent call option in the business and earnings? Is this a conversation that you have with the board when you think through the business prospects evaluation, anything qualitatively you can help us with that would be appreciated.

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [40]

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Sure, this is Pat again. There is a lot of discussion going on around GSE reform primarily and FHA reform to a lesser degree. There is a lot of activity going on both on The Hill with lobbying organizations, certain groups have written papers. The MBA put together a task force that issued a very thoughtful paper, they're out with it today in more detail. The Milken Institute has a paper out on GSE reform, the Parrott Zandi group is out with a paper.

That said, there's a lots of talk and a lot of discussion, I'll call it, at a low level. People are trying to put things together and come up with a meaningful plan. Now to translate that into action is a whole another discussion. It's difficult to see right now that even with the best of proposals, the Congress is going to take any action, barring any kind of severe economic shock to the GSEs. And the reason is of course, as we all know and read, there are other priorities that Congress is dealing with. And so housing reform, while it gets a lot of headline and a lot of play in our discussions going on, translating it into action is quite difficult. Thus, as we talk about on these calls and then also to your question as we talk with our board, we're very cautious in trying to forecast how that may play out. We have not factored anything into our forecast, assuming a certain type of reform.

That said, we are optimistic. The papers I referred to, for instance, this MBA paper that just came out, they did a wonderful job. And they are all -- all of those papers support the use of private mortgage insurance, not only the use but the greater use of private mortgage insurance. So the narrative around private capital and what we are is very strong and the fact that -- or the idea that we can play a greater role, but we're not ready yet to make the leap to say, "Yes, let's start factoring into our forecasts."

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [41]

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I think that makes sense.

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Operator [42]

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Our next question will come from the line of Chris Gamaitoni with Autonomous Research.

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Edward Christopher Gamaitoni, Autonomous Research LLP - Partner, Mortgage and Consumer Finance [43]

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Can you give us a sense of how discussions with regulators related to your capital go? Is there any metric they look at on, you know, allowing, let's say, greater dividend as you continue to build significant excess capital? Or is it more piecemeal?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [44]

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Chris, this is Tim. I mean, I think there is -- we have very healthy, I'd say, robust discussions with our regulator on a regular basis. I don't think they're looking at any one metric per se. We talk in particular about that we believe as our access to PMIERs continues to grow that bodes well for us for dividend because while that's not their -- the way that they look at it, they recognize the risk-based approach of it. And also the NAIC is looking at sort of adopting their own risk-based approach that would also include premium. So I think they can get a certain comfort level as we grow in excess against PMIERs that that bodes well for us, and we can have discussions around that. I think discussions around our use of reinsurance, they take some comfort in that as far as any sort of stress scenario. And so we have, I'd say, pretty wholesome discussion, but no one metric they look at. But obviously, the discussions have, I think, been very productive so far, and we continue to plan on having those discussions with them.

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Edward Christopher Gamaitoni, Autonomous Research LLP - Partner, Mortgage and Consumer Finance [45]

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Okay. And it is -- do you have an update on when normal dividends with using -- utilizing contingency reserve would begin to occur again? Is that anytime in your foreseeable future?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [46]

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Not to the level where I'd say it outstrips what we're getting right now. I mean, I think when you think about the contingency reserves, it builds for a 10-year period of time. So when you think when we turn profitable, you sort of have a 10-year runway there. So we're still a few years out from being able to not build that contingency reserve, which is really a drag on that ordinary dividend calculation.

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Edward Christopher Gamaitoni, Autonomous Research LLP - Partner, Mortgage and Consumer Finance [47]

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Right. And I guess in that vein, do you -- now that credit continues to improve pretty well in consistency and has been for a few years, do you have any sense of how many years away we are from the loss ratio kind of on an ex reserve release hitting your normalized level that you guys point out?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [48]

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Well, I think that's tough to predict, Chris. I mean, I think as we talked a little bit earlier in the comments in the call, a lot of the notices are coming still from the older books, and so when we talk about a normalized rate, it's going to depend upon how that sort of falls off and obviously, how well the new originations that we continue to write perform at the level that they have. And obviously, the books that we've written over the last number of years performed exceptionally well, better than we would have probably expected. Now whether that will continue is obviously difficult to know but the trend is definitely there. I think it's just tough to know exactly where it sort of, I guess, bottoms out at, and keeps stable and whether it can keep stable there, quite frankly.

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Operator [49]

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Our next question will come from the line of Randy Binner with FBR Capital.

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Randy Binner, FBR Capital Markets & Co., Research Division - MD, SVP and Senior Analyst of Insurance Research [50]

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I just have a couple of cleanup questions. I guess, the first is just on the yield. It's not a big driver in the model but it was a little bit higher than we thought. When you went through your asset composition was there between tax-exempt and not tax-exempt, did you have any unusual kind of gains or prepays or anything this quarter? Or is that a good run rate going forward?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [51]

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Yes, I think that's a pretty good run rate. Nothing that was unusual or unordinary in the period.

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Randy Binner, FBR Capital Markets & Co., Research Division - MD, SVP and Senior Analyst of Insurance Research [52]

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And then you mentioned as part of the $49 million of favorable reserve development, you mentioned something about an IBNR shift. I just didn't catch that. What were the comments around the IBNR shift as part of that?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [53]

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Yes, this is Tim again. We just gave the number that we had, $2 million, that was primarily related to IBNR. And so that's I wouldn't say as much of a shift as our expectation as far as the number of IBNR notices that we need to be reserving for has been declining in over the past few quarters. So we update that assumption every quarter as well. So that resulted in $2 million of favorable development.

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Randy Binner, FBR Capital Markets & Co., Research Division - MD, SVP and Senior Analyst of Insurance Research [54]

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Right. So it's small. Okay, got it.

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Operator [55]

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And our next question will come from the line of Mihir Bhatia with Bank of America.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [56]

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First, just wanted to clarify your comments around the premium rate being 2 to 3 basis points lower. Is that year-over-year from 2016 full year or from the Q1 50 basis points level?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [57]

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I would say that when we look at it, we think it could be up to 2 to 3 basis points lower from where we are currently. I don't think we'd expect it to be necessarily down at that 3 points. But I think it depends upon some things with profit commission can change, so we want to make sure that we at least take that into consideration of how it could fall off. But the trend has definitely been there over the last year for the decline to be occurring.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [58]

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Got it, that makes sense. And then just a question on your single premium share declining. Was that due to actions on your part or was that just more a function of the market as a whole?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR - Mortgage Guaranty Insurance Corporation [59]

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Mihir, this is Mike. It's really more of a function of the market as a whole. We had no -- any changes really to our approach to singles. I mean, we obviously -- we have always preferred and continue to prefer the monthlies but it's really just a reflection of the market and the rate environment, right, as that gets added on to the (multiple speakers) and it ends up at an even higher rate for the borrower.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [60]

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Got it, okay. That makes sense. And then on your -- the reserve development, the reserve release. And I know you mentioned the claim rates. Was there any change to your severity assumptions?

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [61]

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There -- we always update the assumptions related to severity. I would say that from a development standpoint that they weren't material.

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

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Okay, got it. And then just last question. In terms of the high LTV loans like the 95-plus, clearly, in the last couple of years with the 97% program, that share is increasing and that's understandable. Now is there a level at which you would be -- you'd start being resistant to writing more? Or is that just a function of we've priced for it appropriately and as much as we can write on that we'll write?

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Stephen C. Mackey, MGIC Investment Corporation - Chief Risk Officer and EVP [63]

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No, this is Steve. We believe we priced for it appropriately, but we also have a tolerance for a certain level of that higher LTV because it is more sensitive to a downturn. And so we will -- we do have thresholds in place around that.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [64]

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Okay. And I assume you're not willing to share on what that is?

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Stephen C. Mackey, MGIC Investment Corporation - Chief Risk Officer and EVP [65]

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That's correct.

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Unidentified Company Representative [66]

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We're definitely not going to share that.

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

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That's fine. Yes, I know. I mean, you are sub-10%. It's just when you look back at what it was in like mid-2000s and stuff, I was just wondering on that. Anyway, that's fine.

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

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Mihir, that's above our threshold.

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Operator [69]

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And our next question will come from the line of Jason Cashwell with Bank of America. And that line has been withdrawn. Our next question will come from the line of Ron Bobman with Capital Returns.

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Ronald David Bobman, Capital Returns Management, LLC - Founder, President, and Analyst [70]

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I'm sorry in advance if I missed this comment. A.M. Best has, as you know, come out with some guidelines for, I guess, mortgage insurance and mortgage reinsurance. And I'm wondering if you expect sort of the A.M. Best -- the evolution of their sort of focus on mortgage insurance and increased definition around their mortgage insurance view is going to have an impact on the cost of reinsurance for traditional MIs.

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Timothy J. Mattke, MGIC Investment Corporation - CFO and EVP [71]

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This is Tim. I think it's too early to tell what that will be. Obviously, I think A.M. Best is looking at it because they view a lot of their customers, clients as participating more in it. And so when you have either regulators or ratings agencies taking a closer look, it always leaves you open to some view change. But I have not heard anything, but I think it's too early to know exactly how those reinsurers will look at it. But I haven't heard anything from a market standpoint that leads me to believe that this would shift anything.

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Operator [72]

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At this time, we have no further questions. I'll turn the call over to Mike Zimmerman for closing comments.

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Patrick Sinks, MGIC Investment Corporation - CEO, President, CEO of Mortgage Guaranty Insurance Corporation, President of Mortgage Guaranty Insurance Corporation and Director [73]

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This is Pat. I just want to thank everybody for joining our call, and have a great day.

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Operator [74]

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Once again, we'd like to thank you for your participation on today's conference call. You may now disconnect.