MGIC Investment Corporation (MTG) Q3 2017 Earnings Report, Transcript and Summary

Good morning. Thank you for standing by. At this time, we would like to welcome everyone to the MGIC Investment Corporation third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn today's conference over to Mike Zimmerman, Senior Vice President, Investor Relations. Sir, the floor is yours.

Great. 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 third quarter of 2017 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 may be accessed on our website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force 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 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. Now I would like to turn the call over to Pat.

Thanks Mike and good morning. I am pleased to report that as we continue to execute on our business strategies, we had another strong quarter. In a few minutes, Tim will cover the details of the financial results but before he does let me provide a few highlights. In the quarter, we wrote $14.1 billion of new business, which was about flat to the same quarter last year. During the quarter, we continued to see a low level of refinance transactions accounting for just 9% of our new insurance written compared to 19% for the third quarter of 2016. Through the end of the third quarter, on as year-to-date basis, the level of new business written was up about 3% compared to the same period last year. Year-to-date through mid-October, we have seen a 43% decrease in refinance applications and an 8% increase in purchase applications compared to the same period last year. This is a net positive for our company and our industry as our industry's market share as a percentage of total originations is 3.5 to four times higher for purchase loans than refis and so refis generally lowers cancellation rate of the insurance in force. The expanding purchase mortgage market, our company's market share of approximately 18%, the hard work and dedication of my fellow coworkers to deliver stellar customer service and the higher annual persistency resulted in a 6% increase in insurance in force, compared to the same period last year. Since insurance in force is the driver of our revenues, this is a key metric that we focus on. With the current and expected level of mortgage rates, we expect the continued low level of refinance activity and that the annual persistency metric we report each quarter will continue to increase gradually in subsequent periods. Given the actual results today and the anticipated new business, we expect to write approximately $48 billion of new business for the full year. The expected level of new business combined with an expected increase in persistency should result in insurance in force continue to increase. The increasing size and quality of our insurance in force, the runoff of the older books and our strong financial performance position us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers. With that, let me turn it over to Tim.

Thanks Pat. In the quarter, we earned $120 million of net income or $0.32 per diluted share. To provide better insight into our operating results and to make the year-over-year comparison of the financial results more meaningful, we disclose adjusted net operating income, a non-GAAP measure. While there are only immaterial impacts in the quarter, a reconciliation of GAAP net income to adjusted net operating income is included in the body of the press release. The primary driver of the improvement in our financial performance was lower losses incurred. Losses incurred were $29.7 million versus $60.9 million for the same period last year, due primarily to fewer new notices received and a lower claim rate on the new notices received compared to the same quarter last year. In the third quarter, we received 9% fewer new notices compared to the same period last year and reflecting the current economic environment and anticipated cures, we used a claim rate of approximately 10.5% on these notices. The current period claim rate compares to the claim rate of 12% that was used in the third quarter of last year. We also modestly lower the expected severity of these new notices, as the time required for servicers to process foreclosures is shorter compared to the extended timeframe of the last several years. To try and put some context of this last statement, I would point out that the number of loans that are 12 months or more past due has decreased more than 50% since the end of 2015. Each quarter we review the performance of the existing delinquent inventory to determine what, if any, changes should be made to the estimated claim rate and severity factors. As a result of this review, we updated our assumption for previously received delinquent notices because the actual experience has outperformed our previous estimates. This resulted in a benefit of approximately $38 million to our primary loss reserves, principally due to a lower estimated claim rate. The result was $6 million net benefit related to IBNR and LAD. During the quarter, new delinquent notices from the legacy book continued to decline at a steady pace and generated nearly 79% of the new delinquent notices received, while accounting for just over 24% of the risk in force. The new delinquent activity from the larger, more recently written books remains quite low, reflecting their high credit quality as well as the current economic conditions. We expect that the legacy books will continue to be the primary source of new notice activity for the foreseeable future. Reflecting the smaller delinquent inventory, the number of claims received in the quarter declined 30% from the same period last year. Net paid claims in the third quarter were $113 million. Included in that amount was $9 million that was associated with loans that were removed from inventory due to the agreement to terminate coverage that have been previously disclosed in our monthly operating statistics. Excluding this impact, primary paid claims were $101 million, down 31% from the same period last year. The effective average premium yield for the third quarter of 2017 was approximately 50 basis points which was effectively flat from the second quarter level and compares to the 53 basis point in the third quarter of 2016. As I have discussed in the past, for a variety of reasons we expect that the effective premium yields will trend lower in future periods however the exact amount and timing is difficult to predict. At the end of the third quarter, MGIC's available assets for PMIERs purposes totaled $4.7 billion, resulting in $800 million excess over the required assets. MGIC's statutory capital is $1.9 billion in excess of the state requirements. In addition to writing new business and exploring new opportunities as they arise, we will try to manage the amount of excess by continually reviewing our use of reinsurance as well as continuing to seek and pay dividends out of the writing company to the holding company. When we analyze various options to deploy our capital resources, we need to take into account that the holding company's primary source of capital is the writing company. So while capital is being created at the writing company level, its ability to pay dividends to the holding company is subject to OCI review and approval. We also consider the resulting leverage ratio, the ability to continue our positive ratings trajectory and the debt service ability at the holding company. Regarding MGIC's ability to pay dividends, during the quarter, we are able to increase the dividend paid to the holding company to $40 million, compared to the $30 million dividend that was paid in the second quarter. While future dividends are subject to regulatory approval, we are optimistic that dividends will continue to be paid on a quarterly basis. We are planning to ask for and receive a higher dividend in the fourth quarter. At quarter end, our consolidated cash and investments totaled $5.0 billion including $182 million of cash and investments at the holding company. The investment portfolio had a mix of 69% taxable and 31% tax exempt securities, a pretax yield of 2.7% and a duration of 4.5 years. Our debt to total capital ratio declined to approximately 21% at the end of the third quarter from approximately 31% at the end of the third quarter of 2016. The holding company has resources for approximately three years of ongoing debt service. As of September 30, the holding company's annual debt service on their remaining outstanding debt is approximately $60 million. This includes approximately $12 million that the holding company pays MGIC which owns $133 million of our 9% junior subordinated debt. Before turning it over to Pat, let me make a few comments about potential impact about the recent hurricanes may have on our financial position. Although we can make no guarantees as described in our risk factors, based on our past experiences and recent analysis that we have conducted, we do not expect any material impact to our financial results due to these storms. That said, we do expect to see an increase in the number of new delinquent notices reported to us in future periods and potential increase in the delinquent inventory. We expect that any elevated level of new notices or delinquent inventory will have an immaterial increase on our required assets required by PMIERs and that any such increase would be of a relatively short duration. With that, let me turn it back to Pat.

Thanks Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. The review and updating of state capital standards by the NAIC continues to move forward, albeit slowly. At this time, we do not expect revised the state capital standards to be more restrictive than the financial requirements of the PMIERs. In regards to housing finance reform, we remain optimistic about the future role that our company and our industry can have, but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. As an individual company and through various trade associations including USMI, we are actively engaged on this topic in Washington. We are encouraged that the discussions are now more inclusive about the role of each of the GSEs, FHA and private capital versus treating them as separate topics which is positive for MGIC and our industry. Regarding the FHA specifically, a new director Brian Montgomery has been nominated and while we have not had conversations directly with him, we continue to believe based on our discussions with various parties in the administration that the FHA will not look to expand its footprint in housing finance in the foreseeable future. Regarding PMIERs, there is no update that I can provide. As a reminder, the GSEs informed us that they currently anticipate that new PMIER financial requirements would not become effective any earlier than the fourth quarter of 2018 and they have committed to us that they would provide 180 days written notice prior to the effective date of the requirements. I am very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force, of which nearly 77% been written since 2008 continue to grow. Annual persistency is increasing, new delinquent notices decline as the newer books of business continue to generate low levels of new delinquent notices and the legacy portfolio continues to run off. Further, the anticipated claim rate on existing delinquencies decline, we maintained our traditionally low expense ratio and the holding company received a $40 million dividend from MGIC. As I said in prior quarters, I continue to believe that there is a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders and we are committed to pursuing those opportunities. With that, operator, let's take questions.

[Operator Instructions]. Our first question is going to come from the line of Mark DeVries with Barclays.

Yes. Thanks. Tim, it sounds like with the expected request for a larger dividend next quarter, we could be looking at over $200 million of dividends in 2018 up to the holding company. At what point should we think about some of that coming back to shareholders either in the form of dividends or buybacks? Or do you also have potential to increase leverage, take on some debt to finance either buybacks or some additional investments in the business?

Mark, it's Tim. It's a good question. I think as we stated, we expect to hopefully receive a larger one in Q4. I would say that as far as what we will get in 2018, we have more formal conversations with the OCI annually as far as what we do there. So I don't want to get ahead of ourselves as far as what we might get into 2018 as far as anything additional. I think we feel pretty confident with still paying a quarterly dividend obviously, but it's one of the things that we will continue to look at. We feel pretty good now that we have got to three times sort of our run rate for interest at the holding company at this point. And as that continues to grow, I think it gives us some flexibility to look at things. From a leverage standpoint, I think we feel pretty comfortable where we are with leverage right now. It gives us some flexibility. So I don't think we are looking to use that in the short term for any specific purposes. But it's something that obviously we will have continued discussions with management and with the Board about how we look any sort of additional flexibility that we have at the holding company.

Okay. But if you are able to maintain that type of run rate and the dividends from the writing company, what should we expect potentially in terms of changes of the use of those dividends as we look out into 2018?

Yes. I think, you know, we have talked before about any potential capital return that would happen obviously either in the form of dividends or share repurchase and we take a look at those. I think from a dividend standpoint, we want to have much more clarity around the flow that continues to come up to the holding company and would want to make sure that it is consistent dividend and hopefully steady increasing and when we have to still get approved from the OCI. That's probably a pretty high bar at this point. And I think as we have said in the past, we are very focused on the amount of dilution that was created during the crisis. So that's something we look at from a share repurchase standpoint. The one thing I would also add as far as the flexibility we want to maintain, Pat mentioned at the end of his comments that we are still waiting sort of what PMIERs 2.0 might look like. And while we have no reason to believe that there is going to be anything there that causes us any concern, I think we want to maintain some amount of flexibility until we know what those new rules are going to be, especially where we expect them in the relatively short future.

Okay. And to the extent to which you can show us, it would be helpful just to kind of know where you are in those conversations with the OCI? Any kind of change in the evolution of those discussions? And kind of what next steps are?

We are not really going to comment too much about the OCI conversations. We have a really good relationship with them and touch base on a regular basis. I would say, more formally annually as far as discussion of dividends. But obviously have communication even on a quarterly basis. So we continue to have those discussions. They are always very productive and it's a good conversation. And we think we have a good story to tell, based upon the excess of PMIERs continue to grow and obviously the operating results that we have been having the last number of quarters

Okay. And then just finally from me, the claims paid came in lower than we have been modeling. Is there anything notable to call out on that for the quarter?

I think, there can be some volatility there. I think that might also be a little bit of impact with us having done some of the settlements that we have had in some of our delinquent inventory, as I mentioned in the comment that we had one this quarter. On average, those are probably a little bit higher severities because they been in the inventory longer. So that might have some impact going forward as far as the average severity on paid claims as well.

Okay. Thanks.

Sure.

And our next question is going to come from the line of Jack Micenko, SIG.

Hi. Good morning guys. I noticed your 95% mix on NIW has come up a bit over the last year and it stood out to me because I know when the GSEs role that back out, we were thinking maybe it was potentially a smaller part of the business. I guess the question is, is that something strategically you are looking to do more of? I am guessing it's driving that increase in the premium yield as well. But is that something you target? Or is that just something that is just the nature of the flow that comes your way?

Jack, this is Mike. It's not something we are specifically targeting. It's really just the nature of the business where lenders are producing new insurance in auto. It took a while, as you pointed out, for that 97% to get started and then drained into the processes of lenders. So I think it's just part of the natural evolution of lenders that are looking for increased production.

Okay. And then on the singles, so the refis came off in the singles. Your mix of singles has come up and I am just curious, strategically is that something that's maybe changing your thinking on mix over the last couple of quarters? Or I ere guess again more market driven?

Jack, it's Mike again. Yes, it's really more market-driven. So haven't changed our philosophy relative to singles. So there is little bit of blip in refis. Not much obviously, because it's flat 9% to 9%. But as far as the mix of lenders that are doing singles, come in a little bit more from the non-banks. They tend to focus a little bit more on refis. But there has been no change to our strategy or philosophy relative to singles.

Okay. And then just one more. You called out persistency improvement a number of times in the prepared comments. Where can that number go if rates stay where we are at or even migrate higher on a little bit steeper curve? How are you thinking about that number internally? It would be helpful for our modeling.

Yes. Jack, it's Tim. I think we always center it around 80% persistency quite frankly. And I think you know if refis stay stamped down, can it go above that? Yes. But I think we don't expect to see the high persistency, let's say, getting to 90% you might have seen a decades ago. I think we have sort of said, it's tough to see it getting below or above 85%, I would say. And I would say, that's very difficult. So when we look at it, you know, I think we center it around 80% and think that's a relatively good sort of guidepost looking forward.

All right. Thank you.

And our next question is going to come from the line of Geoffrey Dunn with Dowling & Partners.

Good morning. Tim, I just want to revisit your comments on the hurricanes. You are going to get the notices in. Is basically the plan to just a low incidence assumption on those?

Yes. I think Geoff, from our experience it hasn't been a significant claims paid and loss event to us. So we do have the ability to take that experience in account as well as additional work that we will do when we see the notices come in and adjust the expected claim rate on those sort of notices that we think are, I guess, more temporary in nature and related to the hurricane and don't think we will end up in the same, I guess, incidence rate as our normal notices. So we are able to take them into account.

Okay. And then do you have refunded premium number for the quarter?

Yes. For the accelerated singles, it was $9.2 million this quarter. That compares to about $7.5 million back in Q2 of 2017.

Okay. And then last question. Pat, you called out the favorable operating environment with the purchase market growing. Given the existing forecast for 2018, I think it's kind of a recurring trend, purchase growth continue to decline in refi, any preliminary thoughts on how 2018 NIW could compare to what you are targeting on 2017, given the macro?

Well, I don't want to commit to a number. But needless to say, or as I have said, we feel good about it, more weight purchase than refi. And as a result, we think we will continue to do well there. So still a little too early to give you a specific number.

Okay. Thanks.

Thanks.

Our next question will come from the line of Douglas Harter, Credit Suisse.

Thanks. I was hoping you could quantify the benefit from the lower assumed severities going forward from shorter timelines. And is there kind of a one-time benefit to that? Or is that something that's just going to recur going forward?

I think when we looked at it and we are talking about new notices coming in, that's subject to change, just like any other assumption on new notices when we reserve. But as I mentioned in the comments, I think we have seen in general that the new notices coming in are not going to say in the inventory for quite as long as the ones that, say, came in three, four or five years ago. So that means that ultimately we would expect we are going to pay a lower severity on that. So all things being equal, it would be something that we look at quarter that we hope that trend would continue to persist. But that's dependant upon obviously what the conditions are and how servicers are resolving any sort of delinquencies in going to claim. But it felt comfortable based upon the trends that we have seen recently that we were able to adjust that for this quarter.

Makes sense. So is there any way you could frame how much benefit that is on those new claims in terms of severity percentage you are seeing on new claims versus what you would see if they were sticking around longer?

Yes. I mean it's not a large amount. I think for the Q, you would probably have a little more disclosure on that when we do the reserve development. And so I think that's probably we will have any more detail on that.

All right. Thank you.

Thanks. Operator? Kelsey? Operator? Hello?

Our next question will come from the line of Randy Binner, FBR.

Hi. Good morning. Thanks. Excuse me. I have a couple just topline related questions. I guess the first is on FHA. You mentioned the new nomination there and that I think the rhetoric from the administration is that they would be less involved in the market. But have you noticed any change thus far? We are almost getting to the end to 2017 here. Has there been any difference you have noticed in how FHA has been involved in the market?

This is Pat. We haven't seen anything yet. I think there is kind of a general feeling they want to wait until Mr. Montgomery gets confirmed which I think is scheduled for next week. So as we have had conversations in Washington, I think it's been business as usual. But with Dr. Carson in there now at HUD, his consultants as well Brian at the FHA, I think at that point in time they will analyze what kind of changes they would like to make. So right now, it's kind of business as usual.

Okay. Yes. And that's our perception too. So they would need to make proactive changes. Is that fair to change the involvement of FHA in the market otherwise whomever is set up on the distribution side to supply that to the market would continue until there is an active changes. Is that the right way to think of it?

Yes. That's a good way of looking at it. They have to make a proactive change. I think my sense of it would be, their actuarial report on their capital typically comes out sometime in mid to late November. I think that will influence it. And then obviously with a new person in the chair, that will influence their thinking as well.

And then also just thinking about the origination side and we have seen banks retaining more residential mortgage originations, more residential mortgage risk just broadly. I don't think that tends to be for product that has less than 20% down. But have you noticed any change in how much throughput you are getting as it relates to banks potentially keeping more of the risk they are originating?

No, not really. The amount of business that was ultimately getting sold to the GSEs continues to be very strong and that's the business we insure. So we haven't seen. There may be a lender or so, but as a broad policy statement, I don't think there is any change.

All right. Great. Thanks.

Our next question is going to come from the line of Bose George, KBW.

Good morning. Just a clarification on the defaults, the claim rate expectation. The 10.5% number, is that sort of a good expectation going forward?

I think the trend has been that that's been trending downward other than first quarter always there is a little seasonality involved. So the trend has been downward and we have said historically that 10% is sort of what we think is historical average. So I think whether we can get below that or not is questionable. But I think I guess as I said, the trend has been slightly downward, but it gets tougher to get farther down the lower you get on that percentage.

Okay. Great. Thanks. And then actually just on market share, I guess it's probably too early to tell but any thoughts on whether there is much change in your share this quarter?

Bose, this is Pat. We think we are still in the 18% range.

Okay. Thanks. And then actually just one more on the FHA. The Congressional Budget Office put out that report, I guess a few weeks ago, just highlighting some of the risk there in the accounting that they use, et cetera. Do you feel like people are paying attention to that report in terms of the people you speak to in Washington?

This is Pat again. Yes, I do. Not just that report but a general perspective on again housing policy to say that there is some concern about the size of the footprints of the FHA and granted the economy is doing well and their newer books of business are doing well, but their book is now something like $1.1 trillion. And the question arises, is that the right role for government? Should it be that large? And so I think there is more conversation around, is that footprint to big and what steps should be taken or potentially taken to reduce it. And I think the report you refer to laid out a number of steps that are possibilities that I think will be given serious consideration.

Okay. Great. Thanks.

Our question will come from the line of Mihir Bhatia with Bank of America.

Hi. Thank you. And if I could just follow-up on that, just on the FHFA. I think in your prepared remarks you mentioned that you don't see, most of your conversation suggest it is not appetite increase the role of the FHA. But are you seeing appetite decrease the role? Because it is still, I think market share wise, it is probably still 2x to what it was in the only 2000 or something for the FHA. So are you seeing momentum for that? And what kind of things need to happen? Is it just a matter of waiting for the new person to be conformed and then them taking actions? Just curious on that.

Well, I would say that if you look at the insured market right now and these are very round numbers, I think the private MI came about 35%, the FHA has about 35% and I think the VA has about 30%. Those are ballpark numbers. And so we haven't seen any material change to that in 2017. However if you look at things historically, the private MI at one point in time years ago had about two-thirds of that market and the government a third. And so there have been various parties within the FHA over the last couple years that have said they think they need to reduce the FHA's role to more of a historical norm. So at 35%, again that's a round number, that's still much higher than it was in history, save for the great recession. So I think there is that view. And then as I said earlier to the previous question, just the size of the FHA, the private sector has clearly recovered. The private MI industry is the strongest it's ever been. And we believe we can play a greater role. And you have to ask yourself relative to the government and this is, we believe, MGIC believes that there is a role for the FHA. The question is, what is that role? And we believe that there is opportunities for the private MIs to play a greater role. For instance, the FHA will report that a good portion of their business in sureties for FICO scores above 700. We would question, is that the right way or right place for government to play. We would question relative to loan limits. Are the loan limits properly set and things of that nature. So the CBO report laid out a number of alternatives that I think all provide some interesting discussion about how to shrink that role and to do so in a prudent fashion. Again, we are not anti-FHA. This needs to be done prudently. It should be done, as I said in my prepared comments, in the context of GSE reform as well. You don't want to take action at the FHA that will simply drive business to the GSEs or take business of the GSEs and drive business to the FHA. It needs to be done holistically as a matter of policy. And as part of that we think we have a pretty good position. And then lastly, I will say I don't expect anything to happen until the new commissioner is in the seat and he has had a chance to assess things.

Great. Thank you. And then if I can continue on that same theme of just the government's role. There was, I think, maybe a year ago, there seemed to be a considerable push from the industry on deep cover MI. Any update on that? Any kind of any update on that? I know there has been, recently it's been in the news again in the last couple of weeks. So just wanted to see any update from your side?

Sure. Well, the update is there is no update. The MI industry continues to believe and this is on the GSEs side of the equation, but we continue to believe that deep cover MI makes a lot of sense with the objective of reducing the GSE's risk and therefore most importantly reducing taxpayer risk. The private capital that we provide that the six MI provide is well-positioned to take on more risk. That said, the conversations have been somewhat or quite limited actually on that specific execution. So the GSEs continue to try to pursue alternatives in the credit risk transfer market. We try to stay very, very close to that. But we continue to believe that the most effective way to reduce GSE exposure and thus taxpayer exposure is deep cover MI. There has been some activity in Congress along those lines. We will have to see how that proceeds. But right now we are kind of in a holding pattern.

Got it. Great. And then if I could just turning a little bit more micro to MGIC. The monthly premium, the premium yields have increased, I think the last three quarters this year. Is that just being a function of the mix of the business? And is that, I think you talked a little bit about this already, but if you could just, if you don't mind, just give us a little bit more color on that? Is it just a mix of the business? Or is there a strategy to write maybe some of the different tiers to manage that premium yield?

Mihir, this is Mike. No, it's really, again it's the mix shift. When you look at the disclosures we have in the supplement, a year ago our fourth quarter 2016, we were like 6%, 7%. It was a greater than 95%. Now we are up to 12% of writing. There has been a modest through drip down in FICO scores also, 760 to 750. So it's really just things of that nature. So more of a mix shift. Again, no change, like with the singles, no change in our philosophy or strategy. It is what the market is producing and maybe to your point, we want to write as much high LTV business as we can that meets our parameters and that's where the market is drifting towards.

Okay. So let me just follow-up on that. And then in terms of your expectations for premium yield, you still think it will be pressured for the next few years. Is that right? And would you be willing to put any kind of numbers around that?

This is Tim. I think from and we are talking again on the in force. We still think that there is downward pressure on the in force just because of some of the legacy book with higher average premium rates expiring that that will keep the downward pressure. And as I said sort of in the comments, it's tough to pick exactly where and when it will sort of get to steady state. Obviously putting on new books of business at a little higher than average premium rate than we had a year ago helps in that regard, but I still think it's very difficult call exactly how much and the timing of that.

Okay. Great. Thank you. Appreciate you taking the time.

Our next question is going to come from the line of Chris Gamaitoni, Compass Point.

Good morning guys. Thanks for taking my call.

Good morning.

Can you give a little clarity on the pace of the bulk run-off? It was down 13.5% year-over-year, which looks like the fastest decline on a year-over-year basis in 4Q13. I am still trying to gauge when that book and maybe the flow pre-2009 books will run off and the pace seems to be accelerating this year. So do you have updated schedule of when and how is that trend moving forward?

Chris, this is Mike. We are trying to figure that one out ourselves. It is pretty long lasting given the nature of it. Steve, I don't know if you want to probably add some --

Yes. This is Steve. I think the NPL sales that we have done and the communications we done with the GSEs have been effective in accelerating that. We continue to have dialogue to try to continue to those because we think those are good resolutions. But overall, we haven't seen any significant trends in the performing segments of what we call the legacy book, the pre-2008. It's just consistently is grinding down.

Okay. And I know a large population of these, they have either been HAMPed, HARPed, modded some other way. Do you have a sense of like when the majority of that book or like if there is a bigger year where it should hit at 78% amortization schedule? Or if it was current, would you be able to be eliminated from coverage?

Chris, this is Mike. When you look back at those books of five and eight, the HARP stuff does certainly influence that. But there was so many 700s, you are looking at 11, 12 years before you get to that 78% LTV. I do believe, it's said in the filings and talked in our risk factors, we can talk about how much of the books have not been HARPed or HAMPed and it's in the single digits percentage with it. So there is going to be some impact of that. But the HARP stuff has really altered that quite a bit. We are probably yet before you start to see the fallout. And that's a contributor to the premium yield as we have talked about in the past. It's not the driver but it's certainly a contributor there.

But it's positive on the other side, just given still how large of a percentage of new default notices come from the population as well.

Yes. Absolutely right. They are 80% or so of our notices are coming from the legacy books. So that said, half of it has also never been delinquent. So there is gives and takes with that. So it helps on the delinquency side, but half of it has never been delinquent and it continues to perform. So there is some income coming from that as well.

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

Thanks.

Our next question comes from the line of Phil Stefano, Deutsche Bank.

Yes. Thanks and good morning. I want to circle back on the reinsurance a little bit. Obviously quota shares have been the primary method of ceding risk. I was wondering, are there any internal conversations about alternative capital or an ION? Why does something like that not make sense or any thoughts you have around something we can excess the loss of coverage?

Phil. It's a good question. This is Tim speaking. We have those discussions all the time, quite frankly, as far as whether the quota share and sort of the structure we have had to study the best, which is primarily been capital driven. We are aware of some more of the capital markets transactions that have happened out there and look at those and we have done similar type of transaction back in 2007 and 2008. So we are familiar with those. So we weigh a lot of the quantitative and qualitative sort of positives and negatives of all the different types of transactions and we have discussions about what we want to do from a reinsurance standpoint. What we said is, you know we view reinsurance as a core part of sort of our capital stack as we move forward, but that doesn't mean that we wouldn't look to other forms of reinsurance, whether it's an XO loss with traditional reinsurers, whether it's an XOL type structure that is done on the capital markets. I think those are all things that we continue to look at and sort of weigh our alternatives.

Okay. I guess under the guise the quota share, the 2018 or is it 2018 method for reinsurance, at what point do those conversations kick off? When do you start reaching out to the reinsurance for indications? And part of embedded in this question is with the third quarter 2017 active catastrophe losses that happened and has impacted the Bermuda balance sheets, is there any sense about their desire to keep writing this business? Any indication of pricing changes or anything like that you can guide us to?

We have conversations with our reinsurance partners on a pretty regular basis. And so through conversations we have had with them, I don't get a sense that there is any change in demand or appetite for what they are reinsuring from our perspective. Obviously, it depends upon market conditions and so a good question of whether the recent catastrophes changed their mind now, but based upon the conversations we have had currently, I haven't gotten indication that that changed their appetite at all.

Okay. Good. And from a gross expense basis, it feels like the guide in the past has been somewhere around 5%, maybe just shy of that. The way I have been thinking about the gross expense base growth is something like GDP, GDP-plus, something in that inflation range, I guess. Is there a floor on the expense ratio? Or what pressure could investments in the business pose on that as thinking about the inflation plus growth rate of that expense base?

Well, I look at it, I think a couple of parts to that. I look at just the growth the expenses itself and also from a ratio perspective. So from a growth in the expense itself, I think we have talked about, somewhat of an expectation of cultured maybe in the 5% range year-over-year. So a little bit outpacing inflation and as we continue to make sort of investments in the business and sort of in our structure, somewhat probably deferred coming through the crisis catching up on some of that, but not a huge cost by any means and try to keep that control pretty well. From a ratio perspective, I think the challenges has been more with the revenue line and we have had a little bit of a disconnect as the in force is growing, the revenue hasn't grown at the same pace. And so as that average basis point question, we just talked about previously, starts to normalize then I think you start to see that sort of pull together a little bit. So we still feel pretty good about our historical low expense ratio. We are very committed to making sure that stays in a good range in that 15% to 17% range, I think it's where it has been the last couple of years and we will stay focused on that. But there is little pressure from an expense standpoint of just a little bit stronger than inflationary growth.

Well, thanks for the thoughts and best of luck on the rest of the year.

Sure. Thank you.

At this time, we have no further questions. I will turn the conference back over to Mr. Zimmerman for closing comments.

This is Pat. I just want to say thank you for your continued interest in our company and have a great day.

Once again, we would like to thank you for participating in today's conference call. You may now disconnect.