MGIC Investment Corporation (MTG) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the MGIC Investment Corporation Third Quarter Earnings Conference 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 call is being recorded. I would now like to introduce your host for today’s conference, Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Sir, you may begin.

Thanks, Anna. 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 third quarter of 2015 are CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, Steve Mackey. I want to remind all participants that our earnings release of this morning, which maybe accessed on our website, which is located at www.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. We have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written, and other information which we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K that was filed earlier this morning. If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent development. 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 Form 8-K. And with that, let me turn the call over to Pat.

Thanks, Mike, and good morning. I'm pleased to report that in the third quarter our insurance in force increased by 2.3% compared to the second quarter and more than 6% compared to the third quarter last year. This primarily reflects the expanding purchase mortgage market of the last several quarters, especially the first-time home buyer and other lower wealth borrower segments. I am also pleased with the low level of losses 2009 through 2014 books are generating and a positive trends of the pre-2009 business relative to new delinquent notices, paid claims and the declining delinquent inventory. The increasing size of the insurance in force portfolio and continued run-off of the older books, and expanding housing market, and our solidified capital and PMIERs acquisitions position us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers now in the future. Net income for the third quarter was $823 million or $1.78 per diluted share, of which a $1.49 was a result of the reversal of the company’s valuation allowance for our deferred tax asset or DTA. Excluding the impact of the DTA evaluation allowance reversal, adjusted net income for the third quarter was $124.7 million or $0.29 per diluted share, compared with net income of $72 million or $0.18 per diluted share for the same quarter a year ago. In a few minutes Tim will discuss in more detail the financial results, as well as the accounting impact of both the reversal of DTA valuation allowance and the transition to the new reinsurance transaction, but first I would like to make a few comments of our current market dynamics and other strategic issues. Then I will wrap up with the discussion of the regulatory and political front. Business we wrote from 2009 to-date is performing well and is a very quality. In addition, an improving labor and housing market has improved the performance of the pre-2009 books. Over the many years, MGIC has been in business, we have seen the combination of improving economic environments along with low credit loss cycles increased competitive dynamics of the mortgage banking and mortgage insurance industries. In the last several quarters we have seen these dynamics playing out in the lender paid or LPMI single segment, which we believe it held for approximately 25% to 30% of the business the industry is writing. LPMI singles comprised approximately 15% of our NIW this quarter and reflecting the competitive environment that business was written with an average discount of approximately 11% from the LPMI rate card. This level of writing and discount is consistent with the last few quarters. We continually assess the impact that any change to pricing and business mix will have on our expected levels of new business written, capital requirements and our returns. We are comfortable that the mix of business we have written over the last several quarters, given the credit performance we have experienced to-date on those books will generate mid-teen returns on capital over the rest PMIERs lives. We are aware of the PMI premium changes that are being selectively offered by competitors in the marketplace and we know the investment community is following decision closely. We continue to monitor the situation and stay close to our customers to determine the extent of these changes. To-date the FHA premium reduction that went into effect earlier this year is not impacting our volumes in material way. We still win some business that may have a lower monthly payment with FHA insurance, as borrowers with private MI enjoy faster equity build-up have the ability to cancel MI coverage and for the most -- and for most with a 680 and higher credit score enjoy a lower total cost over the duration of the policy. Lenders often times find it more efficient and cost effective to use private mortgage insurers versus FHA. The overall origination market is shifting towards more purchase transactions and fewer refinances. This is a net positive for us and our industry. First, persistency should increase to fewer refinances, second, we estimate that our industry's market share for all purchased transactions ranges from approximately 19% to 21% and for refinance transactions it ranges from approximately 5% to 7%. This is about a 3.5 to 1 ratio of purchased to refi. Within the industry we believe that we have approximately 19% market share and a purchased to refi ratio of about 4 to 1. This benefit for us best reflected $33 billion new business written so far this year, a 39% increase from last year. Lien off the strategic issue is our capital position. The PMIERs have been published with the latest change coming in late June regarding lender paid single premiums. According to GSEs and the FHFA, PMIERs are expected to be updated every two years unless market conditions cause the change sooner. They become effective on December 31, 2015 and MI needed to certify compliance by March 1, 2016. As most of you know, PMIERs has required mortgage insurers Available Assets to equal or exceed its Minimum Required Assets. Based on our interpretation of the Minimum Required Assets it is the result of several actions we have taken and plan to take, MGIC will be in position to certify its compliance with the PMIERs in the timely manner. The actions we have taken include the restructuring of the reinsurance transaction, which we -- which resulted in our receiving to $142 million of approved profit commission and which allows us to receive full credit under the PMIERs for the risk ceded under the transaction. The next topic I want to discuss is the opportunity to further reduce the risk warrant by the GSEs and ultimately taxpayers. We believe that private mortgage insurers can assume risk before it even gets to the GSEs and that deeper coverage or front-end risk sharing should be the way to readily implement this. With PMIERs not finalized, we are able to more seriously continue discussions with the GSEs and FHFA on these matters that are encouraged by the fact that the FHFA, lenders, legislators and policy makers are engaged on this topic. To that end, USMI, our industry trade association will be publishing report in the near future that demonstrates how risk can be prudently assumed for REMICs instead of GSEs by using deeper coverage from the front end. We continue to believe that the next logical step is for the FHFA to have these items in the annual GSE scorecard. This would enable pilot program to be developed to validate the concept and we are working towards that goal. Tim will now go through the financial highlights for the quarter.

Thanks Pat. The year-over-year improvement in the financial results was primarily driven by our lower level of incurred losses. The lower incurred losses in the quarter were influenced by two main factors. First, during the quarter we updated our claim rate assumption for all the notices in our delinquency inventory because the actual cure rate experience has outperformed our previous estimates. This resulted in a benefit of approximately $35 million to $40 million. This trend of improving cure rates has become more pronounced over the last two quarters. Keep in mind that because all the notices comprise approximately half of our total delinquent loans, given a small change in the claim rate assumption can result in significant reserve development. The second main factor affecting incurred losses is that we received approximately 15% fewer delinquency notices. And those notices had a lower claim rate applied to them when compared to the same period last year. Reflecting the current economic environment through notices received in the third quarter are estimated to have a claim rate of approximately 13%. The pre-2009 legacy books generated approximately 92% of the new delinquent notices received during the quarter while those books now comprised just over 39% of the risk enforced. The delinquent inventory ended the quarter, down 22% year-over-year and down 3% sequentially. We expect to see the inventory continue to decline to the eventual resolution of older delinquencies combined with a lower level of notices being received. The number of claims received also declined. It was down 31% in the same period last year and down 15% quarter-to-quarter. Paid claims in the third quarter were $207 million, down 21% in the same period last year and down 7% from last quarter. During the third quarter, we restructured our quota share reinsurance transaction by commutating the prior agreement and entering into a new agreement. As we pointed out in the press release, net premiums written and earned were impacted by the commutation of our prior agreement. The commutation of the prior agreement resulted in an increase to net premiums written of $69.4 million, an increase in net premiums earned of $11.6 million and a decrease in the ceding commissions of $11.6 million, which increased underwriting and other expenses. There was no impact on ceded losses or net income during the quarters as a result of the commutation. The cost for the new reinsurance agreement during the quarter was approximately $9 million was due to mechanics of transition due to the new agreement was approximately $3 million or $4 million lower than we would expect in future quarters. The calculated weighted average effective premium yield for the quarter was 56 basis points. However, that includes the 3 to 4 basis point benefit from the transition to the new reinsurance agreement. After adjusting for the one-time effects of the transition and given the current level of losses being ceded, the effective yield is closer to 52 basis points. The ceded losses would increase ceded loss ratio to the low to mid 20% range. We had expected the effective yield to adjust 2 to 3 basis points lower from the adjusted rate of 52 basis points reported this quarter. To put the loss ratio into perspective, the ceded loss ratio, excluding the impact of any transitional related activities was less than 10% in the third quarter. The data for that calculation is contained in the press release. As a reminder, the new agreement has a 30% quota share with a 20% ceding commission and a profit commission. The term of the contract has been extended to be consistent with the PMIERs stress loss scenario, but we have an option to terminate early in 2018. The transaction covers approximately 70% of the insurance in-force and includes NIW through 2016. At quarter end, cash and investments totaled $5 billion, putting $469 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 next month. Regarding the overall capital structure and leverage of the holding company, we continue to analyze our options and are willing to consider options to lower the leverage ratio, reduce interest expense or minimize dilution, if they add long-term value to shareholders. Finally in the quarter, we reversed the DTA valuation allowance which increased book value by $2.23 per share. Further, under the applicable accounting rules, we are required to the treat valuation allowance released under discrete item and look at the calendar year as a whole when calculating our tax provision. Without the valuation allowance released, we would have booked little or no tax all year loss. The portion of the DTA will not be released until the fourth quarter and we will use it to offset the anticipated tax income on fourth quarter income. With that, let me turn it back to Pat.

Thanks Tim. Let me give a quick update on the regulatory and political fronts, review and updating of state capital standards by the NAIC, which Wisconsin insurance regulator is leading, continues to move forward although we are not aware of the timeframe fragmentation. We still do not expect revised state capital standards to be more restrictive than the financial requirements of the PMIERs. While although real legislative progress is being made on overall housing policy in Washington, we continue to be actively engaged in these discussions, be sure we have a seat at the table. I continue to believe that the current market framework is what we will be operating in for a considerable period of time will certainly until after the presidential election. In closing, during the quarter we continue to make great progress. We won $12.4 billion of high-quality business, the in-force portfolio grew, the level of delinquencies in the claim payments continue to fall. MGIC's risk capital ratio improved to 12.3 to 1. Our market share within our industry is strong. We maintained our traditionally low expense ratio. With PMIERs behind us, the bolstered capital position provided by the quality books of recent years as well as reinsurance, I see lots of opportunity for MGIC in the coming years. And I firmly believe that there is greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk that we are committed to pursuing those opportunities. With that, operator, let's take questions.

Thank you. [Operator Instructions] And our first question comes from the line of Bose George with KBW. Your line is now open.

Hey guys. Good morning. First question was just on the premium number you said that you thought that $11.6 million from the reinsurance, were there any other adjustment that you mentioned, I don’t know, if I missed them?

No. That’s really the adjustment that we had to make associated with termination.

Okay. Great. Thanks. And then just switching over to capital management, with the new insurance in place now, it looks like you won’t need to downstream any capital to support new business. So how do you look at the 2017 converts, is there an opportunity to pay those down when they come due?

Yeah. I’ll agree. We feel like we do not need to downstream any money from the holding companies to satisfy the PMIERs at this point. So we look at the holding company cash available now to deal with the convertible debt that’s there in 2017 other than with the debt that we had come due next month with 2017 as next maturity that we view that as being available to pay those off when they mature. There is something that comes opportunistically before that.

And then just one last one on the FHA. There has been some chatter that the FHA might take some action after their annual report comes out in November. Do you have any thoughts of what could happen over there?

We never heard anything specific. We are probably reading the same things that you are. A lot of will depend on their actuarial report. The decrease earlier this year of 50 bps was quite sizeable. So hopefully, they will take that into consideration as they look forward but we don’t have anything specific on it.

Okay. Great. Thanks guys.

Thanks.

Thank you. And our next question comes from the line of Eric Beardsley from Goldman Sachs. Your line is now open.

Hi. Thank you. Just a question, how much positive development was there in the quarter?

Approximately, it’s $35 million to $40 million.

Got it. And that was all in the claim rate?

Primarily.

Okay. And then I just wanted to follow-up on the question on the premiums. You mentioned the reinsurance impacts where the premium rate could go under various loss ratios on the portion that’s reinsured. Could you just repeat that and I have a follow-up?

Yeah. On the rate flow, we said is that right now the ceded loss ratio was just under 10%. So if that were to drift into low to mid 20% loss ratio, ceded loss ratio that would lower the premium yield by 2 to 3 basis points.

Got it.

So you see, we ceded additional losses and they would become less of a profit commission to us.

Okay. So all else equal, assuming that loss ratio hangs in where it is today and I guess, hypothetically could even improve depending on the state of the world that could you would expect some stability I guess in the premium rates then?

I would say we expect some stability there. I think that from the reinsurance, the things that’s going to impact the most is obviously the ceded loss because that would take away from the profit commission. I think we’ve seen somewhat of a drift on the premium yield as we’ve seen right now. But for the reinsurance impact on it, we wouldn’t see a significant volatility other than associated with the losses.

Got it. And what’s the weighted average premium rate of the new business you are putting on today, if that’s higher or lower than your average in the quarter?

I think it’s marginally. This is Mike. I think it’s marginally higher. It’s probably in the 50 to 60 range.

Beyond direct losses.

On direct losses, yeah.

So stripping out reinsurance, I guess it’s equivalent then or still bit higher?

I’d say pretty close.

Okay. All right. Great. Thank you.

Yeah.

Thank you. Our next question comes from the line of Mackenzie Kelley with Zelman & Associates. Your line is now open.

Thanks. Good morning. Can you just talk a little bit about what you are seeing in terms of pricing and overall competition? The discount on LPMI was stable. Do you expect heading into ’16 that average discount will decline just to help offset some of the capital pressure and then also any changes that you are seeing on the BPMI side?

Well, I think in your question you pointed out that we’ve seen a lot of things going on in the market. As I said in my opening comments, we continue to monitor that situation and stay close to our customers and we are always listening to what their needs are to determine the extent of the changes. Beyond that I can’t really add much there.

Okay. And then also on LPMI, in terms of demand, I think last quarter you had cited the level of interest from lenders was coming down. Did that trend continue this quarter, or has there been any change in just demand overall for LPMI?

Mackenzie, this is Mike. I think as you see in our numbers, our numbers were relatively stable quarter-to-quarter. Not sure if that carries over as everybody else because there is not a lot of intra quarter disclosure from the competitors. We haven’t seen a tremendous uptick in customers asking our bar. It’s a steady demand. It’s at levels that we are staying coming in with it. And the whole issue around the pricing whether it’s LPMI, BPMI, it just becomes a very sensitive to talk about in the public setting. So it’s definitely both items, both the LPMI and the future with PMIERs evolution with the credit and the surcharges kicking into the beginning part of the year, as well as what competitors do is really nothing that we can talk about publicly. So it’s just going to be a reaction to what we see with our customers and our interactions and our decisions and Pat and his comments were comfortable with the mix and the levels that we are seeing today.

Understood. Thanks Mike. Just lastly if I could squeeze one more on the operating expenses. Just excluding the reinsurance impact, it seems like the dollar as well as the expense ratio have come down. Is there anything else driving that besides the reinsurance and directionally going forward, how should we be thinking about the level of expenses from here?

You are right. The culmination of reinsurance impacts that little bit this quarter. I would say if you look at the third quarter compared to the first two quarters of the year, we are probably $3 million lower excluding the reinsurance. I would say that’s not necessarily a trend. I would say the first couple of quarters are probably a better run rate but they are all sort of within that zone.

Okay. Thank you.

Yeah.

Thank you. Our next question comes from the line of Mark DeVries with Barclays. Your line is now open.

Yeah. Thanks. Pat, I was hoping give an update from you on where you and the industry stand on getting the work done needed to get deep cover MI potentially included and just work hard for this upcoming year?

Sure. All right. Well, as I said in the report and I said on the panel I was on last week, U.S. MI has engaged a third-party firm for the purpose of providing if you will a proof-of-concept for deep cover private mortgage insurers, which we serve as front end risk sharing. The FHFA has made it very clear that risk sharing is the way the GSEs will be doing business. In other words, it’s standard operating procedure if you will. It’s not just pilots. So what we are trying to do is now we and the industry try to come forth with our ideas and how we can help that cause. We have to wait until PMIERs was done. We’ve been anxious to get to Washington and make the roads. But we have to wait until PMIERs was done until we could understand what the rules were and that we are putting the finishing touches on that report as we speak. And as we said in the very near future, we hope to make presentations to the FHFA and others in Washington to take the discussion down from the headlines and out of the clause and be much more granular. As part of the process then we of course have to let the FHFA and the GSEs respond. We don’t know yet what they are going to think of the matter. We think it makes a lot of sense what the private insurers offers is a very strong narrative. We are private capital. We are long-term capital and we are willing to put more risk on the line. We have the ability to -- we believe raise capital. So, I think it’s -- that’s what the FHFA and the GSEs are trying to do and hopefully, we will make some progress in the fourth quarter. Again, the next step is make the presentation, allow them to react. They are smart people. They are going to challenge some things and then the goal is that by the time the 2016 scorecard, GSE scorecard comes out, we will have a carve out for private mortgage insurance.

Okay. Great. That’s really helpful. Just a couple of other type of questions for Tim. Tim, we noticed there was no kind of release in the premium deficiency reserve this quarter. Is that going away or should we, or was this just kind of a one-time I think for the quarter?

You should view it as gone. We no longer have a liability on the balance sheet. We still have to do a calculation to make sure that the accounting would tell us we have to reestablish ones, that I would say for our purposes you should not expect one in the future on the income statement or the balance sheet.

Okay. Great. And was there a small benefit to premiums from this quarter also?

No, I mean this quarter, there was no release there. So, we know it’s not really a benefit from anything happening with the PDR this quarter.

Okay. Got it. And then finally you mentioned taxes for next quarter. Were you basically saying there should be no net tax number because of the remaining release of the DTA will offset whatever tax you would have incurred in the quarter?

That’s basically what -- yeah, that’s what the accounting sort of tells you. We bring the DTA back on sort of during the middle of the year that to look at the whole year where we should be protectors. And so the reason why we just bring the full DTA back on in the third quarter was we have to hold back some of that to sort of offset the taxes that we would incur on income in the fourth quarter. So another way shouldn’t expect a lot of tax on tax line in the fourth quarter. However, starting next year you should expect sort of pull to the 35% effective rate.

Got it. Thank you.

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

Thanks. And recognizing that it was just one month, the rate of improvement of NODs slowed in September. Would you think -- was there anything there? Just given the kind of the age of the recovery, should we expect NODs to keep slowing, or any color there would be helpful?

Yeah. I think in general we try not to be too worried about one month in particular, because we do see some deficit depending on services report. What I would say though is in general I think we would expect that you would see somewhat of the decrease in sort of the speed of the decline just because we have fewer items from those older books that are still around in imports at this point. So nothing that we are concerned about I would say, although I would say in general we’ve had a pretty steady decline on the new notices over the last couple of years. At some point that will start to flow. We will see improvement on the cure rates on those new notices which we’ve seen which is all the very important from an incurred loss perspective.

Got it. And on that last point, is that improved cure rate, is that already factored into kind of the prior period reserve releases, or is that something that could be still seen in across further reserve releases in the future?

Well, if I am referring to more of new notices that we see in future quarters, we said that the claim rate on new notices this quarter was probably somewhere around 13%. Couple of quarters ago, we probably would have been closer to 14%. And we said long-term historical averages are closer to probably 10% of what you should expect. I think the question is how long it will take to get there, but we would continue to see improvement towards that 10% claim rate on new notices from the 13% that we’re at now.

Got it. And then when you are looking at the vintages, the 2010 and later. I guess how does the notice -- new notice trends compare, you’re seeing continued improvement or stabilization in those trends?

Doug, this is Mike. There is a slide in the portfolio some of draw that kind of track the performance of various vintages by half year and we definitely see that there is very low large content as far as the number of delinquencies and the original risk. And some of those from 10/11 has certainly past or seemed to have returned when they reached their peak and are declining but all at very low levels.

Great. Thanks, Mike.

Thanks.

Thank you. Our next question comes from the line of Jack Micenko with SIG. Your line is now open.

Hi, good morning, everybody. Couple related questions. We’ve been hearing recently Wells and Chase I think in particular have begun to reintroduce quite overlays on FHS. They have been sort of not pleased with the way the certification, indemnification process has gone. Are you seeing any benefit of that in business volumes, or is that product still so far enough away from where you’re at on a FICO just not really the same neighborhood?

Yeah, I think it’s -- unfortunately it’s the latter I guess that we are not seeing any real benefits. The overlays are coming at the very low end of the private spectrum so not taking loans less than 640 where there is already a pretty significant monthly price disadvantage, FHA versus private. All-in, we are seeing maybe 15% of our business is still below 700 private score, that’s pretty stable. We’ve seen a little bit of increase in that 680, 700 and some of little higher LTVs from 95 with the reintroduction of 97, but nothing significant at least at this point any way.

Okay. And then on my topic, you look pre-crisis, you see average cycles in the business were sort of in the lower 700s and premium yields were in the high 50s, low 60s. And I think in your deck this quarter and it’s been this way for a while, you’re running closer to 750 weighted average FICO. I mean, what gets that number moving down and sort of thinking about maybe higher premium and blend? I mean, obviously, there is not the bulk transactions to private yields now, but taking through that, is it just the demand isn’t there for sort of 700 to 720 borrowers, is it the pricing is still not attractive on an affordability basis, I mean is it banks playing a part? What gets the business the weighted average cycle migrating down? I mean, there is still a lot of good borrowers I would imagine in the 720 range versus 750 on a weighted average basis, but just curious as to your thoughts on what moves that down over time?

Jack, we knew to answer that by the way it would be solving the world’s problems right, I think it would be I don’t know I am on rampage. It’s all, I mean, it seems the banks just recently might have released their earnings and their gain on sales have been dramatically compressed, so there is a lot of -- so demand I think is out there. Pricing all-in whether it’s from the cost of FHA insurance, the cost of the Freddie Fannie, GPs and LLPAs, the combination, the additional compliance costs that minors filled into that Fannie to in order to ensure production. I think that all weighs into pricing and how it translates for us from the mortgage insurance side is still fat. All that, our cost is our cost and everything else is outside of our control. And I would say the majority of the price differential where we can’t get at the below 720s more broad sense is because of all the external price. And I will call them add on through like a better world that have been introduced it into system over time. Some of that has that stuff with the FHA but that is where should begin that. So it’s all of that combined. They are certainly like supply of housing still too with the underwater housing, but the demand is there, if you look at the HMDA data and some of the houseful formation information. So it’s a mixture of all of that together.

I mean I guess your expectation, is it your expectation that that moves down over time though back to sort of pre-cycle or pre-crisis more normalized levels?

Jack, just by having the salary higher to have a higher degree of confidence in an reasonable timeframe that we would be also migrating down to 700 fundamental shift that occurs from FHA and GSEs relative to how they view private enhancements transfers with the primary policy and the losses, etcetera that have a lot to do with us as well as but lenders which are from their clients efforts, so not in the near term, no.

And then, I mean on the pilot or not the pilot, the proof of concept, I mean to preview that a little bit more, are we going to actually get potential pricing framework and sort of return expectations? I mean, is it going to be that granular, or just curious as to, will it give us something that we can maybe perhaps model out what this could look like, not putting into your numbers obviously, but give us that much information, we can actually get a sense with the returns on this business?

Well, the proof of concept is a view based on industry data. And so from that perspective, you could probably draw something to generalize. To go company specific would be more difficult. Right now what we are trying to do is industry has move the concept forward and work with the FHFB and GSEs to provide assistance and trying to perform risk sharing. But once we get the proof of concept accepted, if and when that happens then it will up to the individual companies to actually win the deals. And so, I guess what I’m saying is that is at a high level you should be able to get a sense for what that means to price and returns. But on an individual company basis, the greater transparency will have to be forthcoming.

Okay. I look forward to. Thank you.

Thank you. Our next question comes from the line of Chris Gamaitoni with Autonomous Research. Your line is now open.

Good morning, guys. Thanks for taking my call. Quick housekeeping, can you tell me now what the IBNR was at the end of the quarter?

The IBNR, primary IBNR was probably around just over 100.

Okay. And then it looks like on the cure rate for the 12 month or greater delinquencies keeps increasing, I calculated it was 6.1% this quarter from 4.6% year-over-year. Just wondering what you’re seeing on that on -- it’s awfully higher than I thought would happen, so what’s kind of driving cures in the late stage bucket?

As far as what’s driving it, the information and data we get on that is I’d say not overly reliable. So we don’t have a great insight into what is driving each individual adherence toward that increase. We have the ability to see the cures are actually happening, but the data that we received from servicers doesn’t give us a great amount of insight into what’s actually moving the needle on that.

Okay. So nice to have [indiscernible]

Right.

And do have any -- do you plan to give an update annually or quarterly kind of where your available assets will be relative to you minimum required or what you plan to operate on, just so we understand that other capital construct besides the risk to capital base?

I think that to be determined. We obviously didn’t put it out this quarter. I think it’s something we look at once PMIs become effective whether that’s something that we feel that you spot on.

Okay. Well, thanks so much for taking my call.

Sure.

Thank you. Our next question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open.

Thanks. Pat, I wanted to follow up on the deeper coverage concept. There is a ton of appetite for this risk it seems so I think the last deal there was no equity piece retained by the GSEs. So when you talk with the FHFA and GSEs, I mean is there real traction about MIs getting in involved? Or is there anything, any worry that’s more lip service because you have plenty of capacity from reinsurance, private equity, et cetera, out there?

Well, I would say that the FHFA has stated, they’re very open to trying different forms of risk sharing. Clearly the backend risk sharing has developed some market. There is questions around, is there enough capacity or willing capacity on the backend and will that capacity be there during difficult times? But, nevertheless, they are -- they’ve got a nice run rate going there where I think they -- the GSEs at least going to notional on it risk sharing in the neighborhood of $700 million worth of risk. So there is clearly the appetite. So what we’re trying to be able to do is to now go to them and say, there’s other ways of doing this particularly on the front-end. So my point is that the FHFA has stated a willingness. That said, for the FHFA and the GSEs the numbers have to work. Again, we believe proof-of-concept will show that, but the GSEs will have to react to that, I mean, the theory is, is that the MI is taking greater layer of risk and for that age we will charge an additional premium. In return, the GSEs will reduce their g-fees. That’s a very sensitive topic as you can imagine and so the GSEs are going to have to get comfortable with that as well the FHFA. So my point is the door is open. There is a lot of possible momentum around it. But as I said earlier, the goal now for the next 60 days or so is to take a kind of out of the headline and to talk to get much more granular with those organizations and see if we can make it happen.

Okay. And then Tim, the reinsurance disclosures helpful the incremental detail, but it is excluding captives. What’s the premium impact of run rate from captive is still when we look at your net result?

I think it’s probably in the $3 million to $4 million range.

Okay. So, if -- I mean, I want to look at this on a -- kind of pre-everything basis. So the correct adjustments would be to back out the $11 million ceded the profit commission of $35 and then $3 million or $4 million to captive and that will show as your gross rate?

You saying back, so back out the captive amount, back out the $11 related to determination and then can you repeat what else said you back out …

And then back out the profit commission?

Back out the profit commission. Are you backing out the ceded premium without the profit commission or not?

Well, I guess, that’s in the numbers. I’m trying to figure out what your core rate is relative to the -- you had 56 this quarter, 53.3 without the 11.6 benefit.

Yeah.

If you get rid of all that noise, what is your true kind of revenue profitability of the book on the basis -- point basis?

I think, if you’re trying to do that and strip out the reinsurance, I think you’d have to strip out not just the profit commission, but you’d also have to strip out the ceded premium earned in the quarter, which we disclosed with the non-additional information which was 22.6, and the profit commission was 23.3 on top of that. So, I guess the 22.6 is the net amount of those two numbers, so that’s the number you would have to strip out.

Okay. All right. Great. Thanks.

Sure.

Thank you. Our next question comes from the line of Mike [indiscernible] with [indiscernible]. Your line is now open. : Hey. Good morning. One question, Tim, could you clarify what the -- I guess, you can call it normalized expense ratio was removing the impact of the commutation and should we expect that ratio to be kind of within the ongoing range, given the new reinsurance contract and maybe also the 20% ceding commission, is that higher or lower than the previous contracts commission?

I will start with that last question. This is same as what the previous reinsurance agreements was which is 20%. The only I guess differences to note is that, now under a reinsurance you will noticed that the premium return and premium earned that we cede to them is the same because we are not ceding any other premium. But it is still based on 20% of the ceded written premium amount. And the expense ratio we’ve been this year bouncing around between 14.5 to 16.5. I think that’s a pretty good run range for us. It could bounce up a little bit. But I think we’ve always said, somewhere in the 15% to 20% range is what we’d expect sort of on a going forward basis. : Got it. Thank you.

Yes.

Thank you. Our next question comes from the line of Sean Dargan with Macquarie. Your line is now open.

Yeah. Thanks. Good morning. I have a couple of questions about some items that have been kicked around in the press. One is the notion that the FHFA will revisit the capital credit you get for using reinsurance. And I was wondering if you’ve heard anything about this because leases that applies to third-party reinsurers, the prop cat specialist that seems kind of insane to me if the way is that they won't be able to pay?

Sean, this is Mike. Yes, we said when we got the approval for the reinsurance from finally last one from Freddie, there also was Fannie, we disclosed that dollar review that on an annual basis the level of the credit that we’ll provide. We have full credit today. But annually they’ll review that to see. Again Sean, keep in mind as a fixed term to reinsurance contract and may floating 10 years past period with PMIERs every time on an annual basis when they measured things with that. But that sure we would expect them to reevaluate it annually. We don't know if there would be haircut or not haircut, it depends on the results of their valuation within the year.

Okay. But that would apply to third-party reinsurers as well as captives?

Well, it’s the end of third party reinsurers.

Okay.

Captives are prohibited to run under PMIERs under or whether stated.

Okay.

It actually only applies, I’d say, to the external reinsurers.

Got it. And now, one more question, we’ve been hearing reports from the field that 80,10,10s are making the comeback. Is that just in the jumbo market at this point or is that merging as competition again for private MI?

I would say they are merging in a small way in the certain market. It’s always there in the California in particular and we’re always watching it given it history but I would not say that at this point it get rises to the level of any major concern.

Okay. Great. Thank you.

Thank you. And I’m showing no further question at this time. I would like to turn the conference back over to Mr. Mike Zimmerman for any closing comments.

This is Pat Sinks. We don’t have any further comment. We thank you very much for joining us on the call this morning and your interest in the company. Have a good day.