MGIC Investment Corporation (MTG) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder this conference is being recorded. I’d now like to introduce your host, Mike Zimmerman. Please go ahead.

Thanks, Stephanie. 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 both the full year and fourth quarter of 2014 are Chairman and CEO, Curt Culver; President and COO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Larry Pierzchalski. I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC’s website, which is located at mtg.mgic.com under Investor Information, includes additional information about the company’s quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. As we have indicated in this morning’s press release, which we posted on the website a presentation that contains additional information pertaining to our primary risk in force, new insurance written and other information which we think you’ll find valuable are enclosed within. As a remainder when there is net income we must transfer [ph] dilution for each of our convertible securities. For this quarter, in the fourth quarter of 2014 all the shares that could be converted relative to the 2017 and 2020 securities were included and the associated interest from those securities were excluded for purposes of calculating the diluted EPS that was reported in the press release. During the course of this call we may make comments about our expectations of the future, which in this call also include statements regarding the potential impact of the draft GSE mortgage insurance eligibility requirements or alternatives MGIC could pursue for these draft mortgage insurance eligibility requirements implemented in their current form. 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 any obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K. So that said it’s been my privilege since 2003 and again today for the final time to turn the call over to our CEO and Chairman, Curt Culver.

Thanks Mike. Good morning all. I’m pleased to report that in the fourth quarter we recorded net income of $74 million or $0.19 a share, compared to breakeven quarter in the fourth quarter of last year. I am also pleased to report that we achieved another milestone in our company’s recovery by recording net income of nearly $252 million for the full year 2014 or $0.64 a share on a diluted basis. It’s not been since fiscal year 2006 that I have reported annual profitability to you. And I’d like to thank you for your support from shareholders and customers and the hard work and dedication of my fellow co-workers at MGIC who made it all happen. The quarterly financial result was driven primarily by a lower level of incurred losses, which totaled $117 million compared to $196 million last year. The decrease was primarily a result of receiving 17% fewer delinquency notices in the same period last year and an improving cure rate on new notices year-over-year. For the quarter incurred losses had a one-time benefit of approximately $20 million, nearly half of which was attributable to favorable resolution of litigation relating to our bulk business. During the quarter we made no material changes to our claim rate or severity assumptions, but there were minor changes that involved assumptions regarding loss adjustment expenses and IBNR. We made changes to our claim rate and severity assumptions based on how our delinquent portfolio reacts to changes, positive or negative in housing and economic trends. Changes in the credit performance typically emerge overtime and do not occur suddenly. 95% of the new delinquent notices received during the quarter were generated from the legacy books of 2008 and prior. This is particularly telling when you consider that 53% of our in-force was written after 2008. Approximately 85% of these notices have been previously delinquent and tend to have a higher cure rate than notices of a first default. The delinquent inventory ended the quarter down 23% year-over-year and down 3.9% sequentially ending at 79,901 loans. We expect to see the inventory continue to decline during 2015. Paid claims in the fourth quarter were $248 million, down 33% from the same period last year and down 6% from last quarter. As a result of fewer foreclosures being processed, claims received also declined and were down 31% from the same period last year and down 8% quarter-to-quarter. For the full year we paid $1.1 billion in claims versus $1.8 billion in 2013. Like the delinquent inventory we expect paid losses to be lower in 2015 than in 2014. We estimate that our industry’s market share for the third quarter was 15.5% with approximately 25% being single premium, which is predominantly lender paid or LPMI. Within the industry we believe that we have maintained the market share gains we realized over the last several quarters and estimate that our fourth quarter market-share was 20%. For the full year our new insurance written increased 12% over last year, coming in at $33 billion. In the fourth quarter we wrote $9.5 billion of new business, up 43% when compared to the fourth quarter of 2013. LPMI singles comprised approximately 14% to the quarter's volume and reflecting the competitive environment there was an average discount of just under 5% from the LPMI rate card. There was no material impact to the overall premium yield on NIW as a result of the LPMI discount however. While difficult to say precisely, our expectation is that the level of LPMI and level of discount will increase from fourth quarter levels. As you’re aware the FHA is going to reduce its annual premium rate by 50 basis points at the end of January and while we certainly expect the FHA to reduce its premiums in time, after it shored up its balance sheet frankly we were taken aback by the amount of the premium reduction and the premature timing relative to its financial situation. Obviously this premium reduction is contrary to the FHA’s need to increase its reserve fund. It was approximately two months ago that the latest FHA actuarial report reported that the reserve fund was still below its minimum capital level and that an extra year had been added to the amount of time it would take to get to the 2% minimum. In addition the premium reduction is also contrary to the public policy desire for the housing finance system for increased use of private capital. But as I’ve said many times over the past five years it is what it is and let’s get on with it. It’s been a bit more than a month since the GSEs announced that they would again purchase 97% LTV loans provided their mortgage insurance is obtained to lower GSE and tax payer risk. This was welcome news as we are already willing to insure these loans on established guidelines and pricing. However as we sit here today we are not anticipating writing a material amount of this business because the FHA premium reduction will make the FHA more attractive to many of their lower FICO borrowers, after the GSE’s loan level price adjustments guarantee fees and PMIERs are considered. It is disappointing that private capital did not get a chance to demonstrate that it can help improve access to credit for all credit worthy borrowers regardless of FICO score. However even after considering the FHA premium reduction we estimate that for a substantial majority of the business we wrote in 2014 that borrowers would still have had a lower monthly payment using private MI than FHA insurance and if any of the GSEs fees are lowered it makes our premium plans more appealing for all FICO scores. Plus the borrower’s concern was the total cost of mortgage insurance or a faster build-up of equity, private mortgage insurance is a much better execution to the borrower regardless of the monthly cost differential at virtually all FICO levels which is shown on our portfolio supplement. Consequently we do not view the FHA premium reduction as a major setback, but more in line where the pricing differential was a decade ago. Providing a private sector alternative to government insurance is one of the principles that Max Karl founded our company and this industry on and as the largest provider of the government insurance the FHA has always been our largest competitor through the 40 years I have been in the business. This price reduction by the FHA is just another change to the ever changing housing finance system. As a reminder, in the late 1990 and early 2000s FHA was priced at 50 basis points annually and 125 basis points upfront versus the 80 basis points and 175 basis points structure, that will result from the price reduction, and our industry captured nearly two-thirds of that insurable market back then. That was accomplished because we were able to demonstrate that we had a better value proposition for both lenders and the majority of low down payment borrowers and these value propositions are even more favorable today. So as I said earlier, let’s get on with the competition. Overall with 30 year mortgage rates remaining affordable and an improved employment situation we expect a relative healthy purchase market in 2015. Considering current marketplace dynamics we expect to write a slightly higher volume of business in 2015 than we did last year. We could see a materially higher level of NIW if refinances are stronger than we expect. Currently our purchase application pipeline remains robust, running approximately 30% higher than a year ago and we have seen a pick-up in refinance transactions moving closer to 20% from the low teens throughout most of 2014. Insurance in force grew nearly 4% as a result of increased levels of new insurance written and higher persistency to end the year at a $165 billion. At quarter end approximately 61% of our insurance in force was covered by reinsurance transactions. During the quarter in total the reinsurance transactions had the effect of reducing net income by approximately $10 million. At quarter end cash and investments totaled $4.8 billion, including $491 million of cash and investments at the holding company. Our total annual interest expense is approximately $66 million and our next scheduled debt maturity is $62 million due in November 2015. Now let me take a couple of minutes to discuss the regulatory environment. We are still waiting for the final decision regarding the GSE’s mortgage insurance eligibility requirements or PMIERs. We currently expect these rules to be finalized and published no earlier than the end of this quarter. We really -- we don’t really know what if any changes the FHA -- FA and the GSEs will make regarding the various balance recommendations that we and others made, but the comments we have heard were positive to our industry. As we talked last quarter it’s important that the capital rules provide the GSEs with strong counterparties and apply a risk based methodology, but they should also achieve the public policy goals of expanding access to credit for creditworthy borrowers, decreasing the government footprint in housing and reducing taxpayer exposure by encouraging private capital to take a first loss position on residential mortgage credit. In 2014 we estimated that PMIERs were implemented as drafted, that is without consideration for the balance changes MGIC and others recommended, MGIC would have shortfall in required assets of approximately $300 million by the end of 2016. That is despite MGIC’s current risk to capital ratio of 14.6 to 1 and its return to annual profitability. However we believe that a combination of internal resources additional or changes to existing reinsurance contracts and if needed, non-dilutive capital enabled would enable MGIC to mitigate this estimated shortfall and comply fully with the PMIERs requirements. We have been in discussions with the existing panel of reinsurers and feel confident that we’ll have a solution that will eliminate any meaningful capital haircut from the GSEs. Depending on the final form of the PMIERs, re-insurance and internal resources may be the way to overcome any PMIER shortfall. Importantly even if there is no modification to the proposed PMIERs, after considering re-insurance benefits we still will be able to maintain mid-teens returns based on the mix of business we expect to write in 2015, given the underwriting quality and pricing terms being offered. Further we would hope that post PMIERs that GSEs would lower the loan level price adjustments in G fees they charge and begin to seriously consider transferring more risk to the MIs, either in the form of deeper coverage on the above 80% LTVs, or seeking insurance on loans below 80% LTV as our concerns of counterparty risk will have been abated, all of which our company and our industry would benefit from. The review and updating of state capital standards by the NAIC, which the Wisconsin Insurance Regulator is leading continues to move forward, although we are not aware of a timeframe for implementation. We do not expect the revised state capital standards to be more restrictive than the financial requirements of the draft PMIERs. The debate over housing policy and market structure was brought front and center once again with the recent FHA premium price cuts and the GSE’s announcement of 97% LTV loans and the awaited policy direction of G fees and loan level price adjustments by the FHFA. At the same time the President announced the FHA premium reduction he also renewed his call for GSE refinance in the past, I have said that Congress would not act on any legislation for a number of years. It is possible with the change of parties and control of Congress that there is more legislative activity than we initially thought, but I continue to believe that the current market framework is what we will be operating in for a considerable period of time, as Washington moves at a glacial place. In closing, during the quarter we continue to make great progress on the path towards sustained profitability with annual earnings of $252 million. During the year we wrote $133 billion of high quality business the in-force portfolio grew by 4%, the level of delinquencies and claim payments continue to fall, MGIC’s risk-to-capital ratio improved to 14.6 to 1, our industry market share improved nicely and MGIC’s market share within our industry is strong and we maintained our traditional low expense ratio. As a result I feel our company is in excellent position to take advantage of the opportunities being created today, but more importantly we are positioned nicely for growth and success in 2015 and beyond. With that, operator let’s take questions.

Thank you. [Operator Instructions]. Our first question comes from Bose George with KBW. Your line is open.

Good morning. Actually first, can you just go through the components of that $20 million benefit to the losses incurred line item?

Sure. The $20 million benefit you're referring to is the positive reserve development in the quarter. As Curt said just under half of it came from a favorable resolution litigation revolving around our bulk business as far as claim paying practices. The other half I would say are adjustments to our IBNR, LAE and other within there. So I think the point we’re trying to make is there were no significant adjustments to severity or claim rate on the noticed inventory, but it was within those IBNR, LAE and other reserves that the adjustments were made.

Okay great, thanks. And then actually just switching to investment income, just curious what’s been -- what driving that up the last couple of quarters?

I think for the most part we try to move out a little bit on duration, that’s helped us and obviously from a credit perspective we have been able to get a little bit of yield there as well.

Okay. And then just finally on the deferred tax asset can you just give us your latest thoughts on when that could potentially reverse?

Sure, I think based upon looking upon the results this year, as we said in the past it’s a complicated sort of formula in discussion, because there is no pure formula to it. But I think at this point there is a likely chance that it would come back on in 2015. When during the year we don’t know at this point, but I would say that 2015 looks more likely than 2016 at this point.

Okay, great. Thanks and Curt good luck in retirement.

Yeah, thank you.

Our next question comes from Eric Beardsley with Goldman Sachs. Your line is open.

Hi, thank you. Just a follow-up on your commentary on the FHA premium cut impact. How much volume did you write in 2014 in those FICO LTV buckets where the FHA would now be cheaper than PMI?

Well if you look at the through the end of the year 5% of the business that we wrote had a payment -- FHA had a payment advantage. So we won 5% of that business. You expand out to the new criteria you could probably add maybe about 15%, so cumulative about 20%. But again keep in mind we win business where we have payment differential along the way, but that’s how much it would be technically, if you will out of the money.

Great, thank you. And just on your reinsurance agreements do you anticipate any cost to extend the reinsurance or is this something that you don’t expect an impact from?

I guess what I’d say is that we expect that the economic terms would be similar to where they are right now. And so the cost would be more as far as what the size of the reinsurance is and then obviously if we extend it those additional years would have a cost associated with them. But from a cost to capital perspective we think it’s similar or better terms to where we are right now.

And then just lastly if the PMIERs were to be implemented as they are currently written would you expect it to have to take on new reinsurance or are you really just looking to extend your existing agreements?

Well we’re looking to extend with the current panel. It’s -- part of the reason for that is to make sure we don’t have any haircuts from the PMIER capital calculation, but we have had dialogue with the existing panel of reinsurers, depend upon the finalization of PMIERs to whether we would have additional amounts that we would feed. And as Curt said that could be a significant component of eliminating any deficit or I guess making us net positive from a PMIERs perspective we would hope.

Okay. In terms of $300 million shortfall that you initially disclosed you wouldn’t be able to just fill that just with cash at the HoldCo. and the assets that you have at subsidiaries you might consider looking outside of that as well?

I think all of those are in play, I think from cash from a subsidiary perspective we have said before that we have about $100 million that are in subsidiaries that are accounted under the PMIERs. We should be able to get a majority of that to be able to count and then with the combination of cash at the holding company as well as potential increase in the cede on the reinsurance or the volume that would be ceded we think we’d be able to get through those methods.

I think the key here is just the flexibility that the company has to meet. If they come down as they initially proposed them and I don’t think they will, I think they’ll be more favorable to us when they do come out with the finals, but we have the flexibility without adding dilutive capital to this company to fill this void if that’s indeed what happens. So we’ve got a lot of alternatives available and you've suggested one which we’re aware of.

Okay great, thank you.

Thank you.

Our next question comes from Mark Devries with Barclays. Your line is open.

Yeah, thanks. Could you give us your thoughts on the probability that the FHFA will also look to reduce the loan level pricing adjustments and/or G fees?

The probability of it happening?

Yeah.

I’m an optimist. So it has to be good when we work there, but I mean given the President’s reduction on FHA, to me that sounds as though [ph] he is going all in on the economy over the next two years and that to me would say he’s going to -- I think we’ll see a positive, something positive out of FHFA on both the PMIERs as well as the loan level fees.

Yeah this is Pat. I would add, there is also -- just like with the FHA price reduction there is a lot of pressure on the market from the MBA and lenders on the FHFA to reduce those fees also. So there is reason to be optimistic.

Would you expect that to be coordinated with the -- if they do anything with the release of the finalization of the PMIERs?

That’s the indication they have given us, the timing of the release of those should be relatively close.

I mean there will be no other reason why to hold it up, other than to coordinate the two together and frankly I am applauding them if they indeed were thinking that far ahead.

Yeah, there -- within the G fee calculation there is credit given for private mortgage insurance. So the impact of PMIERs will impact what they do with G fees. So it makes sense to tie them together.

Okay and given what you think might be a reasonable reduction in the LLPAs if we get it how much of an impact could that have on the monthly payment and the impact -- relative value of private MI versus the FHA?

Mark, I’d say it’s going to be helpful, but it depends on the [indiscernible] if you have to eliminate them completely if LLPA go to zero, if any payment disadvantage that was created by the FHA price cuts goes away and it kind of scales up from there and I think it’s probably somewhere around half. But it really depends on pricing dynamics in the marketplace, where spreads are with Jennie Mae’s versus Fannie & Freddie’s, where the lenders are trying to pursue volume maybe taking lower gains on sales et cetera. So there’s a lot of variable that come in. And again on the margin we are talking about where if these are 680-720 bucket of borrowers and you are talking about payment differentials of maybe $30, $40 a month, but lifetime increased cost of several thousand dollars a month. So but technically from a payment perspective you get half or more till you get a big [indiscernible].

And you can foreclose that all Mark on conventional loan versus the FHA loan, the lender and borrowers going to choose the conventional loan just for the ease of processing that loan and then working with the system going forward. So I really think when this is all said and done regardless of what happens with FHA the 97% loan is a great opportunity for our industry.

Okay, got it. And then Kurt I think you also referenced in your comments the potential that the GSEs might look to go deeper on the cover and do more risk sharing, is that something you get the sense that they are working on right now?

I think those things are being looked at and again it relates back to their mandate from FHFA to offload more risk if you will from tax payers and given the new eligibility requirements, I mean they have a stronger than ever credit counterparties against that. So I certainly think given what they’ve done with their portfolio that they’re looking at that going forward on new writings also.

Great and Curt let me also wish you well on your retirement it’s been a pleasure over the years.

Thank you Mark. I have enjoyed working with you. Thanks.

Thanks.

Our next question comes from Jack Micenko with SIG. Your line is open.

Hi, good morning. Let me ask Mark’s question in a different way. Curt you had given some historical context around where the FHA fees have been in the late 90s early 2000s knowing that the GSEs or the FHFA rather ramped up LLPAs under the crisis. Can you give us sort of a historical context where LLPAs were back in the earlier part of the 2000s, just sense of magnitude on where we can go?

They weren’t there.

None, zero?

Zero.

Okay great. And then the underwriting ratio…

Jack, just to be clear, there was a guarantee fee…

Sure.

… being charged. But there was no adverse market charge and there was no -- for a mainstream product there was no add-on fees.

Okay. So the 275 at one point [ph] it’s a really heavy lower FICO -- those were still zero the G fee was there still but nothing on top of that. Okay, perfect. And then underwriting ratio’s come down pretty nicely in the last six quarters. How much operating leverage do you think you have in the model? How much business can you write with the expense base you have? I mean does that number move materially further down from the ‘13 and change level we saw this quarter?

Yeah. So I think you are referencing the underwriting expense ratio. What I would say is it’s probably gotten about its lowest point. Keep in mind that the ceding commission is taking that ratio down. So that’s had an impact of probably three percentage points to four percentage points on the ratio and then as we have been very diligent obviously to the financial prices on expenses and have continued to be so, but I think it’s safe to say that even excluding the ceding commission that we’d probably reach sort of a low point from an expense standpoint, not that you are going to see a large jump in the ratio separate from the ceding commission. So we think we can still scale a lot off of where we are with expenses, but there will just be some upward pressure on expenses going forward.

Okay, great. Just one last question, Curt you have been running the business for very long time, energy prices, taxes is a fairly big market for you although you get an energy relief I guess across the broader footprint from higher level borrowers. How do we think about that? Is there a qualitative component to loss incurred that’s either favorably or unfavorably adjusted, just some historical perspective there maybe?

Yeah, I would say that the overall benefit to the country outweighs the issues that there are in Texas or North Dakota. So I think this is a net positive to all our borrowers to a couple of states that may have some issues although still I think they are insignificant issues. I think the price is still at a level that people can make money at and won’t impact those states as much as may have been indicated, but I think the overall benefit to consumers and across the country will far outweigh any issues that this may cause.

Okay, great. And add my congratulations as well, thanks.

Yeah, thank you.

Our next question comes from Sean Dargan with Macquarie. Your line is open.

Thank you, and good morning. I am trying to reconcile the guidance that the new insurance written will be slightly higher in 2015 versus 2014 with the comment that 20% of 2014’s business will be cheaper under FHA under the new premium rates at FHA. I guess what internally are you assuming you are going to lose incrementally to FHA?

First let’s start with the fact that we are looking at a smaller overall origination market in 2015 versus ‘14 and then with our industry market share being right around 15% plus change and we are right around the 20% market share. Part of that it does assume modest growth in our industry’s market share and we continue to have modest growth in our market share throughout the year. And you start with that as a micro environment and then when we started getting into competition relative to where the product goes it’s just as Curt said earlier it’s we have advantages and disadvantages. We lose technically 5% of the business we wrote in 2014 was cheaper on a monthly payment basis yet we got that business. So we’ve said 20% of the business would fall technically being more have a cheaper monthly payment even though the all-in cost would be more expensive. So to quantify how much of the additional 15% we lose if you will, when I say we don’t know it I mean there is going to be on the margin, there is going to be a borrower that maybe goes that way but they are on the margin they come back our way too. And then what I would recommend you do is talk to mortgage lenders and you will find that mortgage lenders anything close will go conventional. And I think by 97s being offered, it will offer that’s a net increase. I think the re-finances will be significantly higher next year than this year given where rates are and where I think they will remain to be. I don’t think -- again as I said on the FHA I think that will ultimately with a 97s -- well the gain in business there will outweigh the loss of business that may have happened because of the price decrease. So I am stepping out of this thing, but I got to tell you I am more optimistic relative to volume than what I stated here and as far as the company I think it will be a good year for volume next year.

Okay great, that’s helpful. And if I can just turn to slides 19 and 20 in which you’re comparing conventional with MI versus FHA insured, you guys have prepared something similar at the end of 2013 when there was a rumor that LLPAs or a notion that LLPAs might be raised. When I look at the spread between the conventional rate and the FHA rate it’s tighter now than it was at that point. Is that based on what the market is offering today or is I'm just wondering why the spread differential is narrower now than it was then?

Yeah, well I think that’s a lot to do with it, and so I mean it ebbs and flows overtime. Two years ago the spreads were, probably maybe -- as I recall they are all time highs in the secondary market execution. Today they have tightened up quite a bit they are past tighter than normal, you can actually go out to the largest lenders websites and see that they’re offering conventional interest rates at a lower coupon than FHA where traditionally you would see a band anywhere from an eight to three-eight higher than conventional over FHA. So that’s why I said earlier, there’s a lot of dynamics that go into the pricing on this. We’re showing what we think is a more traditional view of where the spreads are with interest rates where conventional is typically a little bit more expensive on the coupon because of the inherent differences of Fannie versus Freddie & Fannie and then layering into how lenders pay for those fees or our borrowers pay for those fees that the GSEs charged in the form of higher rate, but that can change by the hour quite frankly.

Got it, thank you and Curt congratulations.

Thank you.

Our next question comes from Douglas Harter with Credit Suisse. Your line is open.

Thanks. I was just hoping you guys could help me sort of reconcile and what’s going on in the industry with the pricing differential on a large portion of the LTVs and your commentary that mortgage bankers prefer to work with conventional versus FHA? I guess why is it that we’re still sort of well below historical market share for the private industry and sort of what changes to sort of get back to that level?

Yeah, this all plays out, I think again what will happen. I think the point that’s not noted is the fact that the VA is now 25% of the market. I think when this is all said and done we will be back to traditional where the conventional is 50% and FHA will be 25% and VA will be 25%. I mean back when 10 years ago VA was insignificant in that number. So that’s why our share is not higher than it was back then right now, is more VA related and FHA related. So and god bless our veterans, the more we do in that area it’s just better for everyone. So I think the real difference is the fact that VA wasn’t in the old number frankly and is a significant part of today’s number.

Yeah and then Doug I would also kind of point out the trend in 2014 where our industry would have about 11% share in the first quarter and it grew to 15% and change by the end of the year. So there has been consistent growth as we’ve said over the last couple of years as the world normalized and we reoriented lenders to the benefits of private mortgage insurance so that those others leaders have more expensive guidelines for them to satisfy their needs.

Got it. And then just one more on kind of the commentary around your volume expectations for ‘15 over ’14. I mean just looking obviously 2014 sort of to those points that Mike just made, ‘14 started off quite slow and picked up. So that slightly higher just seems off like conservative given the first quarter over year-over-year changes that you should have just sort of any thoughts as kind of the progression of volume over the year that you’re kind of expecting?

I agree totally with you.

Okay.

It’s -- you got to get back, so we going to refinance this and there’s just a lot in play right now, what happens with loan level price adjustments and things of that sort. So the deal is we are going to do more volume this year than we did last year and it’s a matter of how much and we have differences of opinion within this room on that. But the beauty of that is that it’s going to be more business and it’s going to be better business.

This is Pat, if I could add to Curt’s perspective what he made the comment about as we sit here today and that is that, we are still -- we are making the best guess on the impact of FHA and we won’t know that until it actually kicks in next week. We got the G fees and all LLPAs coming in, we think towards the end of the first quarter we got PMIERs come in we think at the end of first quarter we talked a lot in the last couple of days about a potential big refi market and what’s going to happen with rates, on one hand the tenures down quite low. On the other hand in the paper this morning [indiscernible] was talking about continuing their plan to increase rates. So there is a lot of noise. I think we are going to be a lot of smarter 90 days from now than we are now, but that’s the reason we’re being a little bit conservative as we enter the year.

Makes sense. Thank you very much.

[Operator Instructions]. Our next question comes from Chris Gamaitoni with Autonomous Research. Your line is open.

Good morning guys. Thanks for taking my call.

Good morning.

Just going to the origination size, what’s the underlying market size that you’re using in your estimates when you said it would be smaller year-over-year?

About a $1 trillion, $1.2 trillion right now, to recall caveats that Pat just mentioned.

Yeah, it’s January. I am not going to hold you to that. On the pricing reduction side, can you just clarify the 5% PMIER, are you saying the 5% reduction to what a monthly would have been or 5% per reduction on the LPMI?

To the LPMI.

Okay.

So that’s 14% lender payable from LPMI base rate.

Okay, so the 55% reduction to the LPMI base rate?

Right.

Is there any offset on cost at all if you are doing kind of more bulk pricing or is just there is no additional offset to that?

I think the LPMI pricing is with discount is allowed by a rate card filings because of the lender performance, good geographic mix, good DTI mix all of which are factors that are not normally addressed in our day-to-day standard rate card.

Got you, and then what’s the most updated size of the DTI that you can recover?

It would be around $850 million-$900 million.

859 million.

Yeah, $850 million, $900 million. Some will come back through the income statements and some will just come back on through OCI. So the total impact I think on the balance sheet will be around 900 million, was about 850 million of it falling through the income statement overtime.

Perfect, thank you so much.

Thanks Chris.

I am showing no further questions, I will now turn the call back over to management for final remarks.

This is Pat, if I can jump in for a moment. I am going to take a second to embarrass Curt. A number of people have already acknowledged this is his last call. So before we sign off I want to acknowledge Curt’s contribution to MGIC. Curt is staying on as Chairman but he is retiring as CEO at the end of February. So this is his last call. For those of you who don’t know Curt has actually been with MGIC for more than 32 years and as he said he has been in the business for 40. He has been our CEO since 1999 and of course there has been a number of business cycles through that past 16 years that he has let us through. Not only has Curt been the leader of our company, but he has been a leader in the industry, both nationally and locally in the never ending discussions around housing policy has truly been a face of private mortgage insurance for a long time. He has never shied away from a challenge and for those of you who have consistently listened to these calls and as you’ve heard this morning Curt is very much a straight shooter. He was at this his best during the recent great recession where his leadership with shareholders, regulators, customers and co-workers got us through the most difficult time such that the company is now well positioned for the future and as Curt calls it nirvana. For those of us who work with Curt everyday it’s been a privilege; his down to earth nature, his optimism, his sense of humor, his mantra to just do the right thing have contributed to MGIC’s strong culture and our legacy. Curt is beloved by his co-workers and he will be greatly missed. So Curt on behalf of all of those that you have touched these past 16 years as our CEO in the past 32 years with MGIC we thank you and we wish you the absolute best of luck in all of your future endeavors.

Thank you, Pat. That's very kind. I do want to -- it’s really nice, as Pat said this is my last earnings conference call and I’d like to thank all our shareholders for their investment in our company. I’ve had the pleasure to host these earnings conference calls for 62 quarters but who’s counting. So it’s been extremely positive, some have been exceedingly difficult but they’ve all been interesting. Throughout that time period I’ve had a great management team to work with their strategic ideas and focus and made the difference in our recovery. But just as importantly we have a group of people behind us at MGIC whose loyalty and dedication never wavered even through the most difficult of times. Their dedication is what I most remember about my job and I was honored to be this company’s CEO. I am equally thrilled that we’ll have such a fine management team led by Pat to carry forward the MGIC legacy. It really is a special place made up of special people and I will certainly miss all of that. So I thank them all and god bless to all. Thank you.

Thanks operator.

Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day.