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

Q1 2019 MGIC Investment Corp Earnings Call

MILWAUKEE Apr 24, 2019 (Thomson StreetEvents) -- Edited Transcript of MGIC Investment Corp earnings conference call or presentation Tuesday, April 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

* Stephen Crail Mackey

MGIC Investment Corporation - Executive VP & Chief Risk Officer

* 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

* 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 Adarius, and I will be your conference operator today. At this time, I would like to welcome everyone to the MGIC Investment Corporation First Quarter Earnings Conference Call. (Operator Instructions) Thank you. Mr. Mike Zimmerman, Senior Vice President of Investor Relations, you may begin your conference.

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

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Thanks, Adarius. 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 first quarter of 2019 are Chief Executive Officer, Pat Sinks; Chief Financial Officer, Tim Mattke; and Chief Risk Officer, Steve Mackey. I want to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we'll 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 primary risk in force and new insurance written and other information we think you'll 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 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 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 we are off to a great start for the year as our financial results demonstrate. Our balance sheet is strong and 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.

Main driver of our future revenue, our insurance in force, grew by 7% over the last 12 months, ending the quarter at $211.4 billion. The increase was driven by the higher annual persistency on the existing book and the level of new insurance written. 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 despite the volatility in mortgage rates to remain attractive. While the supply of homes available for sale is tight, there is a strong demand for homes. So while we may not see a surge in purchase originations, we expect it to remain steady. As a result, I remain optimistic about our ability to 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. I feel very confident by our ability to serve our customers given our capital strength and position in the market.

The quarterly financial results reflect 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 a level not seen in more than 20 years, and that number -- and the number of new delinquency notices received during the quarter declined. The strong credit performance continues to be a tailwind for our financial results. The existing insurance in force has very 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 business objective is straightforward. We strive 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 for our shareholders. One way we are executing on that objective is to offer competitive products and services while maintaining a sharp focus on risk-adjusted returns on capital and expenses. We deployed our new price [enhancement] called MiQ early in the first quarter. As more customers adopt MiQ, its more granular approach to risk-based pricing will assist us in managing the risk and expected return profile of the insured portfolio. We expect it will also allow us to continue to be a relevant business partner with our customers.

However, we know that one approach to delivery price does not work for all customers. So we will continue to work with customers to deliver competitive options that meet our returns for our shareholders in a manner that works best for all involved. That said, I continue to believe that the adoption rate of pricing engines, like MiQ, will increase over the course of time.

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 first quarter, we earned $151.9 million of net income or $0.42 per diluted share compared to $143.6 million or $0.38 per diluted share in the same period last year. In the first quarter, on an annualized basis, we generated the 17% return beginning shareholders' equity. Premiums earned increased compared to the same period last year due to higher average insurance in force as well as a higher profit commission from our quota share reinsurance transaction partly offset by the effect of lower premium rates. Losses incurred consist of reserves established on new delinquent notices plus changes to previously established loss reserves.

Total losses incurred were $39.1 million compared to $23.9 million for the same period last year. We have been disclosing for some time that certain parties have made claims against us concerning some of our past insurance claims decision. The increase in total losses incurred reflects a pretax charge of $23.5 million related to the probable loss related to litigation of our claims paying practices that we have previously disclosed. These matters are part of a confidential arbitration process, so we won't comment on the specifics, but we look forward to putting this behind us.

Separate from this charge that impacted losses incurred, there was a $31 million reduction of losses incurred due to changes in previously established loss reserves before reinsurance, which is similar to the amount we experienced in the first quarter of 2018. As we do each quarter, we review the performance of the delinquent inventory to determine what, if any, changes should be made to the estimated claim rates and severity factors of previously received notices. We continue to experience a favorable credit cycle. The positive development was driven by higher-than-expected cure rates and delinquencies that are aged 2 years or less.

During the quarter, we received 7% fewer new delinquency notices than we did in the same period last year. The rate of improvement on a year-over-year basis reflects the strong credit performance on business written beginning in 2009 and the fact that the remaining 2008 prior books, which is a source of the majority of our new notices received continues to be a smaller and smaller portion of our overall portfolio. The 2009 and forward books account for just 35% of the new delinquency notices but account for approximately 84% of the risk in force as of March 31, 2019. The claim rate on new notices received in the first quarter of 2019 was approximately 8%, which reflects the current economic environment and anticipated cures and was lower than the 9% claim rate we used in the first quarter of 2018. While continuing to diminish the number, we expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters.

Net paid claims in the first quarter were $57 million, while the number of claims received in the quarter declined by 30% from the same period last year. This activity reflects the continued declines of the delinquency inventory. The effective average premium yield for the first quarter of 2019 was 47.4 basis points, effectively flat year-over-year and sequentially. The effective yield reflects changes in losses ceded to reinsurers, changes in the recognition of premiums and single premium policies, changes in premium refund accruals and the levels of premium ceded to the various reinsurance transactions we have in place. 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 higher premium rates continue to run off and replace the new books of business written at lower premium rates. Net underwriting and other expenses were $48.4 million in the first quarter of 2019 compared to $48.7 million in the same period last year.

We continue to expect that in 2019 expenses before reinsurance will be flat to 2018. The effective tax rate for the quarter was 20.4%, up marginally from the first quarter of 2018, as we have more taxable investments than we did a year ago. During the quarter MGIC paid a $70 million dividend to the holding company. The dividend payment reflects the fact that MGIC is generating meaningful capital and that we expect to be able to continue to do so for the foreseeable future.

We expect the dividend, of at least this quarter's level, will continue to be paid to the holding company at a quarterly basis, subject to the approval of our board. As a reminder, before paying any dividends, we notified the OCI to ensure it does not object any dividend payments from MGIC. At quarter end, our consolidated cash and investments totaled $5.6 billion, including $299 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 79% taxable and 21% tax-exempt securities, a pretax yield of 3.16% and has a duration of 4.0 years.

Our debt-to-total capital ratio was approximately 18% at the end of the first quarter of 2019. At the end of the first quarter, MGIC's statutory capital is $2.7 billion in excess of the state requirement. At the end of the first quarter, MGIC's available assets totaled approximately $4.5 billion, resulting in a $1.1 billion excess over the required assets. Regarding the appropriate level of excess to PMIERs, it is difficult to actually manage to a specific target given the regulatory requirements for paying dividends. Some level of excess provides a nice buffer against adverse economic scenarios as well as the potential for additional capital requirements from the GSEs should they occur in the future. In excess to minimum PMIERs requirement also positions us to take advantage of new business opportunities should they occur.

As forecast change about the timing and severity of a recession, investors have been trying to determine what impact there would be to our earnings power if we are to experience a moderate economic downturn. If such a downturn begins today, we would expect to continue to be able to generate double-digit after-tax return and continue to increase book value. We arrive at that expectation based on our current internal modeling of the existing book of business that is based on a modified 2017 CCAR-adverse scenario to make certain assumption, including among other items, a 10% decline in home prices and unemployment rising to approximately 7%. And that incorporates our existing quota share insurance treaties and insurance like no transaction.

Finally, I want to spend a few minutes discussing our capital position and how we think about allocating capital. First, I'd say that when you take a step back and look at the uses of the annual amount of capital that's being generated to do business we expect to write and the existing level of dividends MGIC is paying, the substantial majority of capital that's being created is accounted for. As a reminder, in 2018, we repurchased nearly 60 million shares or 4% of our shares outstanding at an average cost of $10.95. We have $25 million remaining under a share repurchase program that does not expire until the end of 2019. Additionally, the Board recently authorized additional $200 million share repurchase program that runs through the end of 2020. I would expect this to continue to be opportunistic in utilizing the remaining 2018 and new 2019 authorization. When deciding when to repurchase shares, we consider a number of factors, including our internal 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 discuss strategies to allocate, utilize the capital to exist at the writing company, we first estimate how much capital is needed to support the new business that is being written. We've also started to become modestly more active with the GSE risk transfer transaction that require capital support and we expect to remain active in this area provided that the returns meet our thresholds. Of course, we are also sending dividends now at $280 million annual run rate to the holding company. We do have periodic options to adjust the level of quota share reinsurance we utilized, which could impact the amount of excess, but the level of reinsurance we have today creates a level of excess we do have. While there could be no impact on our first quarter financial results, we did give notice to the reinsurers of the 2015 quota share transaction that we are exercising our options to terminate that treaty, which in turn allowed us to renegotiated a new treaty that effectively reduces the percent ceded on that block of business from 30% to 15%. The new treaty will be effective starting June 30, 2019, and is expected to reduce our PMIERs excess by approximately $200 million and will be modestly accretive to earnings beginning in the third quarter of this year. The transaction, while agreed to with our reinsurance partners, still needs to receive GSE approval, which we expect to receive.

So we will continue to analyze and discuss with the board the best options to deploy capital 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 of this topic in Washington. A new FHFA Director, Mark Calabria, has recently been sworn in, and he has appointed Adolfo Marzol as his principal adviser. Director Calabria has a great deal of knowledge about housing policy and Mr. Marzol has a great deal of expertise and how the mortgage market functions on a day-to-day basis.

Recently, President Trump directed the U.S. Treasury Department to develop a plan as soon as practical 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. Exactly what will unfold and how the role of the GSEs, FHA and private capital play out remains to be seen. But we are encouraged that Director Calabria and the team he is assembling see the private sector as part of the solution for transferring credit risk away from taxpayers.

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, our industry, offers many solutions and a great value proposition for lenders and consumers to overcome the #1 barrier to home ownership, the dollar payment. I believe that our company is well-positioned to acquire and manage mortgage credit risk in a variety of forms supported by a robust capital structure that includes our strong balance sheet, and where appropriate, reinsurance treaties and the capital markets.

I will close my comments where I started. We are off to a strong start 2019. We grew our insurance in force by more than 7%, investment income increased, credit losses continue to improve, expenses are being held and checked, and we increased the quarterly dividend to our holding company. We are writing high-quality new business in what is expected to be a low loss environment as being added to an existing book of business that is performing exceptionally well, and we are generating significant shareholder value. That is why when I look ahead, I'm very excited and confident about the future of 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) And your first question comes from Douglas Harter from Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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On the reinsurance treaty that you renegotiated, which vintages does that cover? And is there any change to kind of your use of reinsurance on new insurance written?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [3]

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Sure, Douglas, this is Tim. The way to think of it is that covered business that was 2016 and prior, so it was the largest outstanding treaty, but it covered vintages all the way back through crisis era as well. So we're getting $400 million of premium credits. We're going to cut it effectively in half from a 30% quota share down to 15% quota share, which we think is the right thing to do, sort of, at this point with those vintages. And again, I think it's a way to demonstrate sort of the flexibility that the reinsurance allows us to do and appreciate the help our of reinsurance partners in that.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4]

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And then I guess on the 2017 and later vintages, I guess when would you have the next option to kind of revisit that treaty? And I guess how are you thinking -- or how are you thinking about that? And kind of if is there a point of delineation on the 2016 before just kind of when the treaties came up?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [5]

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It's really just more when the treaties came up what we had in there. I think we're still a couple of years out from anything on the '17 being able to be looked at. But again, I think we try to think ahead and think about when we might want flexibility. So as you [see] it, there's then good seasoning associated with those books of business to look at that. So we'll continue to use the traditional reinsurance markets, continue to look at insurance like the [hot] markets as well as effective ways to lay out capital and manage our risk.

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Operator [6]

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

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [7]

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Tim, first question, with respect to that QSR adjustment, how much risk is currently associated with the '06 -- or the '16 and prior?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [8]

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I guess if we look at that, Geoff, I mean, effectively it's a 30% quota share. So I think from our supplement, if you look at that for most of those vintages, I'd say, post '11, it seems 30% of the risk is going into that. If you start to talk about the risk associated with the '08 and prior, I'd say it was only a select portion of that. So I'd say a good way of sort of approximating that is to look at the supplement and assume 30% with anything sort of postcrisis, and precrisis, it's a smaller amount.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [9]

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Okay. And then also, this quarter, there was a jump up in the NIW subject to reinsured. Does the '19 quarter have any kind of different restrictions on business? Or is it a broader pool of business that's eligible for the QSR?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [10]

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We were able to negotiate some changes in caps to certain risk characteristics that -- when we look at the first quarter business that compared to the fourth quarter last year, it said some of those caps might have been impacting how much was ceded. So it was really along those lines.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [11]

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Okay. And then just a number question, the accelerated single premiums in the quarter?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [12]

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Accelerated single premiums in the quarter was just under $6 million.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [13]

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And then last question, what is your ILN strategy with respect to frequency? Is this something where you think you're going to come to market once a year? Or are you going to try to come twice a year and wrap each half year a book? How are you approaching that?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [14]

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Yes, Geoff, I mean it's -- again, this is Tim. It's a good question. I think obviously we're reducing. We're going to be somewhat programmatic with it. It's one of those things where we have a quota share in place. We have taken their accounts sort of building up for reasonable amount of risk that we can cede off and that the bonds could be filled through that. So I think there's basically a play -- interplay between giving the appropriate size of securities that could be filled and sort of timing that is close to sort of when the business has been written as possible.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [15]

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So sticking with kind of an annual run rate or is it just up in the air?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [16]

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I think annual is probably the way to think about it. I mean it could potentially be quicker than that. But again, with our 30% quota share in place and how long it takes depending upon the volume business we write, I think annual is the right way to think about it as opposed to anything that's more frequent than that.

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Operator [17]

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

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

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I'd like to ask a question on the claims paying related litigation. Can you just elaborate a little bit more on what the issue was there and if this amount you've put aside would settle that litigation from your perspective?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [19]

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Yes, Randy, this is Mike. I mean so the issue is just that they are questioning our claims paying decisions in the past where we did not settle claims in recessions or denials or other issues along that front. So it's just that laying off those decisions, and they are questioning the legitimacy of those. So that's the issue that surrounds it. Several years ago, these settlements were countrywide and others along those same lines. So that's the issue with it. Second part of your question on that was?

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [20]

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Well, I guess, so I mean so this is a class action? Is that right?

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

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No, no. It's not a class action. Individuals serve to serve as questioning the claims.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [22]

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So it's with one service. So would you view this as a resolution of that litigation? Or would this...

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

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Well, it's not resolved yet. So we're at a point where we can make a probable and estimateble charge. So we took the charge at this point, and we hope to be able to resolve it. It's going to be behind us.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [24]

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And it's all...

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [25]

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It's not done. I mean these last long time, right? I mean so not unlike the IRS litigation. These things can linger for long periods of time.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [26]

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It's all in legacy claims though from the crisis years, yes?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [27]

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That's correct.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [28]

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And then just on MiQ, I think when we had this last call, it was quite new? And I'm just curious now that a quarter has gone by, do you have kind of a feel for the kind of a takeup rate and the feedback you're getting on that from your distributors?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [29]

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This is Pat. Yes, it's been in the market now for a little more than 90 days. We're learning as we go. We have a number of customers signed up, some are already using it, some are just hooking up to technology. I would call it just kind of a steady increase in the amount of business we are doing there. It continues to be one of a number of options. We have not pushed it on our customers, rather we've relied on their desire to how fast they want to go. So we still have the premium rate card in the market. We do forward commitments on occasion. So it's just one solution, if you will, but it's progressing as pretty much as we had expected. We are learning as we go. But I still expect that by the end of this year, it will be the dominant way of doing business.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [30]

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And the MiQ -- so the MiQ by the end of year will be the majority, like over 80%? Is that kind of rough numbers?

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [31]

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I wouldn't go so far as to say 80%. I mean we haven't disclosed anything on that. But yes, it will be the majority, that's for sure.

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Operator [32]

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

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [33]

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Just going back to the quota share, did you give a number for the net premiums that were ceded under that in the first quarter?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [34]

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Yes, Bose, this is Mike. In the press release put up there, so the premium ceded -- $28 million of ceded premiums written in the quarter.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [35]

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And Bose, just for clarity, that's related to all of the reinsurance transactions, quota share reinsurance, not just for the particular treaty that we have given notification to terminate NIW effectively come up with a new agreement on.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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Okay. And Tim, roughly how much of that is the QSR? And is this treaty just trying to think about what that number is that will come into earnings starting in the third quarter?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [37]

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Well, I think there's a couple of things to think about there as we're still going to have it in place in the third quarter and it's just going to be reduced from 30% to 15%. So if that run rate is going to go down, we will be able to reduce the cost a little bit. So as we said in the comments, I'd say mildly accretive to earnings, but it's not something that I would view as significant.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [38]

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Okay. Great. And then actually just going back to the -- your comments on capital, you've got this $280 million annualized that's going to the holding company and you already have whatever $300-ish million there. In terms of the capital that's -- the $280 million that's going there, is it fair to think about that capital as sort of available to be returned to shareholders so that could be used for buybacks and maybe something more than that, but at least that level could be used -- could be returned?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [39]

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Yes, Bose, I mean I think we've talked about before that we want to make sure we have sort of 2 to 3x interest carriers in the holding company. We're still ways off from the next debt, the due, which is 2023. When you think about 3x, it's $180 million. So we do have an excess there and then you think about the run rate. With the amount of shares that we repurchased last year, I think we are right around $175 million. I think we feel like we have the flexibility to do that, and that's the current dividend run rate of the holding company. I think we have that available, and so I think that's in line with what you're saying, but we are going to look to be opportunistic with that, quite frankly, which is what we, I think, demonstrated over the last year.

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Operator [40]

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Your next question comes from Jack Micenko from SIG.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [41]

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I'm wondering if you have the average coupon rate on the insurance in force book. And as because I think persistency came in a bit better than expected with the moving rates in the fourth quarter and we gotten some investor concerns -- as they risked to refi and that persistency rate pulling back, but obviously rates would have to go through sort of the prior level for that to really have it in size. I'm just curious if you had a rough number for us to think about on where the portfolio has been on a rate basis?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [42]

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Jack, this is Mike. So the short answer is no, right? Typically, our claim is what the weighted average coupon is. But I mean I think if you look at each vintage year in the 30-year mortgage rate that's being delivered to Freddie and Fannie. Now that will be the proxy floor, but I don't have a calculated weighted average coupon. But certainly, where the increase in rates really was that second part of '18, right, I mean so that [would be the value of the book] that probably is slightly to be exposed, but it's a pretty small segment.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [43]

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Okay. And then on the NIW, the 95 LTVs moved up about 300 basis points in terms of mix. Is that strategy and the impact of more adoption of dynamic pricing? Or is that more with the markets given you relative to maybe some of the competitive landscape with some of the government programs?

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

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I'd say all of the above, the latter part of your answer. It's difficult for us to say it's just because of MiQ, just market dynamics and the mix during this period of time.

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Operator [45]

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

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [46]

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My first question around the severity. They are continuing to trend lower. Can you just talk a little bit about what's driving that? And can we expect to see that benefit continue now it's very huge, at around 44,000?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [47]

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Yes, McKenzie, this is Tim. I think obviously this quarter, we felt the average claim paid come down. I think historically sometimes that sort of bounced around a little bit, so I think we're hopeful that trend continues. I think it's safe to say when you look at sort of where the default inventory is now. It's a little bit less out of some of the states that we're judicial where it just took a long time and so some of the costs of how long it was in the delinquent inventory added on to the severity. And I think that was home price appreciation obviously that's been beneficial, too. I think it's a good trend, but again the drop in the quarter, I'd say, it's -- we'll look to see another quarter to see if that persisted at that sort of level. But again, very happy with sort of where the trends have gone from a severity standpoint.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [48]

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Okay. Great. And then similarly on the claims rate, is there a floor that we should be thinking about as the legacy continues to roll off, and we see that benefit in the claim rate trending lower? Obviously, it's a hard number to peg, but anything we should be thinking about that would kind of offset the downward trend?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [49]

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McKenzie, just to be clear, you're talking about the claim rate on new notices or the claim rate -- new notices?

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

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Yes.

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [51]

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Yes. I mean 8% for the quarter is probably as low as I can remember. Keep in mind the first quarter, on a seasonal basis, normally is a little bit lower than the annual rates for the year. But again I think we've been very happy with the credit trends and again with the reserve release we had this quarter, and things have continued to perform better than what we have been putting it on, say, a year ago. So we reflected that. We're talking about a floor, I think, we've talked about in the past. I didn't see it getting much below 8% to 9%, and it's hard to see it necessarily doing so for any prolonged period of time. But again, we're obviously experiencing a good environment right now and good credit quality of the portfolio.

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

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Okay. That's helpful. And if I could just ask one more, Pat, just a bigger picture question on the competitive environment. Now that the industry is pretty well along and rolling out the black boxes, what are you seeing just from the competitive standpoint compared to about a year ago when things were more heated?

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

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Well, I think our understanding is that everybody, all 6 MIS, are in the market with their form of risk-based pricing and some are obviously further along they have adopted sooner than the rest of us did. So we're trying to kind of feel our way through that. Thus far, I wouldn't say there's been any major surprises, but we're monitoring as we go. And I think your remains competitive, there's nothing different about that. We're just going about it in a different way with a different pricing mechanism.

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Operator [54]

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

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [55]

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Could you help me think about when you do find your stock attractive or opportunistic, if I just look today buying back your stock complies to 12% to 13% return -- risk-free return? And holding the cash at the holding company seems to probably earn something much lower than that. So I'm just trying to figure out what's that deterministic point for you?

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

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Chris, this is Tim. Obviously, we're not going to give out an exact spot. All I can do is point to what we purchased back at historically. And I think we gave a little bit more color as far as some of the metrics we look at, which is discounted cash flow as well as some market indicators as far as price to book and price to earnings. And there are definite trade-offs there. I think we are aware of sort of what goes on from a marketplace. But it's one of those things where we just continue to look at it, have discussions with our Board about where we think appropriate levels are, feel like we are pretty disciplined in sort of the methodology looking at it, and again, I think are hoping to be opportunistic when the opportunity presents itself. But recognizing also that we're trying to return capital to shareholders if we can't deploy it.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [57]

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Okay. And I appreciate the comments about the difficulty in managing the excess capital at the subsidiary level and pulling back, I guess, $200 million of credit for the QSR. Has there been any thoughts or discussions about a special dividend of a larger nature post PMIERs 2.0 and the availability of ILN market?

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

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Yes, Chris. I think we have conversations with our regulator on a pretty routine basis, sometimes more in-depth probably on annual or semi-annual basis about sort of where we think we can go with dividend. I would tell you that we haven't had any in-depth conversations about sort of a larger special. But we do have conversations with them regularly about how does reinsurance tradition in the ILN impact their view on dividend capacity, where do we think that could go to. And again, so we're very happy that the regulator approved the increase to $70 million a quarter this year, but obviously that's not our full earnings run rate. But again, continue to have that dialogue, and I would say, that we will continue to explore not only quarterly but could there be other dividends, but at this point, there's nothing imminent and nothing really just to discuss in detail as in the quarterly.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [59]

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Okay. And just one little one, the new premium yield on new business dropped 1 basis points quarter-over-quarter. Was there anything material in that? Or is that mix related?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [60]

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Chris, this is Mike. Yes, it is mix related and don't forget, right, it's -- we've been discussing for a period of time, right, with the new premium rates that were in effect last year, the older book falling off -- or that the yield, but as new premium rates were effective last year, that's going to result in a lower premium rates. So mix related but nothing other than that.

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Operator [61]

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Your next question comes from Mihir Bhatia from Bank of America.

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

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Couple of just quick questions. First this thing with just the capital return. Was there something in Q1 that while you were doing maybe the reinsurance or something, where you weren't able to be active for some reason with capital returns or with repurchases?

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

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Mihir, this is Tim. No, no, there's nothing specific to preclude us for being active with share repurchases.

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

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Okay. And you all didn't do any in Q1, is that right?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [65]

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Correct.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [66]

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Correct. Okay. And then just wanted to understand that I think in your disclosure you talked to us a footnote about changing the way DDI is calculated. What was the driver of that? And I guess what is the impact that you all expect from that change?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [67]

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Yes, Mihir, this is Mike. So that happened last year really where it conformed with what the market practices still were. So we're calculating it. We're using the -- for pricing and eligibility is excluded out for. So it's really conforming to market practices. What was driver before, now is the change.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [68]

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Okay. That's helpful. And then just on the premium rate, obviously, I think just following up. With the impact of MiQ, do you expect that to moderate that drop, accelerated or no change? I think the expectation is that the average premium rate will continue and decline a little bit just from -- as the new stock and the lower pricing works its way. But unlike with MiQ, obviously, it's more granular pricing, and it's not just the rate card. So I was just wondering will that help moderate that downward trend or not really.

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

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So Mihir, it's Mike. It's difficult to say. It's going to be mix depended on the business that comes in, and obviously, the pricing because it's a dynamic pricing tool at the same time and how much of it comes through MiQ versus other ways of delivering price. So it's still one that we just will continue to watch as it comes through, but it's difficult to say that it will definitely try in one way or the other.

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

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And sorry, just one last question staying on that, just following up. When you all priced up, the returns are pretty similar across all the buckets, right? I mean that's the idea behind this dynamic pricing is all more granular?

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

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This is Mike. We haven't changed our return criteria. Correct.

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Operator [72]

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Your final question comes from Phil Stefano from Deutsche Bank.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [73]

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In thinking about new notices, it feels like some of your peers have started to talk about the inflection and then uptick in new notices coming through. Obviously, we got the 70% approved year-over-year in first quarter '19. I guess thinking long run, how should we think about the inflection that's probably going to come at some point as this legacy book burns off and we have this normalized rate moving forward of the new business post crisis?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [74]

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Phil, this is Mike, again. I can't speak obviously to the competitor's statements of what they are experiencing. Clearly, our book is a little bit more mature and stable from that side of it versus others who might be growing. So I guess that could be one possible reason they see a higher rate. About 2/3 of our notices are still coming from the older book, 1/3 coming -- a little more than 1/3 coming from the newer book and very low loss rates. So looking at Steve...

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Stephen Crail Mackey, MGIC Investment Corporation - Executive VP & Chief Risk Officer [75]

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Yes. This is Steve. I would just say as the legacy book continues to roll off, we're going to be looking more at the economic fundamentals to drive mortgage performance. And where we stand today, there's outstanding economic fundamentals that drive mortgage performance. We've got a very tight labor market. We've got solid wage growth. We've got home price appreciation. So all those board well for the performance of the post-crisis vintages. And as long as those trends stay in line, I would expect to see continued strong performance from our post-crisis book vintages.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [76]

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Maybe trying to get to the same point but from a different perspective, assuming -- or looking at just the post-crisis book of business, is there a percentage of loans in force that you'd expect to be new defaults on a quarterly basis? Or is there a way to think about kind of what normalized looks like from that perspective?

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Michael J. Zimmerman, MGIC Investment Corporation - Senior VP, IR [77]

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Phil, this is Mike. I mean so clearly bottling out, we have seen this team spent a lot of time looking at that and doing forecast. We don't -- we're not prepared to tell you we expect -- or why was that because that leads into, to a certain extent, some forward guidance relative to earnings and losses incurred, but then we don't do forward guidance. But historically, I would say, if you look back at long periods of time, you go back to the '90s and so on, you'd see 1%, 1.5% of our portfolio, per performance portfolio roles delinquent, in any given quarter then you apply the cure rate. Whether that range is still appropriate, given the comments like Steve made relative to the outstanding credit characteristics and the economic environment we're in, does they trend lower than that, does it stay in that range, I mean that's something that we continue to watch and monitor at the same time. But that's why we say we continuously expect strong performance, but is there a normalized level? I mean we have a very different mix of business today than we do from the historic side of inflow. So it's difficult to say.

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Operator [78]

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Our next question comes from Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [79]

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Tim, just one follow-up with respect to the incidence assumption. Last year, you had I think about a 50 basis points uptick on the incidence assumption into the second quarter. And you've always cautioned us that the back half of the year, you could see upticks depending on what the experience is. With you now down to 8%, is that a level you think can be sustained? Do we still think about seasonal pressure as the year go on potentially? And with what you're seeing, what do you think is the prospect for it to go potentially even lower?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [80]

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Geoff, again, a good memory on that. I mean from a seasonal standpoint, there's always going to be a view that the first quarter claim rate should be lower, based upon sort of just history of what you've seen. So I would say that I would still expect that seasonally that you would expect the first quarter to be better than sort of the remainder of the year. That being said, obviously, the claim rate that we estimated over the last couple of years that continues to trend lower. So it's hard to say that it wouldn't be at that level going forward, but based upon what we know now and based upon noise from the history around seasonality, our expectation is that it wouldn't be at 8% next quarter, for example. But again, we will look at it in the second quarter based upon the information we have then, taking into account sort of the trends and the seasonality we've seen historically.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [81]

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And given how the books performing, the potential drop below 8%?

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Timothy James Mattke, MGIC Investment Corporation - Executive VP & CFO [82]

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I mean it's tough to tell I think with where we are right now. We feel comfortable that 8% is the right level for this quarter, but it's difficult to say if it goes below that or if it goes back up next quarter.

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Operator [83]

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There are no other questions from the phone.

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Patrick Sinks, MGIC Investment Corporation - President, CEO & Director [84]

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Okay. This is Pat. Again, the year is off to a great start. We're very pleased. Thank you for your interest in our company, and have a great day.

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Operator [85]

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