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Edited Transcript of MTG earnings conference call or presentation 4-Feb-20 3:00pm GMT

Q4 2019 MGIC Investment Corp Earnings Call

MILWAUKEE Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of MGIC Investment Corp earnings conference call or presentation Tuesday, February 4, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael J. Zimmerman

MGIC Investment Corporation - SVP of IR

* Nathaniel Howe Colson

MGIC Investment Corporation - Executive VP & CFO

* Timothy James Mattke

MGIC Investment Corporation - CEO & Director

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Conference Call Participants

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* Arthur Michael Winston

Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Fourth Quarter 2019 Earnings Call. (Operator Instructions) With that, I would now like to hand the conference over to your speaker today, Mr. Mike Zimmerman. Thank you. Please go ahead, sir.

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

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Thank you. 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 results for the fourth quarter of 2019, our Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. I want to remind all participants that our earnings release of this morning, which may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. We've posted on our website a presentation that contains information pertaining to our primary risk in force, new insurance written and other information which we think you'll find valuable. I also wanted to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and interested parties may 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 today. 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 8-K.

And with that, let me turn the call over to our CEO, Tim Mattke.

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

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Thanks, Mike. Good morning. I am pleased to report that the solid financial results for the fourth quarter capped a strong 2019 as we continued to execute on our strategies and kept our focus on the long-term success of our company. In a few minutes, Nathan will cover the details of the financial results, but before he does, let me make a few comments. First, our GAAP net income of $674 million was an all-time high, and we are very proud of this accomplishment. Our insurance in force increased approximately 6% year-over-year despite the increase in mortgage refinancing that lowered our annual persistency.

Reflecting the size of the origination market, our market presence and our increased share of refinancing transactions, we wrote 26% more new insurance than we did in 2018. In addition, the new insurance we wrote has strong credit characteristics and is expected to generate meaningful returns for shareholders. Overall, current credit conditions are favorable. The number of new delinquency notices received continues to be low and cure rates remain strong, both of which should be good news for losses incurred in 2020.

We increased the amount of capital we were able to upstream from our insurance subsidiary, MGIC, to our holding company from $220 million in 2018 to $280 million in 2019. There's more news on that front for 2020 that I'll address in a minute. We used a portion of the increased holding company liquidity to return capital to our shareholders, repurchasing shares of our common stock and reestablishing our common stock dividend. These actions supported our strategy to manage and deploy capital to maximize our long-term value. Over the last year or so, we have been asked about this capital management strategy. Let me take a moment to address that issue.

First, let me say that capital strategy cannot be static, it must be dynamic. This is particularly pertinent today because our business model has transitioned to one where we still acquire managed mortgage risk, but we now more actively seek to reduce the volatility of losses and diversify our capital base through reinsurance and capital market transactions. We have used quota share transactions since 2013 and have used insurance linked note transactions executed in the capital markets on portions of the 2016 through 2019 books. We have been able to execute these transactions at attractive cost of capital and intend to continue to use these capital sources when it makes long-term economic sense. In addition to diversifying our sources of capital, these transactions enhance our returns and reduce losses in weaker economic environments.

With our business model, there will be times where we generate more capital than we can prudently deploy in acquiring residential mortgage risk that meets our risk-adjusted return targets. In those times, we assess our next best alternatives for our capital include returning it to shareholders. We have preferred to deploy capital by acquiring residential mortgage risk as a primary mortgage insurer, but we certainly will look to other ways to use our capital and expertise such as by participating in GSE credit risk transfer transactions.

The increased use of quota share insurance linked notes decreases our reliance on traditional debt and equity sources of capital. This impacts how we consider the allocation of our capital in the future. So as we routinely consider the level of capital that we retain for future deployment versus return to shareholders, the levels will vary based upon the business environment we are or expect to be in. Our balance sheet is currently strong from both the statutory and PMIERs perspective. Reflecting our balance sheet strength and our outlook over the next 12 to 24 months, I am pleased to tell you that in January of this year, MGIC received the necessary approvals to pay a $320 million special dividend and a $70 million quarterly dividend to our holding company. Our Board also authorized an additional $300 million share repurchase program. This is in addition to the $111 million remaining under the 2019 authorization.

Circling back to the core business. I would characterize the total mortgage origination market as healthy. Consumer confidence remains strong, and mortgage remains -- rates remain attractive. While the supply of homes available for sale is still tight, there's strong demand for homeownership. Our current expectation is that the 2020 total mortgage origination market will be approximately $2 trillion, which is down modestly from 2019, primarily due to fewer refinancing transactions. And of course, keep in mind that the amount of refinancing transaction is clearly the most difficult item to forecast, so there could be some variability in this outlook. As we look ahead to 2020, I remain optimistic about our ability to prudently grow our insurance in force given the healthy mortgage origination market, our capital strength and our position in the market.

We estimate that our primary insurance in force will grow in the mid-single-digit range in 2020. This rate of growth assumes annual persistency improves over the course of the year from its current level and that we write new insurance in the $55 billion to $60 billion range. We are focused on the long-term success of the company. We do that by offering competitive products and services to customers while maintaining a sharp focus on expected risk-adjusted returns on capital and expenses. We think this is a winning strategy for all stakeholders.

With that, let me turn it over to Nathan.

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

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Thanks, Tim. In the fourth quarter, we earned $177.1 million of net income or $0.49 per diluted share, which compares to $0.43 per diluted share from the same period last year. For the quarter, we generated an annualized 17% return on beginning shareholders' equity.

Net premiums earned increased 8% compared to the same period last year, which was primarily driven by 2 factors. First, insurance in force was higher, although this was partially offset by lower average premium rates on that insurance in force, which I will discuss later. Second, accelerated premiums from single premium policy cancellations increased $5 million in the fourth quarter -- increased from $5 million in the fourth quarter of 2018 to nearly $20 million in the fourth quarter of 2019, reflecting the strong refinancing market. Net losses incurred were $24 million compared to $28 million for the same period last year. Losses incurred consist of reserves established on new delinquencies plus changes to previously established loss reserves. The decrease in net losses incurred primarily reflects the lower number of new delinquency notices received and a lower claim rate on those notices.

During the quarter, we received approximately 3% fewer new delinquency notices than we did in the same period last year. Positive loss reserve development on previously received delinquency notices was modestly higher year-over-year as well. In the quarter, 60% of the new delinquency notices were from the legacy books of 2008 and prior. While continuing to diminish in number, we expect that the majority of the new notice activity in the coming quarters will continue to be from the pre-2009 books. As of December 31, 2019, 88% of our risk in force was from the 2009 and later. The portfolio supplement we published gives you some insight into the strong credit trends of these books. The estimated claim rate on new notices received in the fourth quarter of 2019 was approximately 8%, which is consistent with the prior quarters of 2019. This estimate reflects the current favorable credit conditions and was lower than the 9% claim rate in the fourth quarter of 2018.

The number of loans in our delinquency inventory remains near 20-year lows. The percentage of insured loans were current at the beginning of the fourth quarter but were subsequently reported as delinquent during the quarter continues to remain below 1.5%. Reflecting the low level of delinquency inventory and improved cure rates, the number of claims received in the quarter declined by 34% from the same period last year. Primary paid claims declined by 32% from $62 million to $42 million.

The net premium yield for the fourth quarter of 2019 was 48.4 basis points, down from 49.6 basis points in the third quarter of 2019 but up from 47.3 basis points in Q4 of 2018. Net premium yield has several components. The largest component is what we call our in-force portfolio yield, which reflects the premium rates in effect on our insurance in force. Premium rates on new business have been trending lower over the past several years. As a result, we expect our in-force portfolio yield will continue to trend lower as older books of business written at higher premium rates continue to run off and are replaced with new books of business written at lower premium rates.

The other components of the quarterly net premium yield include accelerated premiums from single premium policy cancellations, changes in premium refunds and the levels of premiums ceded through our various reinsurance transactions and the associated profit commission. While the newer books have lower premium rates associated with them, they are also expected to generate low levels of losses and meaningful risk-adjusted lifetime returns. In addition, our reinsurance coverage on these books is expected to increase the risk-adjusted returns we otherwise would have earned on a direct basis.

It is a good point to mention the information we plan to report on a going-forward basis. We have been previously reporting quarterly statistics -- pardon me. We've been reporting quarterly statistics about our premium rates on new insurance written from monthly premium policies and single premium policies. We've also been reporting monthly statistics about delinquency notices and insurance in force. As we previously announced, we will no longer publish the monthly data about delinquencies, but as we have again this quarter, we will continue to publish the same detailed quarterly statistics about delinquency notices and activity that we currently do. We think that the detailed quarterly information, along with the data and the supplement, provides insights to how credit is performing on the policies we insure.

In the beginning of the first quarter of 2020, we will transition away from providing direct premium rates on quarterly NIW to providing information about the quarterly premium yield on our insurance in force, including a reconciliation of the direct yield to the net premium yield. For this quarter, we have included both sets of information. We will continue to report information about new insurance written and insurance in force both in the press release and the supplement we post to our website. We believe that our disclosure of direct premium rates on new insurance written has increasingly become sensitive competitive information and overemphasizes one element of estimated risk-adjusted returns on new business, which are also impacted by, among other things, expected losses, the amount of required capital and the cost of capital. In addition, the disclosure was not an immediate indicator of near-term revenues because it takes a number of years before the premium yield would converge to the premium rates on new business. We believe that our new disclosure of the trends in and the components of the net premium yield on the insurance in force can provide meaningful insights into the trend of our near-term revenue and value.

Continuing on with the discussion of the quarter. Net underwriting and other expenses before ceding commission were $63 million in the fourth quarter of 2019, which is flat to the same period last year. For 2020, we expect those expenses will increase modestly higher than inflation as we continue to make investments in our franchise. During the fourth quarter, MGIC paid a $70 million dividend to the holding company, and we utilized approximately $20 million under our 2019 share repurchase authorization and repurchased 1.4 million shares. We have approximately $111 million of authorization remaining under that program, which runs through the end of 2020. After considering the payment of the common stock dividend and our share repurchases, the total amount of capital returned to shareholders in the fourth quarter was approximately $42 million, and for all of 2019 was $156 million.

As Tim mentioned, because of our strong capital and earnings position, in January of this year, we received approval from both our Board and our regulator for MGIC to pay the $70 million quarterly dividend and an additional $320 million special dividend to the holding company. We expect MGIC to be able to continue to pay the quarterly dividend at this level going forward. The Board also declared a common stock dividend of $0.06 per share payable on February 28.

As a reminder, any future dividend payments to our holding company are subject to approval of our Board, and we notify the OCI to ensure it does not object to any dividend payments from MGIC. Associated with the approval of the $320 million special dividend from MGIC to our holding company, our Board approved an additional $300 million share repurchase authorization that runs through the end of 2021. The timing and volume of share repurchases in any given period may vary for a variety of reasons, but as we have with prior authorizations, I expect us to execute both the remaining $111 million on the 2019 authorization as well as the $300 million that was just authorized. Given the strong balance sheet we currently have and the expected outlook for capital generation and needs of the writing company, we feel that the additional share repurchase authorization represents a good use of a portion of our capital and, importantly, does not limit the company's strategic options.

At the end of the fourth quarter, our debt-to-total-capital ratio was approximately 17%, and MGIC's available assets for PMIERs purposes totaled $4.6 billion, resulting in a $1.2 billion excess over the minimum required assets. It is difficult to precisely manage our excess available assets, however, some level of excess not only preserve strategic optionality, but it provides an offset against adverse economic scenarios, reliance on third-party capital and the potential for increases in capital requirements from the GSEs should they occur in the future. At quarter end, our consolidated cash and investments totaled $5.9 billion, included $325 million of cash and investments at the holding company. Investment income increased year-over-year primarily as a result of a larger investment portfolio. The consolidated investment portfolio had a mix of 81% taxable and 19% tax-exempt securities, a pretax yield of 3.1% and a duration of 3.9 years.

So to wrap up, I would say that 2019 was a great year, and we are off to a great start in 2020. And with that, let me turn it back to Tim.

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

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Thanks, Nathan. Before moving to questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain encouraged about the future role that our company and industry can play in housing finance, but it continues to be difficult to gauge what actions may be taken and the timing of any such actions. As we discussed last quarter, the U.S. treasury department issued a plan that outlines administrative and legislative reforms for the housing finance system. The reforms are aimed at reducing taxpayer risk, expanding the private sector's role in housing finance, modernizing the government housing programs and achieving sustainable homeownership. The plan did not contain many detailed directives, so the impact of the plan on our company and industry is still uncertain.

Treasury plan calls for the FHFA and CFPB to continue to coordinate their efforts to avoid market disruption. To that end, the FHFA is focused on developing their plan for the eventual end of GSE conservatorship. This includes finalizing the capital rule for the GSEs. We expect another proposed capital rule to be released early this year. The FHFA has selected an adviser to assist in developing their plan. The pathway to the end of GSE conservatorship is complicated and will take time to develop and implement.

The FHFA continues its process of reviewing various pilots and programs that GSEs are involved in, but there have been no updates regarding the IMAGIN and EPMI programs. Our discussions with lenders continue to support the notion that these programs have not gained significant traction to date. Regarding the CFPB, we and other mortgage market participants are awaiting the CFPB's update to the definition of qualified mortgage or QM and specifically any updates that relate to so called GSE Patch, which is set to expire in January 2021.

And the GSE Patch expands the definition of QM to include mortgages eligible to be purchased by the GSEs even if the mortgages do not meet the debt-to-income ratio limit of 43%. The CFPB has recently indicated that it expects to issue for comment no later than May 2020, a proposed new ability to repay rule that would replace the use of DTI ratio in the definition of QM with an alternative measure such as pricing threshold. The CFPB also has indicated that it would extend the expiration of this GSE Patch until the earlier of the effective date of the proposed alternative or until one of the GSEs exits conservatorship.

At this point, it's hard to predict an effective date for the proposed alternative as it is yet to be published, and once it is published, it will take several months to request and review public comments before the final rule can be determined. We do not believe that the intent of the CFPB is to restrict access to credit for deserving homeowners or make homeownership materially more expensive or untenable.

We continue to be actively engaged in all of these topics, and we continue to advocate for and remain optimistic that what changes do occur will include the use of private capital, including private MI. Our company and industry offer many solutions and a great value proposition for lenders and consumers to overcome the #1 barrier to homeownership, the down payment.

I believe that our company is well positioned to acquire, manage and distribute mortgage credit risk in a variety of forms supported by a robust capital structure that includes our strong balance sheet and where appropriate, reinsurance treaties and the capital markets. Our business is performing well financially, and we are generating meaningful returns. We are writing high-quality new business in what is expected to be a low loss environment. That new business is being added to an existing book of business that is performing exceptionally well, and we're generating significant shareholder value. And given our outlook for economic and labor market conditions, we expect that to continue. I am very excited and confident about the future for MGIC.

With that, operator, let's take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question, comes from the line of Bose George from KBW.

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

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Actually, first wanted to ask about the insurance in force growth, the guidance that you gave for the mid-single digits. Do you think your insurance in force growth stays in line with the industry, so the modest decline that you're talking about is really something you expect for the industry as a whole?

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

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Bose, this is Mike. Still getting a hand on that, right? I mean, obviously, market share within the individual companies can influence that, but the refi -- it's really reflecting as we sit here today in expectation of lower refinance volume and then as to what -- how much volume then we would get of the market opportunity. So it would seem like the overall market is small -- MI market is smaller, but exactly a straight pro rata share or not [is the road you're maybe seeing].

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

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Okay. But it's not suggesting anything on share shift. It's really just looking at the size and your expectations there, et cetera.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [5]

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No. That's correct. Right, right.

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

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Okay. Now that makes sense. And then your comments about the repurchase authorization, you mentioned you expect to complete it. The -- in terms of the timing, can you just say, are you expecting to complete it by the -- would the goal be to complete it by the 2021 time line for the authorization?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [7]

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Yes, this is Tim. I think, yes, when we put out the data, our expectation would be that we complete it by the time line that the authorization is in place for.

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Operator [8]

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Our next question comes from the line of Randy Binner from Riley FBR.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [9]

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Just following up on Bose's last question. So the -- it would be ratable, the use of the buyback through the end the authorization. Just trying to understand how it might come through the forecast.

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

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It's Tim again. I guess from ratable, I guess, when I think about that, I almost think about it being sort of an even amount across all the periods. I wouldn't think about it necessarily that way. I think you can think about it being fairly programmatic if we intend to utilize it all, but we might not utilize the same amount of the authorization in every quarter as an example.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [11]

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Okay. And then the other, I guess, is kind of a follow-up, and it has to do with MiQ. And just thinking about how the market's reception of that pricing tool has stabilized. Or is that still changing? And trying to understand where you might end up on market share this year. I think last year, you gave some share up as you transitioned to the new tool. And I think my perception is the market is stabilizing there, but would be interested in your perspective on that.

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

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Yes, it's Tim again. I think when we look at our customers and their adoption of MiQ, I think your reflection that it seems stable at this point, I would tell you, I don't -- when we talk with our sales group, I don't feel like we have customers that we're trying to push MiQ onto that will not accept it by any means. Our view all along has been we want to provide the pricing through mechanism that the customers want. I think as we rolled through 2019, once we got to the third, early fourth quarter, we felt like we probably hit a fairly stable level on MiQ from a penetration standpoint. And now we just continue to execute on that and sort of customer relationships and feel really good about that moving forward.

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Operator [13]

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

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [14]

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So take advantage of this question since it's the last quarter you're providing it. But can you just talk about the decline in the premium yield on the NIW. It does look like the mix shift continues to kind of move towards lower risk. Does that account for kind of all of the sequential decline? Or is there anything else on sort of the competitive nature of the market that's driving that decline as well?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [15]

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This is Nathan. I would say one of the key parts of returns in our premium rates is the capital required, and we've seen really throughout 2019, a decline in the required capital under PMIERs as a threshold, but even under -- that obviously doesn't include DTI, and we've seen DTIs improve throughout the year as well. So as we think about the capital necessary for the business, we have really seen a pretty big decline throughout the year and continuing through the fourth quarter.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [16]

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So that required -- is that required capital is that factoring in kind of the ILNs? Or is there something else that's -- or is that just in the mix shift of the better credit quality that you're writing that's lowering that capital requirement?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [17]

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I think it's certainly true, I guess, what we would call on a direct basis, so before considering reinsurance or insurance linked notes, but it's true net of those as well. So those continue to be kind of attractive tools in the capital structure as well.

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Operator [18]

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

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [19]

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First question on the timing of the special dividend review with the regulator. Can you just talk a little bit about the rationale and their thinking there? And then going forward, is that expected to be an annual conversation?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [20]

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This is Nathan. I would say that the timing was we really started to have conversations in the second half of last year relative to our capital position, the risk distribution mechanisms available in the market, how we were utilizing them and also the credit quality of the business being written on a direct basis. Those conversations continued into January. And then when we formally requested the $320 million dividend, we received the approval. In terms of going forward, I think the way I would think about it is, we feel like this is the appropriate thing for us to do at this time in the future. We're kind of continuing to reevaluate the capital structure and what we want to do. Part of this is a function of the business being written today. A function of the reinsurance and ILN markets continuing to be really attractive. If those things persist, then we could be in a position where we have additional capital, but there's other situations that could exist where this might not become something that we do every year. So I wouldn't want to leave the impression that the special dividend is an annual special dividend but a reflection of the strong position that we're currently in.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [21]

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Okay. That's helpful. And then, Nathan, can you just quantify the amount of single premium amortizations during the quarter?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [22]

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Yes, it was $20 million.

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Operator [23]

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

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [24]

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I wanted to follow up on the question about the pricing and, Tim, ask you maybe a different way. Well, I guess specify what you said about the capital charge coming down over the last year or years. Can you give us an idea of the amplitude of the average PMIERs capital charge change over the last year?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [25]

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Geoff, this is Nathan. I had mentioned that before, but I think the right way to think about it is from like the fourth quarter of 2018 to the fourth quarter of 2019, we've seen, on a PMIERs basis, kind of a move from the low 7% of risk in force to the low 6s. So I think a pretty meaningful change.

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

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And I think, Geoff, just to that point, as Nathan mentioned, that doesn't take in account all the things that we price on, for example, DTI. And so PMIERs cuts DTI at 50-plus DTI. And so when we consider the amount of above 45 DTI and how that changed from 2018 to 2019, I'd argue that it's probably even more pronounced than that.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [27]

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Okay. And then when you look at your pricing, and I'd be curious in your thoughts on what you're seeing competitively as well, do you think -- or is MGIC sticking to its normalized loss expectations and longer-term cost of capital estimates? Or have those estimates changed given credit performance and given the recurring nature of the reinsurance and ILN executions?

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [28]

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Geoff, that's -- it's a really good question. It's tough to obviously know how others look at it. I can tell you that we look at it through a number of different lenses. We're very focused on making sure we think about things through the cycle whatever that cycle might look like. And obviously, we've had a nice extension for a period of time here. But when we consider pricing, we think about different stress environments that we can be in and what the book would look like.

I can tell you with the credit quality being where it is, I think there's less volatility around those scenarios, and I think that can be reflected in the pricing. I think the access to the capital markets and the reinsurers is something that you can't ignore. Although, I would tell you that we look at returns both on a direct basis, as Nathan would say, without that being in place as well as consider how it looks like with those structures in place. But again, part of that process is while we think we have very good relationships with our reinsurers, we think we can sell in the capital markets, we know that those markets can change over time. And so we don't want to become dependent upon those versus take advantage of those outlets when they're available and they're priced attractively.

So all that is really way to think. I think we really look at it both on a direct basis, and that's what we really prepare most of our information on, but we're not -- we don't turn a blind eye to what some of the leverage on returns can happen from the ILNs and the quota share reinsurance but that we need to also be focused on through the cycle. But with a higher credit quality, that does reduce some of the variability and volatility around the losses, I would say.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [29]

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All right. So I guess it sounds like some adjustments going on, but not getting overly aggressive.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [30]

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Yes, I think that's a very nice, short, distinct way to put it, Geoff. And that's -- I think that's what you'd expect from us.

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Operator [31]

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Our next question comes from the line of Jack Micenko.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [32]

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I wanted to come back to the dividend question a little bit. If I look at the run rate, so you're run rating like a $280 million number up to the holdco and then you've got the $320 million one timer. So I'll put that at $700 million. And then if I look at the buyback, plus what's not drawn down, plus 2 years of dividend, I get close to like high 600s number. So I guess the question is, do we -- is it safe to assume you're going to be out of the special dividend conversation now through the end of 2021 when you sort of look at all sources and uses as you've laid them out today?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [33]

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This is Nathan. I mean I would say, like the way I answered a similar question previously, I wouldn't want to say that we will or won't do anything over the next kind of 2-year period. We'll continue to reassess the capital structure, the availability of alternative capital, our other needs for that money at the operating company level and I think could be in a position where we would go back and ask for kind of beyond the $70 million run rate at some point in the future. We're not -- we obviously just got done with this conversation. But I don't think that precludes us from having a conversation about that over the next 2 years either.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [34]

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Yes. I think, Jack, when you think about -- we've had questions before, can we get larger dividends out of MGIC and with ILN activity being out there, the one thing we've, I guess, always been a little bit cautious about is tying dividends out with any one transaction versus viewing sort of the capital in MGIC, sort of on a more ongoing basis. And so I think it's a natural spot for us to sort of annually to go to the OCI and have a conversation about where we're at. I think we feel really good about the quarterly dividends being sustainable through all different sorts of cycles. And so I think the conversation on the special dividend was really about where we are at this time. And I think we'll have the opportunity to have those conversations in the future with them as well.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [35]

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Okay. And then, Tim, in the prepared comments, you suggested that delinquencies would come down in 2020 versus 2019. The notices ticked up a little bit in '19 versus '18. So I'm guessing, well, are we thinking notices now sort of re-trade lower? Or do you expect better cure activity to bring that net delinquency number down next year?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [36]

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Jack, this is Mike. I mean you're right, the comments on there. But I mean we're at a pretty low level right now. So I think 3% year-over-year decline in new notice activity, so it's going to be in that range. We're running like 1.3%, 1.4% of the portfolio rolling delinquent each quarter. I think those are kind of the metrics. Don't be looking for any dramatic changes to those numbers.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [37]

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Okay. So it's more of the same.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [38]

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Yes, yes.

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Operator [39]

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Our 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 [40]

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Wanted to follow up on the same question's everyone else is asking. So if I do my math, I get there is -- there'll be roughly $200 million more coming in from the sub over the next 2 years based off the quarterly dividends and the announced special versus kind of the usage. Just what's the plan for that? What's -- what are the opportunities out there for that additional $200 million given you have $325 million right now at the holdco, the 16% debt to cap? It doesn't seem like there's not a lot of deleveraging or additional capital you need for deleveraging at this point.

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [41]

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Chris, it's Nathan. Can you just -- I'm not following on the $200 million above the -- can you just walk me through the math that you're...

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [42]

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Sure. So it's $280 million of regular dividend each year. It's $560 million. $320 million is special, $880 million. Annual dividend, I believe, are $165 million. Debt expense's $110 million. It's $275 million, it gets you to $600 million. So there's $880 million coming in, $600 million going out. About $200 million delta.

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [43]

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Yes. So you're looking out through 2021.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [44]

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Yes, 2021, 2-year period just because the authorization is for 2 years for the $300 million.

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [45]

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Got it. Yes, I mean, I think at this point, we'll continue to evaluate the uses for that money. We obviously have the quarterly dividend, the share repurchase authorization. As we've kind of demonstrated here, we've been able to get increased authorizations. Over time, we've been able to get them even before the other authorizations have expired. So I think, over time, we'll have options for that money, but nothing to kind of highlight today.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [46]

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Okay. Yes, I was wondering if there's any other nonbuyback opportunities you're thinking about or anything we should put in our mind that might become interesting.

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [47]

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It's certainly something that we continue to evaluate, but nothing to highlight at this point and nothing that I would think in the near term, we'd be communicating in that front.

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Operator [48]

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Our next question comes from the line of Mihir Bhatia from Bank of America.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [49]

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Just want to go back real quick to the premium yields. And maybe since we're going to talk about in-force premium yields going forward, maybe I'll talk about that. Just wondering, is that something special that we should be focused on in Q4? Maybe it was refis or something where the -- it seems like the in-force, the decline in in-force premium yields accelerated pretty materially in Q4. What would drive that?

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [50]

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Mihir, this is Mike. I mean I think you have number of things, right, that are going into that. You have the cumulative effect of all the pricing that has been going on and the new business that's been coming on for the last several quarters, exited by a little bit faster prepays in the fourth quarter. So you're going to see a little bit higher turn -- again, we look at annual persistency, you look at that quarterly persistency, you would see it much lower. So we had a little bit more churning going on of the existing in force being replaced than with the newer business coming on. So I think you've got some of that dynamic that's taking place.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [51]

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Right. Is there a good -- I guess a good run rate in terms of just how much you expect that in-force yield to decline just given how things have been trending that you would be willing to share?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [52]

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This is Nathan. I mean I would say it's a difficult thing to kind of project over a longer period of time because I do think it's a function of refinance activity. It's a function of the future credit quality that we're writing and the premium rates on that business. So I think there's a number of factors. I would look to the larger change in the fourth quarter as we wrote a lot of business in the fourth quarter at a much better risk profile than our in-force book. So a lot of that is just reflecting the improved credit profile of the in-force book as a result of the refinance activity in the fourth quarter.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [53]

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Got it. Maybe just turning quickly to credit. You've had some pretty nice development on the cures, particularly the cure-to-default ratio. It's been steadily climbing. Is that just driven by the economy, better credit quality you've been writing? Anything else that -- anything that you would comment on that? Any more color? And where do you expect that rate to stabilize? I think it's up to like 40% now.

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Michael J. Zimmerman, MGIC Investment Corporation - SVP of IR [54]

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It's Mike. I mean the credit quality is simple as yes. I mean it's economically driven, right? We've got a solid economy and the new book -- and such a small piece of the legacy book that's contributing, and the new business is so strong. Where the cure rates kind of -- we're testing kind of all-time lows on claim rates, if you will, so the [inverse is] on the cure rates, I mean, because they go lower. I think that's just something you have to see why we've been focusing the last few calls about that, kind of that roll rate from clean to delinquent hovering in that kind of 1.3%, 1.4% range or so. That's being a good indicator of where things are at. So that's been pretty stable. So you might see a little bit of variance in the other numbers but nothing material.

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Mihir Bhatia, BofA Merrill Lynch, Research Division - Research Analyst [55]

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Right. And then just last question. How are you thinking about reinsurance and ILN plans for the rest of this year? I think you have an option to reduce the amount you see on your 2019 QSR in July if I'm remembering correctly. And then just thoughts on ILN, has been, I think, almost 6, 7 months now since you did the last 1.

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [56]

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Yes, this is Nathan. I would say for the quarter share forward looking, we have agreed the terms with our panel for our 2020 quota share transaction. So that will again be a 30% quota share with generally similar terms to what we've had in the past, so really nothing to highlight there. The one interesting thing that we were able to accomplish with some of the panel was we got coverage extended to the 2021 vintage. So that's not for the full 30% quota share but for 17.5%. So we have coverage on the 2020 and kind of a little bit reduced coverage on the 2021 book already in place. But relative to kind of optionality on previous deals, our main optionality points are still out in 2021 on a couple of our older quota share agreements. But you're right, we do have some of these kind of reduced session options. But frankly, the quota share continues to be, I think, really attractive for us. We like the structure of it. We like the benefits that it provides. We like the loan level coverage. So it's certainly -- it's nice to have the option, but I wouldn't view any -- either kind of keeping it or executing on that option as being something we've already decided.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [57]

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And I think on the ILN, this is Tim adding in, I think you'd expect us to continue to be active there. And I think, as Nathan said on the quota share, I think the way that we're able to structure the quota share in the ILNs, it doesn't have any quota shares in place, doesn't preclude us from utilizing the ILNs to the extent that we think are valuable to us. So I think you should expect us to continue to be active in that space as well.

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Operator [58]

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(Operator Instructions) Our next question comes from the line of Phil Stefano from Deutsche Bank.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [59]

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Just wanted to go back to the question about the outlook for a decline in new notices. I know you -- it felt like mid-2019, there was an inflection. And I think the messaging at the time was around the new notice or the recently written vintages were just coming into their peak loss years, and that was helping to drive up the new notices year-over-year. Has there been a change since mid '19 in what you're seeing that it feels like new notices should be coming down? Again, I appreciate that it's not material. It's kind of more of the same, but it feels like we had an inflection mid '19, and it feels like, in some ways, we're backing off of that.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [60]

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I would say it's probably more nuanced. I think the one thing that's persisted that we talked about a little about here, and again I don't think this moves the numbers dramatically, but obviously the quality of the book that we wrote in 2019 and those credit characteristics, I think, help us feel really good about it compared to the booking we wrote in '18. And so I think you have all those factors as far as some of those larger books coming into sort of the peak loss years. That's true. I think it seemed similar to when we talked about how you project where premium might go in the future. It's sometimes difficult to predict exactly, especially at the low level we are right now on losses, where exactly the bottom is, and a lot of that has to do with, again, where -- what vintages are coming into the sort of their peak loss years but also the credit quality of those vintages. So as Mike said earlier, I think we don't view it as anything material, really, that we're talking about there. But there's subtle changes, obviously, as we try to project things out based upon the quality of the books and what years they originated.

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Philip Michael Stefano, Deutsche Bank AG, Research Division - Research Associate [61]

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Okay. And a topic du jour is uses of excess capital. Maybe to ask this one a little differently. How is debt reduction involved in the conversation? Is deleveraging there something that's being contemplated? And I think 15% was a line that one of the other rating agencies had given you -- maybe they look more favorable on your rating to the extent you got below that 15%. Is debt reduction a mechanism you're contemplating to get there? Or is it just equity growth through earnings is going to get -- naturally get you there over the coming years?

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Nathaniel Howe Colson, MGIC Investment Corporation - Executive VP & CFO [62]

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This is Nathan. I would say it's certainly something that we continue to talk about. We do have -- as part of the consolidated debt, we do have a draw on the Federal Home Loan Bank, which if we felt like getting under that 15% threshold was important, that's really prepayable kind of any time for us. So we have a mechanism to pretty quickly get under that 15% debt-to-cap threshold but frankly haven't viewed that as kind of a bright line that we need to get over. But it's an active conversation with the rating agencies, and frankly, if we ever view it as that, then we'll take action to do that.

Relative to the other debt outstanding, no strong desire to reduce the overall debt level at this time. And part of that is just driven by the market prices of that debt, the 2063 is -- trade in the $130, upwards of $140 range. So well, it's something that we continue to evaluate. I'd say that's more -- if there was a good opportunity for us to do that, we would think about it versus something we feel like we need to do.

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Operator [63]

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Our next question comes from the line of Art Winston from Pilot Advisors.

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Arthur Michael Winston, Pilot Advisors, L.P. - CEO, President, and Chief Operations Officer [64]

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Following up on the last question, is there any way to force conversion of those 9% junior converts that are trading at $130, $140?

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

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There is. It involves -- the share price needs to be above a certain threshold. That threshold is, I think, $17.46 (inaudible). Yes. It varies now that we're paying the cash dividend on a quarterly basis. The force conversion price will continue to adjust over time. But right now, I mean I think of mid-17s is the level at which we can force convert.

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Operator [66]

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And there no questions at this time. Please continue.

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Timothy James Mattke, MGIC Investment Corporation - CEO & Director [67]

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We appreciate everyone's interest in the company and look forward to a great 2020. Thanks, everyone.

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Operator [68]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.