MGIC Investment Corporation (MTG) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your MGIC Investment Corporation First Quarter Earnings Call. At this time all participants on the phone lines have been placed on mute. [Operator Instructions]. Later we will conduct a question-and-answer session and the instructions will follow at that time. As a reminder, this call is being recorded. I’d like to introduce your host for today’s conference, Mr. Mike Zimmerman. Sir, please begin.

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 the results for the first quarter of 2015, our CEO, 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 could be accessed on our 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, we’ve posted on our website a presentation that contains certain information about our primary risk in force and new insurance written and other information we think you will find valuable. During the course of this call, we may make comments about our expectations of the future, which on this call also include statements regarding the potential impact of the draft GSE - or actually now final GSE eligibility requirements or alternatives we may pursue to obtain achievement and compliance with those requirements. 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. At this time, I’ll turn the call over to Pat Sinks.

Thanks, Mike, and good morning. I’m pleased to report that in the first quarter we recorded net income of $133 million or $0.32 per share, compared to $0.15 per share in the first quarter of last year. I know most people are anxious to discuss the announcements of last Friday by the GSEs and we will, but first I will recap the quarter financial results and trends. The year-over-year improvement of the financial results were driven by a lower level of incurred losses, increased realized gains as we rebalanced the investment portfolio, a re-estimation of reserves relating to disputes regarding our claims paying practices and modest growth in our premiums earned. The lower incurred losses in the quarter reflects the fact that we received 19% pure delinquency notices and those notices had a lower claim rate when compared to the same period last year. Historically, the first quarter has always been a strong quarter from a credit perspective but there is a higher cure rate on notices received during the first quarter versus other quarters. Other than for these seasonal factors, there were no material changes to our claim rate or severity assumptions from those years and the fourth quarter of 2014. As a reminder, we made changes to our claim rate and severity assumptions based on how we expect our delinquent portfolio to perform and wider changes, positive or negative, in housing and economic trends. We expect that the claim rate will modestly improve throughout the remainder of the year when changes in credit performance typically emerge over time and do not occur suddenly. Incurred losses also had a one-time benefit of approximately $20 million. The majority of the benefit resulted from a re-estimation of previously recorded reserves related to disputes regarding our claims paying practices as well as minor changes that involved assumptions regarding IBNR. The legacy books of 2008 and prior continue to generate approximately 94% of new delinquent notices received during the quarter while those books now comprise just 45% of the risk in force. The delinquent inventory ended the quarter down 21% year-over-year and down 4.3% sequentially, ending at 72,236 loans. We expect to see the inventory continue to decline during 2015 through the eventual resolution of older delinquencies combined with the lower level of notices being received. The number of claims received also declined, was down 29% of the same period last year and down 9% quarter-to-quarter. Paid claims in the first quarter were $232 million, down 32% from the same period last year and down 6.5% from last quarter. Similar to the delinquent inventory, we expect paid claims to be lower in 2015 than in 2014. We estimate our industry’s market share in the first quarter of 2015 was 14% with approximately 25% to 30% of that business being written as single premium policies, which is predominantly lender paid or LPMI. Within the industry, we believe that we have maintained the market share gains we’ve realized over the last several quarters and estimate that our first quarter market share was at least equal to last quarter’s market share from 20.6%. We expect that FHA’s market share increased in the first quarter, primarily as a result of a surge in refinanced transactions subsequent to the FHA premium reduction. We previously estimated approximately 80% of the business we own in 2014 had a lower monthly payment using private MI and FHA after considering the FHA rate reduction. By looking at Q1 NIW and our applications pipeline for March and April of 2015, there’s no material change in this mix. So the substantial majority of borrowers we insure enjoy a payment advance with private MI. And all the borrowers with private MI enjoy faster equity build-up and the ability to cancel the coverage when compared to FHA programs. In the first quarter, the GSEs began acquiring 97% LTV loans. This was welcome news as we were already going to insure these loans with established guidelines in pricing. However, given the LLPA announcement last Friday by the GSEs, we would not expect the material increase in the statement. LPMI singles comprise approximately 20% of the quarter’s volume. And reflecting the competitive environment, there was an average discount of approximately 13% from the LPMI rate card. As we discussed last quarter, our expectation was that the level of LPMI and the level of discount will increase from fourth quarter levels, and we are seeing that play out in the first quarter. Our expectation is that the percentage of our 2015 volume from LPMI singles will be higher than last year but not as high as it was in the first quarter. All that said, in the first quarter, our NIW increased over last year, coming at $9 billion. This year-over-year improvement primarily reflects the fact that both the MI industries and our company’s Q1 2015 market share was higher than it was for the same period last year. Currently, our purchase application pipeline remains robust, running approximately 29% higher than the same period a year ago. Our expectation remains that we will write modestly more business in 2015 as we did in 2014. Year-over-year insurance in force grew nearly 5% as a result of the increased levels of new insurance written and higher persistency to end the quarter at $166 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 - the premium deal was 52.5 basis points in the quarter versus 52.2 basis points last quarter and 54.1 basis points in Q1 2014. At quarter end, cash and investments totaled $4.8 billion, including $494 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. Let me now take a couple moments to discuss PMIERs and other regulatory matters. The long-awaited GSE private mortgage insurer eligibility requirements or PMIERs were finalized and published last Friday. We expect that MGIC will be in compliance with the PMIERs when they become effective on December 31, 2015. While we would have desired more balance in the final rule, I am pleased that the PMIERs, including our financial requirements, have been finalized and we can, for the most part, put this issue behind us. Furthermore, given the conservative nature of the financial requirements, it is now time to accelerate the discussions regarding proposals that would allow private mortgage insurers to further reduce the risk of the GSEs and ultimately the taxpayers. These proposals include allowing deeper coverage above 80% LTVs, a replacement insurance on loans below 80% LTV. We believe that allowing private mortgage insurers to take out the risk before it even gets to the GSEs could increase access to credit and lower cost for borrowers. Under the PMIERs, the mortgage insurers premium [ph] assets must be equal to or exceed its minimum required assets. We estimate that as of March 31, 2015, MGIC has a gross shortfall of approximately $230 million. This compares to a gross shortfall of $1.1 million under the draft PMIERs we disclosed last year. Our shortfall estimates are based on our interpretation of the PMIERs and assume that the risk in force and capital of MGIC’s MIC subsidiary will be repatriated to MGIC. However, this shortfall estimate does not include any benefits from the existing reinsurance agreement or the anticipated restructure of the existing reinsurance transaction. Any capital contributions from the holding company of MGIC or the transfer of assets from regulated insurance affiliates of MGIC that, subject to rates reapproval, could increase the assets of MGIC. As we have previously disclosed, we were assuming we will receive approximately $500 million of benefit over PMIERs for the risk that was seen. However, we also said that we do not expect that we would have received full credit over PMIERs over our existing reinsurance transaction. As a result, over the last few months, we worked with our panel of existing reinsurers to structure the transaction in a way that we will be able to result MGIC receiving the maximum benefit under the PMIERs. We recently completed these negotiations with reinsurers and have submitted the final contract where state regulator as well as the GSEs to review and approve. In addition to the benefits we would gain from the restructured reinsurance transaction, here in April, we received regulatory approval to transfer $45 million of assets from regulated insurance affiliates of MGIC and will increase renewable assets with MGIC. Finally, we also believe that a portion of the holding company’s $494 million of cash in investment at March 31, 2015, A, be available for future contribution to MGIC. We estimate that for the new business we are currently writing, the initial minimum required assets under PMIERs would equate to a 14 to 1 risk to capital ratio. After considering normal delinquency development in an operating cushion, we would expect to generate a mid-teens after tax return. Clearly, the final PMIERs have materially increased the amount that capital insurers will need to hold. But we believe we can generate returns that are acceptable for the rest of the team. And looking back, the LPMI for a moment, the GSEs said they are considering changes to the PMIERs for LPMI business due primarily to duration risk. They expect to have those finalized by June 30, 2015. Depending on the outcome of their analysis, single premium stands maybe come less prevalent than they are today if more capital is required by the GSEs. So net-net as I said. I’m pleased the rule is final and we can concentrate on improving access to credit for consumers and derisking the GSEs with private mortgage insurance. To review on updating the state capital standards by the NAIC, which the Wisconsin charge regulator is leading, continues to come forward, although, we are not aware of the timeframe for implementation. We do not expect revised state standards to be more restrictive than the financial requirements of the PMIERs. No real progress has been made over housing policy in Washington. So while it’s possible, change of partisan control of congress that there is more legislative activity than I anticipate, I continue to believe that current market framework is what we will be operating in for a considerable period of time. In closing, during the quarter, we continue to make great progress building on the foundation of the [indiscernible] 2013 and 2014. During the quarter, we brought $9 billion of high quality business. The insurance portfolio grew by 5%. The level of delinquencies and claim payments continue to fall. MGIC’s risk to capital ratio improved to 13.7% to 1%. MGIC’s market share within our industry is strong and we maintain our traditionally low expense ratio. In many respect, the finalization of PMIERs is the last remnant of the recent crisis as well as the building block for our future. It has taken a lot of hard work by my coworkers or shareholders to get MGIC to this point. And I thank you for your commitment to our company. As an industry, we’ve learned some tough lessons during the financial crisis, but we are stronger forward. Mortgage insurers have been recapitalized, successfully implemented a new master policy. And now we have modernized GSE eligibility requirements. With all of that behind us, I see lots of opportunity for MGIC in coming years. There is a greater role for us to play and provide access to credit and reducing home ownership cost for consumers. It’s time to shape the future of private mortgage insurance. And as the founder of this modern day mortgage insurance industry, MGIC can and will lead those discussions. With that, operator, let’s take questions.

[Operator Instructions] Our first question comes from the line of Mark DeVries of Barclays. Your question, please.

Yes, thanks. I first just wanted to clarify where you stand from a capital position after PMIERs and all your comments. So based on the $230 million growth steps that you talked about, the roughly $45 million you think you’re going to get from - credit for MIC, $90 million plus on credit for the profit sharing commissions. And then I guess as you indicated, you now expect full credit for the extension of the existing reinsurance of $500 million. That gets you to roughly a $400 million day one surplus. Am I thinking about that correctly?

This is Tim speaking. I think in general, at the internal walk down and talked about the dividend credits and that was sort of from non-mixed subsidiaries. And then talked about the profit commission that we would expect we’d get nowadays at the PMIER as we’re going forward, the only variable in there is the reinsurance credit that as we’ve talked in the past. We don’t know the exact amount of credit we get. And we talked to the reinsurers about being able to scale that based upon the final PMIERs. So I think your basic answer is correct that we will have a surplus. The question really is that how much reinsurance do we seek and how much credit do we get or it?

Mark, this is Mike. Just to clarify that $500 million that we referenced was the credit we were assuming under the existing deal. But as the [indiscernible] more as a reminder of what was the benefits based --

Yes, exactly. So the next question is in the existing deal or the old deal, if it is roughly a $400 million surplus, presumably you wouldn’t feel like you needed that much surplus to begin with. So does that give you room then to potentially scale down the size of that reinsurance contract?

Yes. It’s something that we’ll obviously discuss. We view it as the track to source the capital and the reinsurance is important part of sort of the capital structure. And we thought before, now it helps our returns out. But obviously, there’s the balance with that in having excess over the required capital amount. So that was the oppositions that we’ll be making in the near-term here.

Okay. Are you in the position here to talk about what kind of a cushion you think you’re going to hold day one?

Not at this point.

Okay, got it. And then when you think about how much access you want day one at the writing company, is that going to depend in part on the opportunity you see out of someone who sees other opportunities that Pat alluded to particularly deeper MI coverage or even like GSE risk sharing?

Definitely in consideration when we talk about cushions, what opportunities might be there for additional volume that our current forecast or other opportunities that Pat mentioned.

Okay. And tell me [ph], could you talk through --

Mark, one more and then we’ll ask you to go back to get some others in line, all right? One more.

Yes, sure. Yes, sure. Yes, if you could just walk us through the timeline of your thoughts of how this opportunity around deeper coverage should evolve in the coming months?

Well, I think there’s been a number of people in Washington primarily led by the MBA who’ve been advocating for deep cover for a bit a long period of time. Going back to 2014, the private mortgage insurers are generally aligned with that. I think of the hurdles that we’ve had is that PMIERs was not final. That’s what we heard consistently with what we’ve seen how PMIERs shape out. Now that they’re finalized, I think we have a stronger argument to be made. I think that argument has to be made or those discussions have to take place with the FHFA as well as the GSEs. And I think that will take a period of time. I don’t think it’s eminent. But I think we’ve got momentum now that PMIERs is done.

Got it. Thank you.

Thanks, Mark.

Thank you. Our next question comes from the line of Bose George. Your line is now open. Your question, please.

Hey, guys, good morning. As you first saw in the singles, the 25% to 30% you mentioned for the industry, how does that compare to the last few quarters? And then you noted that you expect your percentage to be lower for ’15 versus the first quarter. Just curious what’s going to be driving that?

Hey, Bose, this is Mike. I mean, yes, the old roll out then [ph] which I don’t think has changed much. So our expectation really is just as we look at the pipeline and we see what the application volume has relative to the mix of singles versus the modulates which is why we think that statement that we think it’s going to be lower going forward than it was in the first quarter.

And with that [ph] is the first quarter piece being driven by more refis or is there a defensive structural issue that it is going to drive [ph] it up a little more this year, this quarter?

I mean I think that could be. We definitely - we saw a surge in refi volume. And as you know we haven’t had a lot of singles in the background, although, referred over the course of the last year or so that our lenders be more likely would refi. So I’m sure that was a contributing factor to the increase.

Okay. And then switching to the FHA, the comments you guys made on the FHA volume, do you think a lot of that was FHA to FHA refis? Do you have a sense for that?

Yes. That’s where we think that primarily [indiscernible] the streamlined refis FHA to FHA, we saw a large spike in the FHA refi index as a result of assets where [ph] rates went to but then coupled with the price cut that they had.

Okay then. Actually, just one last one. Actually, in terms of the HAMP modifications, I guess we’re starting to see some HAMP resets. Is there any early read on whether redeploy [ph] rates on that? Do you think it’s going to be an issue at all?

And up there in the supplement, they still on there - and most of our HAMP guys [ph] have HAMP 2.0 whereas really the 1.0 has a reset condition relative to rates. But, no, we haven’t seen any changes in the reperformance of those.

Okay, great. Thanks.

Thanks, Bose.

Thank you. Our next question comes from the line of Eric Beardsley. Your line is now open. Your question, please?

Hi, thank you. Just back on the reinsurance side, would you expect to get a majority of your original expectation, the $500 million?

I think our view is our expectation is that we will not receive a haircut or that we’ll get sort of the maximum credit for it. I think the part to be determined is the size of the - respectfully [ph] the quota share [ph] that we would have on it. And that will be determined in the near future.

Got it. And just as you look out at capital deployment opportunities in the future, how do you prioritize in terms of looking at whether it’s the converts taking down reinsurance or participating in some more growth opportunities?

Well, it’s honestly - the growth opportunities, the returns that we get off of those and make returns off the capital within the writing company is something that we focus on. If we’re not able to deploy the capital there and have obviously some money at the holding company, what we can do on the converts is something we’ll take a look at. Obviously we have a few different issuances that the holding company will be able to deal with all of their - all the nuances. But it’s something that we keep an eye on obviously.

Eric, this is Pat. I would add to what Tim said that now with PMIERs being final, we can start to answer these kinds of questions. We’ve been very focused on capital for a long time but the last five or six years have been in the survival mode. And now we can shift to growth mode. And what’s really important is that we have options - how much reinsurance we choose, what we’re going to do with the dividends maybe available to us in small amounts. And nothing definitive yet, but for the first time we’ve had a more robust discussion with our board about these matters.

Great, thanks. And just really quickly, I’m not sure if you said, but what was the ultimate claim rate in the quarter?

Are you talking about new notices?

Yes.

Well, I think we’ve been talking before that most recent quarters it was slightly better than 15% claim rate. As Pat mentioned in his opening comments, seasonally, the first quarter is better. I’d say it’s probably two points better in the first quarter.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Jack Micenko. Your line is now open. Your question, please?

Hi, good morning, everybody. I wanted to go back to pre-crisis times. I think one of the interesting things in the LLPA revisions was seemingly discouragements of potential piggybacks going forward. And I know that was a competitive pressure pre-crisis. How much NIW do you think the industry gave up to piggybacks before the downturn?

Pretty low on that one. But I think at one point, I mean, we would say several points of our industry share, so in the range of 25 to a third maybe of potential. But again, pretty high at one point, especially in the early 2000s.

Yes, if you go back in 2003 and ’04 and particularly in states like California, piggyback lending was huge. And so it was a major competitive issue.

Okay.

We’re not saying that - today, that’s not the case. Piggybacks are just some - it’s more of a traditional role, I mean, that product. So each of them, we’re speaking [ph] a lot of times used for jumbo borrowers and self - that people work around some of the conforming limits. But we don’t see much of that activity at this point anymore.

Right, right.

Banks [ph] are overly thrilled with the CLTV ratio downwards [ph].

Right. And I guess staying in the earlier 2000s and I know it’s maybe a bit premature, but remind us of what your corporate capital return payout strategy had been. I mean, dividends versus buybacks, ballpark payout ratios. I know that the industry had been an active repurchaser of the shares and dividend payer, but can you just maybe put a sharper point on some of those numbers?

Well, I think - this is Pat. I’ll give that one a shot. In the late ‘90s, early part of the 2000s and holding [ph] those exact years, we were buying back stock. But it was a situation where we couldn’t deploy the capital back into the business. I mean, our risk to capitals back then based on the old traditional calculations were 9, 8, 7 to 1. And so we thought the most efficient use of the capital was to send it back to the shareholders in the form of shareholder buybacks. We were - there were upside - there wasn’t that much upside in the ability to redeploy the capital in MI business. As you alluded to, piggyback lending had become a threat. And so it was a challenge for us to redeploy it. And the profitability of those rate books of 1990s was such that we just accumulated capital. So there was a period of time. We had a dividend payment back then but I would not describe it as sizable. It was more of an effort to be attractive to shareholders and investors who felt they needed a dividend paying stock.

Yes, I think we got to about $1 a share on the dividend side.

Yes, correct.

Okay, great. Thanks. And then just one last one. Why do you think the final PMIERs broke out the post ’08 into three additional buckets?

I think there, Jack, despite again this - they indicated in the final rule that they’re going to be updating these tables every couple of years. So this rule, the fact that it’s long-awaited, right? I mean, so this was - and that is the role of [ph] ’14. The rule was probably finalized - when I say finalized, but the tables may be formulated back in ’13. And so they went through the process of updating for home price appreciation, the relatively less severe CCOC [ph] stress scenario as - to reflect a better economy. So it seems like it’s just in line with what they’re saying in the rules that those repeat [ph] every few years and they thought they had those and that - but really, you’d have to ask them. But that seems to be the bench on it [ph].

Okay. Thank you very much.

Thank you. Our next question comes from the line of Mackenzie Kelly [ph]. Your line is now open. Your question, please?

Thanks. Good morning. First, Pat, can you just clarify on the comment that you made with PMIERs potentially saying some additional changes on the single premium capital requirements?

Well, they, in their announcement last week, alluded to that one of the items they were still working on is what kind of assets should be held against LPMI. And there was concern over the duration of risk. You always have that with single premiums, better than what’s been happening with interest rates. And as a result of that, our expectation, based on what they said is that we’ll see some kind of additional requirement for assets to be held against single premiums.

Okay. And now, feeling like you’re somewhat on par with the market on the LPMIs and I know you made the comment that you expect that share of the business to decline, do you think that the pricing should be relatively stable in that part of the market? And then also, on the borrower paid [ph] in more traditional business, how do you think about balancing returns and volumes in this environment, especially now that we do have clarity on PMIERs and know we’ll offset with the GSEs, how should we expect overall pricing to trend?

Well, this is Larry. I guess as far as the impact of PMIERs on LPMI singles, we’ll have to wait to see what the GSEs finally do there in terms of capital requirements. And then we’ll have to evaluate that. Because it’s a longer lived long because it’s - the premium is really built into the interest rate and it’s not subject to Homeowners Protection Act, the risk is on the books longer but subject to what happens in the interest rate environment. So we’ll have to see what comes of all that and have to make our decision then. Much like the impact of PMIER capital requirements on our borrow paid rate card, now that we have the capital requirements, we can look to see what the returns are by the LTV cycle pricing bends [ph] that we currently have and see how much the returns deliver and how much volume is in some of those sells and make a business decision.

Okay, makes sense. And if I can just squeeze one more in. Looking at the reserve that you set aside for the existing delinquencies, can you just provide some perspective on what you’ve seen more recently with the very late stage delinquencies? Has there been really any movement in the progression of those loans to resolution and how we can expect severities and claim rates to trend on the later stage?

Yes, this is Tim. On the later stage, quite frankly, we haven’t seen a lot of changes on their behaviors as far as the resolution whether it be a claim or whether it be a cure on those late stages. So variety-wise [ph] we haven’t seen anything that gets real movement on those either. Obviously, the longer they’re in there, we face some additional curing cost. But there hasn’t been a significant movement as you can from our average pay claims statistics. But generally, we talk about the claim rate on those items. We haven’t seen a lot of change in those kind of behaviors in the last few quarters.

Yes. The only additional comment I would make, even on the very aged delinquencies, three years plus, we do see a fair amount of cure activity. They don’t all go to claim, somewhere out there because they’re tied up in bankruptcy and whatnot. But a material portion of those fees and delinquencies do in fact cure.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Geoffrey Dunn. Your line is now open. Your question, please.

Thank you. Good morning. A year ago, you were talking about instance rates and the expectation was that rates would deteriorate as the year went on after a good seasonal first quarter. Now, we’re looking for rates to gradually improve. What occurs in the book that gives you the confidence that gives you the confidence that we’re shifting to that trend and probably more importantly, what do we need to look for to try to determine the pace of improvement? Is it simply just the mix of the inventory? Or what are the factors do we need to do to try to gauge how quickly or slowly that might develop?

Yes. This is Larry. I’d say the claimer rate on new delinquencies, the trend is a slow improvement, upward path. On top of that, you’ve got the seasonal pattern that Tim has spoken to. What’s driving that is a couple of things. One is the home price appreciation. So some of the loans that we’re weigh under water aren’t so much anymore. And those on the margin are now maybe above water. So that helps. I think on the servicing side, there is a strong effort more so than ever to try to work with borrowers to avoid some of the scrutiny of the CFBP and whatnot. The CFBP instituted a rule a year ago not to start foreclosure proceedings until a borrower has died at least 120 days. So all of that together and then we still have hemp of their contributing. And then side from that, the mix of fewer delinquencies from the old books more from the new book as the portfolio transitions. So all that collectively together is causing this rise in the overall cure rate. On top of that, that’s seasonal. And we’re still below the historic norm. I’d say historic norm in general is around a 90-10 split, somewhere in that area, maybe a little better than that, so 90% to 92% going to cure, 8% to 10% going to claim. We’re still below that. We’re trending up to that. How long it takes I guess depends upon all the factors I’ve mentioned.

And Geoff, this is Mike. Just to clarify I think too on the comments - what we said about expect modest improvement of the year is without considering from the fourth quarter, without kind of considering that seasonal influences and all the things Larry said. So improvement if you will from the fourth quarter forward after the seasonal benefits to kind of first quarter.

I guess just to try to frame what might be modest change of an incidence, year-over-year, is 1.5, 2 points of shift, a reasonable assumption given the trends we’ve seen?

I think that would be the maximum we’d expect to see. But I think we would expect to see, as we’ve said, a positive movement on that. But we would not expect it to be more than 2%.

Okay. And then just one more question on the PMIERs, I understand that you don’t know what cushion you need to operate with under the new rules. Are you able to talk even at a high level how you can go about trying to approach it? I mean we saw just after two years, when they finally updated their model, how much of an impact that had. Going forward, it seems like there’s potential for a lot of volatility as macro factors shift. Any thoughts at a very high level, how you’re going to begin to approach the cushion you might need?

I mean at a high level, if I think you hit on board [ph] aspect there that we know that there could be volatility with these where they reset them every couple of years. That could be up or down. So that does have to be a consideration on that. Honestly, other considerations are the dividends that we may or may not be able to get out of the writing company. That has to be approved by our state regulator. So those are probably a couple of the considerations when you think of on top of, as we talked about, what we think we can deploy at the writing company and new opportunities they might be there to have some capacity to take those opportunities up when they come.

And then I’d answer that too. Just having a relationship with the panel of reinsurers, just having that relationship in place over time, the degree there are changes to PMIERs or the opportunities, the economy or whatnot, it gives us much more flexibility and improves our response time because we can easily go to those panels. They’re in touch with the business. And because they’ve been in touch with the business, we can talk to them about maybe changing the structure to deal with any of those opportunities or changes to PMIERs.

Okay. Are soft capital facilities an option for the industry?

Soft capital?

I think anything --

[Indiscernible] preferred or something like that?

I think anything outside of what’s prescribed in the PMIERs, to play [ph] to be conservative that we would have to play would need GSE approval.

All right. Thank you, guys.

Thanks.

Thank you. Our next question comes from the line of Chris Gamaitoni. Your line is now open. Your question, please.

Good morning, guys. Thanks for taking my call. Just an update on the capital structure. Is there any, besides [indiscernible], is there any way to - or any thought about issuing non-convertible debt to take out a portion of the convertibles.

I don’t want to talk any specific. But I think as we’ve said before, as a holding company, now that we know what the PMIERs are, we can start to have more of those discussions for our board and say anything we might want to do with the debt as a holding company. So we’ll look at different options. But not talk about anything specific.

Is there a target in normalized period when all the capital rules and earnings are more steady? Is there are a target debt to equity leverage ratio at the hold co [ph]?

Depends to how the rating agencies deal with leverage. We talked before that we’d like to be back to investment grade, is particular of that is meaningful from being able to market the business. Pat said, I don’t if there’s a fed ratio at this point. But that will be a consideration in whatever we settle on.

Okay. You made a comment that you expect NIW on a year-over-year basis to be modestly higher. So year-over-year on the first quarter, I believe it’s up 74%. Is that an indication that you expect the rest of the three quarters to pretty much be flat year-over-year?

Well, I think - and we were building NIW in the share during the fourth quarter of last year. So by the time you get a fourth visionary, you’re just not going to see the same kind of percentage entries. It’s simple math actually.

Okay. And then any update on the DTA?

DTA, we spend - we expect it to come back this year. I would base on the final levels of earnings we’ve seen over the most recent quarters, our expectation would be would be before the fourth that would come out. But too difficult to tell what specific quarter.

Okay. Well, thank you for taking my question. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Doug Harter. Your line is now open. Your question please.

Thanks. I’m wondering if you could - you talked about the competition in LPMI. Can you talk about the level of price competition in the borrower paid and the monthly pay products?

This is Pat. I don’t think there’s anything unusual there that we’ve seen. Certainly, not from a pricing perspective. Discounted LPMI by definition contains a discounted price that causes the comparative pressure. The day-to-day on the borrower or paid side, it’s all about execution right now. Stumping is as simple as delivery time to customers when they have a high refi market, they want their loans to turn quickly. And that becomes a source of competition but not in terms of pricing at all.

And then can you just help remind us, in a more normalized environment which it looks like we’re going towards, what are the rules as far as getting dividends approved from the writing company up to the hold co?

Well, the rules as they stand right now look at the lesser 10% of surplus or effectively your prior year statutory income. The statutory income has the calculus of deducting our pins [ph] reserve build against it. So what I would say is that the dividend capacity under the strict rule is fairly minor over the next couple of years because like injuries [ph] are built. And for that, we do into sort of the extraordinary dividend realm of having to get the approval from your state regulator. And for that, it’s that sort of the, I guess the world we’ll be living in for the next few years. Now, historically, we have gotten extraordinary dividends out pre-crisis. So that is not something that is uncommon, per se. But that is something that would be a request as opposed to a pure amount of dividend we can take out without any discussion.

Got it. And the ability to take the kind of the standard that as long as you’re in compliance you have that ability to take the standard amount --

Correct.

Okay. Great, thank you.

Thanks, Doug.

Thank you. Our next question comes from the line of Sean Dargan. Your line is now open. Your question, please?

Yes, thanks. Just following up on the last question. Now that you have the final PMIERs, when do you think you’ll be in a position where you’re generating enough statutory net income so that you’ll be able to pay a regular ordinary dividend?

Well, I would say following up on the prior question that the statutory net income is designed today where we have to deduct our pins [ph] reserve which is 50% of our premium. That’s a pretty significant drag on our statutory net income even for the next few years. So the amount of dividends that you’d be getting out from just that pure calculation I would say are, for the most part, immaterial. Anything that would be sizable would have to be an extraordinary dividend.

Okay. So, I mean, like --

[Indiscernible].

Okay, all right. And now that we do have some sense of what the level playing field is going forward, is there any appetite if an MI property became available to raise capital to acquire in force premium?

You mean an acquisition?

Yes.

Yes, well, I think it’s - we’ll have to wait and see what PMIERs does. I mean, as we talked about, it does take returns now in advance because we have to hold more capital going forward. Does that change the appetite of some of the MIs or their parent companies to be in the business? I don’t know yet. Everybody has said they’re going to comply. So we would be opportunistic. You always have to be cautious when looking at acquisitions as to whether or not you can maintain the market share of a customer. If an MI - or rather a customer divides their MI between four companies and two of them merge, that doesn’t mean that the merged company gets both shares. And that has to be factored into your equation. So MGIC would be good listeners of the opportunistic but I don’t have anything on the horizon that I see that’s going to happen for sure.

Great, thanks.

Thank you.

Thank you. Our next question comes from the line of Mike Zirinski [ph]. Your line is now open. Your question, please?

Thanks, good morning. Follow-up on the DTA reversible potential, what’s your estimate of the expected tax rate? I’m wondering if there’s an impact from, say, muni bonds or other times.

Well, I think from a - talking once we bring it back on and what our effective rate is, once we have the DTA back on the book?

Yes, exactly.

Well, right now, our muni bond portfolio is relatively small. And so we get some benefits. Obviously, as we switch over into a position where we become a taxpayer, historically, we have moved more to a muni bond portfolio which could benefit us on the effective rate and lowering it past 35. And that will take time based upon sort of our current path [ph].

Okay, got it. Also next on expense levels, it jumped single digits year-over-year basis and a good deal on a sequential run rate basis. How should we think about either the absolute level or the ratio kind of going forward throughout the year?

I think on absolute dollar amount, it’s probably on the ratio that the first quarter is probably a pretty good run rate for you to assume for the rest of the year.

Okay, great. And lastly, you guys have done a good job lifting the portfolio yield in the face of falling interest rates. Is there more you guys can do outside market interest rates increasing?

There is. As we’d like to get the yield higher, I mean, part of it is obviously the equation of how far out do you want to go on durations. And we’re very cognizant of not going too far out on duration to make sure that when rates do we go up that we would get hits going [ph] the other way. So we’re trying to bring up the yield as much as we can. But I don’t think there’s any silver bullet there to take it up significantly.

Thanks for the answers.

Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Christine Worley. Your line is now open. Your question, please?

Hi, thank you. Turning back to reinsurance for a second, I know you we’re in an environment right now where there’s a lot of excess capital in the reinsurance market. And it sounds like that’s a capital tool that you guys will look to utilize going forward as we can potentially see some capital requirement changes. I mean, are you looking to build anything in in your renegotiation that would, I guess, allow you to dial up or dial down the amount of reinsurance used without having to necessarily go through a full discussion process with the reinsurers again? I’m just - my concern would be going forward when there’s less capacity in the market, how that would impact your relationship.

Yes, it’s obviously - I think we’re cognizant of this interactive time to be seeking reinsurance right now. I think as Larry said earlier, whether we get anything contractually or not that would allow us to dial up specifically, I think that would be to be determined. But I think we do feel that the fact that we work with the scale of ranchers [ph] over a period of time and effectively have been renegotiated a third time now shows our willingness to sort of work with them and their willingness to work with us. And so hopefully that would provide to be mutually beneficial in the future as well.

All right. Thank you very much.

Thank you.

Thank you. And I’m showing no more questions in the phone queue at this time. I’d like to turn the call back over to management for closing remarks.

Okay, this is Pat. Thanks, everybody, in your interest in our company. As we’ve discussed this morning, the fundamentals of the business are strong. PMIERs is now known and we can get the rate and we’re excited to get on with it. Thank you.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.