MGIC Investment Corporation (MTG) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation Second Quarter Earnings Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instruction will be given at that time. [Operator Instructions] As a reminder this call is being recorded. I would now like to turn the conference over to Mike Zimmerman, Senior Vice President Investor Relations. Sir, you may begin.

Thanks Ashely. 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 second quarter of 2018 are Chief Executive Officer, Pat Sinks; Chief Financial Officer, Tim Mattke; and Chief Risk Officer, 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, a 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. 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. The company makes any forward-looking statements, we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no interested 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 8-K. At this time, I’d like to turn the call over to Pat.

Thank you, Mike, and good morning. I’m pleased to report that we had another strong quarter and we continue to make excellent progress in executing our business strategies. In a few minutes Tim will cover the details of the financial results but before he does, let me provide a few highlights. The expanding purchase mortgage market, our company’s market share of approximately 18%, the hard work and dedication of my fellow co-workers to deliver stellar customer service and a higher annual persistency resulted in greater than a 7% annual increase in insurance in force ending the quarter at $200.7 billion, a level not seen since 2009. Since insurance in force is the primary driver of our revenues, it is a key metric that we focus on as well as the expected returns on the new business revenue. In the quarter, we were $13.2 billion of new business, which despite a lower overall origination market to the fewer refinance transactions, was higher than the same quarter last year and we are on track to rate $50 billion for the full year. The strong purchase market along with some share gain from the FHA has helped to contribute to this result. Total revenue was approximately 8% higher than the same period last year, primarily result of higher reinsurance profit commission and investment income. Turning to credit for a moment. Performance continues to be outstanding. A number of new delinquent notes is received declined both sequentially and year-over-year. Further, the percentage of policies that were delinquent as of the end of the quarter has fallen to its lowest level since 2002. The strong credit performance continues to be a tailwind for our financial results. Our expense ratio well higher than last year due primarily to higher compensation cost continues to be the lowest in the industry. The ratio decreased from the prior quarter NFA from an increase in net premiums return. Before I turn it over to Tim, I know many of you had enquired about the competitive environment within the industry. Over the last few months, all VMIs have introduced new premium rates into the market and lenders are incorporating them into their workflow. While there was a meaningful increase in the level of price competition earlier this year from what we can absorb, it appears that current conditions have returned to be much like they were before the tax rates change. From our perspective, our top priority is to remain a relevant business partner with our customers and to prudently grow insurance in force, which generates long-term premium flows and creates long-term book value growth for our shareholders. With that let me turn it over to Tim.

Thanks, Pat. In the second quarter we earned $186.8 million of net income or $0.49 per diluted share compared to $118.6 million or $0.31 per diluted share in the same period last year. To provide better insight into our operating results and to make year-over-year comparisons and financial results more meaningful, we disclosed adjusted net operating income and non-GAAP measure. While there were only immaterial impacts in the quarter, the reconciliation of GAAP net income to adjusted non-net operating income is included in the body of the press release. There were multiple drivers of the improvement of our financial performance for the quarter including higher earned premiums and investment income, lower losses incurred and lower tax provision. Premiums earned increased primarily due to a higher cost commission. I will go into more detail about the higher profit commission in a moment. The tax provision for the second quarter of 2018 reflects some due lower corporate tax rate compared to same period last year. Losses incurred rate negative $13.5 million compared to $27.3 million for the same period last year. Losses incurred consistent reserves established on new delinquent notices plus any changes to previously established loss reserves. As we do each quarter, we review the performance of the delinquent inventory to determine what if any changes should be made to the estimated claim rates and severity factors of previously received notices. We continue to see some positive primary loss reserve developments specifically before considering the impact of our reinsurance communities. We recognized $70 million of positive development on primary loss reserves compared to $52 million of positive developments in the second quarter of 2017. The positive development was driven by higher than expected cure rate, especially performances of final and delinquent inventory for 12 months or longer. We also saw improvement in the 4 to 11 months category. During the quarter we received 16% fewer notices that we had over the same period last year. The claim rate on these new notices received in the quarter was approximately 90.5%, which reflects the current economic environment and anticipated gears and compared to 11% in the second quarter of 2017. New delinquent notices received in the legacy books continue to generate the majority of new notice activity in the quarter. The legacy books accounted for 74% of the new delinquent notices received while accounting for approximately 19% of the risk in force as of June 30, 2018. New delinquent activity from the larger more recently written books remains quite lower reflecting their high price quality as well as the current economic condition. We expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters. Reflecting the smaller delinquent inventory and the impact of the GSE for closure moratoriums related to the hurricanes. The number of claims received in the quarter declined 36% from the same period last year. Net stake claims in the second quarter were $91 million. The effective average premium yields for the second quarter of 2018 was 49.6 basis points, which was up a little more than 2 basis points from last quarter. As I've discussed in the past, for a variety of reasons including the policy of yield book, changes of premium refund accruals, changes of single premium recognition and losses due to the reinsurers to reported net deals can have some volatility to it. This increase in the premium yields in the quarter was due primarily due to positive primary loss reserve development we reported this quarter. The positive loss reserve development resulted in a decrease of ceded losses, which in turn resulted in a decrease of ceded premium earned. Positive development also resulted in a decrease of the accrual for premium refunds as we expect to pay fewer claims from the delinquent inventory. As a reminder, our profit commission is reported through the net premiums earned line is directly correlated with the ceded losses incurred. As ceded losses decrease the profit commission increases and of course the opposite attributable ceded losses increase. If we exclude all the impacts of the positive losses of development from the Q2 results, the premium yield was about flat to Q1 of 2018. So while there will be some volatility in any given quarter from the items I just mentioned, we expect that the effective premium yield will trend lower in future periods as the old book continues to run off and the impact of the new premium rates take effect over the next several years. However, the exact amount in any given quarter is difficult to predict. Net underwriting and other expenses were $44.7 million in the second quarter of 2018 compared to $41.1 million in the same period last year. The increase in expenses was primarily due to higher stock based compensation, which resulted primarily from a higher stock price of the grants paid and changes to our nonexecutive compensation. At the end of the second quarter, MGIC's available assets for PMIER's purposes totaled approximately $4.8 billion resulting in a $980 million excess over the required assets. MGIC's best rate capital is $2.4 billion in excess of the state requirement. As we reported in the press release, during the quarter, MGIC paid a $50 million dividend to the holding company. We expect the dividend of at least this level will continue to be paid on a quarterly basis. Additionally we repurchased 9.2 million shares of common stock at a weighted average price of $10.88 per share. In addition to writing new business and exploring new opportunities as they arise we'll try to manage the amount of PMIER's excess by continually reviewing our use of reinsurance as well as continuing to seek and pay dividends on the writing companies to the holding company. When we analyze various options to deploy our capital resources we need to take into account the holding company's primary source capital is the writing company. So while capital is being created at the writing company level, we notify and make sure the OCI does not object any dividends payment from MGIC. We also consider the resulting leverage ratio, the ability to continue our positive ratings trajectory, the debt service ability of the holding company and of course any changes to PMIERS. We'll continue to evaluate all capital management options. At quarter end our consolidated cash and investment totaled $5.1 billion including $191 million of cash in investments in the holding company. The consolidated investment portfolio had a mix of 71% taxable and 29% tax exempt securities, a pretax yield of 2.91%, up nearly 10 basis points from last quarter, and a duration of 4.2 years, which is unchanged from last quarter. Our debt to total capital ratio was approximately 20% at the end of the second quarter of 2018. Finally, I know many of you are interested in possible changes to PMIERS or PMIERS 2.0. As a reminder, in December 2017, we received from the GSEs summary proposed changes to the PMIERS. In June 2018, we received a revised draft of proposed changes to the PMIERS we expect will be finalized in the third quarter of 2018 and become effective at the end of the first quarter of 2019. Upon effectiveness of PMIERS 2.0, we expect MGIC would continue to have an excess of Available Assets over Minimum Required Assets. Although our excess will be materially lower than it was at June 30, 2018, and then MGIC would continue to be able to pay quarterly dividend to our holding company in the $50 million quarterly rate. Since we are bound by a nondisclosure agreement, we do not plan to provide updates on details of the discussion with the GSEs and I think just fair until they are finalized. Finally, with regard to changes in PMIERS, I think it is important to point out since we expect the proposed changes will result in MGIC having an excess, our GAAP return should not be materially impacted by any changes that are being contemplated under PMIERS 2.0. 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. With regards to housing finance reform we remain optimistic about the future role that our company and the industry can have but it continues to be very difficult to gauge what actions may be taken and the timing of such actions. As individual company and through various trade associations including U.S. M.I. we are actively engaged on this topic in Washington. While this is possible that GSE reform proposals either legislative or administrative may be forthcoming, we do not think it is likely that they would be acted upon in 2018. We are encouraged as the discussions are now more inclusive about the role of each of the GSEs, FHA, and private capital versus treating them as separate topics. Regarding the FHA specifically a new Director has recently been confirmed. During interviews following this confirmation he has stated that it is unlikely that the FHA will reduce its M.I. premiums this year. FHA's most recent actuary report, which he said gives some insight into the health of FHA's flagship insurance fund. As indication of why no M.I. cuts are likely come in 2018, specifically he mentioned that had the premiums been lower on the loans FHA insured 2017 that the fund would have been lower 2% mandated ratio. With respect to the new pilot programs that Freddie and Fannie have introduced, we are discussing with our customers their interest in these programs, which has been loan to date versus working directly with an M.I. company. If successful, both pilots would accounted for perhaps 2% to 3% of the market opportunity over the next 12 to 18 months so we do not materially change our forecast for NIW for insurance report during the period. In closing, disclaimers and other policymakers to be the future of the housing finance system. There is so much written of all the roles GSEs, FHA and the private mortgage insurance industry will have at future state. I believe this is created unnecessary uncertainty about our company and our industry. By any company in industry there are always strategic issues that need to be monitored and considered that could impact the policies of firm. We are aware of the issues that could impact our industry and are actively working on them but sometimes we need to remind ourselves that despite changes that may or may not happen in the future, right now, in the present we have a book of business that is performing exceptionally well and generating significant shareholder value. And we expect that to continue for some time. That is why when I look ahead, I'm very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force increased more than 7% in the quarter at $200.7 billion, persistency continues to trend favorably and the credit trends continue to improve on the legacy book. I expect that our insurance in force will continue to grow due to the level of new business we expect to write and strong persistency. Further, I anticipate that the number of new mortgage delinquency notices, claims paid, and delinquency inventory will continue to decline. 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 remain committed to pursuing those opportunities. With that, operator, let's take questions.

[Operator Instructions] And our first question comes from Geoffrey Dunn of Dowling & Partners. Your line is open.

Tim, can you start up by maybe commenting on the drivers of the sequential increase in the cancellation rate? And also what the accelerated premium number was for the quarter please.

Yes, I'll take the, I guess, I'll take the accelerated premium question first. I think its right around $6.5 million for the quarter. That was just pretty close to where we were last quarter as well but not a big driver in the quarter-over-quarter change and yield and basis point. As far as cancellation, really I think seasonality in NPL deals are really what the point as far as that go beginning to be lumpy from quarter-to-quarter so we look longer term on it. But when you think about certain seasonality and then with some of the lumpiness of the NPL deal, that's what I'd point to for that change of cancellation.

And then Pat, I’m not sure how much you can talk about, but in terms of this new pilot BPMI, there was a statement that the traditional MIs or the regulated PMIERs MIs are not going to be eligible on the at least the first pilot draft here. But it seems like maybe affiliate could be eligible. Can you confirm if any part of magic can participate in these deals like you do on CRT or if you were truly blocked from being part of the initial pilot?

Sure, happy to do so Geoff. I guess to take your step back what are these credit programs all about, what the FHA and the GSEs are trying to do, to explore additional options to transfer credit risk to the private sector, which were obviously down. We’re committed to working with the GSEs to identify different ways to explore these options and as well as post for any important role traditional private MI already plays in housing finance, so that’s the backdrop. In this particular case the same BPMI, as you noted, they had said that they would allow affiliates of traditional MIs eligible in the pilot. In that regard we elected to participate through our subsidiary, a company called MGIC Mortgage Insurance Corporation or the acronym is MAC. So we can't get into the specifics of it. We’re prohibited by confidentiality agreement. But I can tell you that in terms of the financial commitment is relatively immaterial. It's not anything we’re going to breakout in our financials because it's just not big enough. But it does allow us to participate in the transaction in a sense to keep our pulse on the finger of the market. And so you while we participated in a small way it's important also to add that we still think it's important as new transactions are developed by both Fannie and Freddie that we still seek a level playing field. So again this isn’t necessary material but the transactions need to be material, I’m sorry, transparent to one level playing field. We didn't make sure that one transaction is the advantage over to the other. So our participation is relatively small but again it allows us to be on the inside and kind of watch what's going on. That said we continue to believe that the traditional borrower paid mortgage insurance execution is the best way to go, best for the GSEs, best for our customers, best for the homeowners and best for the housing policy process as a whole. So we remain fully committed to the borrower pay channel as the best execution but thought we stick our toe on the water herein see all these develops.

And just to round that question out in terms of what your lending customers' feedback has been with regard to whether or not they're interested in the program?

It’s still very early. I mean the Fannie Mae program doesn’t kick in until August 1, while we’re not participating in the Freddie imagine program. The feedback we get is that it's relatively muted. They're still on the conversation stage and it really hasn't anything material in terms of a move away from a traditional private MI execution.

Our next question comes from Mark DeVries of Barclays. Your line is now open.

Have some questions just about what we should expect from capital returns going forward. I think you guys recently indicated that you like to hold the liquidity cushion at the holding company of about 3x your annualized debt service which I guess you're kind of at right now. So should we expect going forward that your capital returns should be kind of capped out that your dividends up to the holding company from the writing company less whatever your debt services in other words something in kind of the range of $37 million a quarter?

Mark, it's Tim. It's good question. I think we are sitting at 190 -- just over $190 million in capital over cash to holding company, interest carries about $60 million per year, like you said just about that three times multiple. So it’s historical one of the two to three times we like closer to just three times. So I wouldn’t say that we wouldn’t get below the three times. But obviously as we implemented that the authorization this last quarter we did take advantage of market opportunity and we'll just continue to look as we go forward and balance sort of cash that we need the holding company to make us feel comfortable as well as what the market sort of represent it from an opportunity standpoint.

And should we still expect going forward the dividend up to the holding company as kind of be in the $50 million range? Or is there room for you to continue to request if that move higher?

Mark, I think those are conversations we always have with our regulator the OCI. I think as results continue to perform well it's something we'll have a discussion with them about. We feel very comfortable about the $50 million level and the ability to continue to get back. And we'll continue to have conversation about whether that could go higher in the future.

Okay. And then when might you think about reestablishing the dividend for your shareholders?

That’s one of the other tools that we've talked about with our board as an option there. I think we've talked about it in the past the certainty around the dividend flow out to the holding company. Right now we do ask the OCI for the dividend and then sort of just that ability to see that clearly and to make it meaningful. So it's something we'll continue to talk about but there is nothing that’s on the horizon on that.

And then finally just one clarification about one of the points you made Timothy. You still expect the average premium to drift down. Do you mean that relative to where we are this quarter or relative to and where we were last quarter before we got this kind of nonrecurring benefit related to the positive developments?

That’s a good question. It's IT related to where we were first quarter. Again we had some items this quarter that they're not onetime items because they can happen in any period but they are unpredictable. But I’d say if you look back to where the first quarter was we still expect to see even trend down from there.

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

This is actually Solomon for Jack this morning. My first question was on your loss ratio this quarter. So you had the $70 million in benefit. But as I look at cure default ratio last quarter and this quarter they were sort of at the highest levels they have been since we have been tracking the data. And that also seems to be coinciding with the hurricane last year. So do you guys think we might be getting somewhat of a false read on that metric for the past two quarters? And how much of that if any paid part in the loss ratio reported today?

I think you definitely have to control for the hurricanes and the cure activity that’s flowing out because of them and that’s when we look at from a reserve standpoint that’s what we do. I think from a hurricane standpoint when they happen, we talked about the amount of reserves that we put on for the hurricanes was just short to $10 million. I stated we still think it's in that ballpark. And so when we look at the reserves in total, we really focused on what we believe our non-hurricane related items and are looking at that the sort of statistics and data to determine what we should do from a large reserve standpoint.

So the cure default ratio for this quarter is sort of not the core so you don’t look at it as a core number that's something lower?

Sure. This is Mike Zimmerman. I think we had less impact on the goods. It is clear to returning closer to be a core number. It's certainly the first quarter. We had a lot of the search game if you will in the fourth quarter relative to growth activities and gear started flowing through in the first quarter. It's started to come down in the supplement to put out right now in those zones that indicated as better areas. They have about 7,800 delinquent units in those markets, same going in year ago around 6,000 or so. So it's just a little bit elevated but we’re getting back closer to our core number.

And the other one was on capital allocation. Little surprise to see that you guys used that path your purchase authorization in one quarter especially given the upcoming PMIERs announcement. But should we take this to mean that it just continue to remain at these levels you would be comfortable using up the entire authorization in the coming quarters despite the expiration being next year? Just trying to get a sense of the cadence.

I think it's tough to predict exactly how much we’re going to use over the next quarter or two quarters. The authorization does go through the end of 2019. What to take advantage or what the market conditions were from a PMIERs standpoint we talked about even though we'll have a martial decrease. We still feel very comfortable with the dividend flow as a holding company. So we took all those things in the account we thought about how much we see repurchasing under the authorization this last quarter.

Okay. And then just lastly on the pricing changes that you guys announced last quarter there were three weeks there in the quarter that you had a lower public rate card competitive peers. So we’re just wondering if you saw any outsize benefit in volume in June and does that change your $50 billion target of NIW in anyway?

This is Pat. I mean three week activity was not in all material. It hasn’t changed our forecast of $50 billion.

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

On the new rate card it appears that some of your peers at a more granular rate card. Just wondering if anything you saw at the end of June or in July as you concern or how does this change any of the mix of business you’re seeing?

This is Steve Mackey. So our new rate card that matched some of our competitors went into effect July. We did see some, I would say noise in the mix in June. But that was expected and nothing that we’re concerned about.

Our next question comes from Chris Gamaitoni of Compass Point. Your line is now open.

Can you give us a sense of the kind of your outlook for the required asset level? It's been roughly flat for a few quarters. And it looks like declined from -- declining delinquencies is being roughly offset by growth. I know it'll be a step-down from PMIERs 2.0. But I’m just trying to think about the strong profitability levels at the sub and roughly kind of flat recent growth in required assets. I think it's going to build on a lot of excess capital in the future just for the one time step down for PMIERs 2.0?

Yes, I mean, I think and we look at it obviously there is two parts of the growth in the actual assets versus the required assets as we said. The required assets, we have some tailwinds by the spot inventory continue to decrease and obviously there is some more capital required to the default inventory. So that comes down and helps us. But as we continue to grow the book and our in force grows, we have requirement associated with that. So I don’t see a lot of -- under the current construct, I won't see a lot of change in that. It's really more of the asset growth quite frankly that will cause a difference. And as you said it's -- even though its cash flow base the standard earnings ultimately returning to cash flows. And so I think that is the right way to think about how the excess could grow overtime. Again keeping in mind sort of a onetime reset when 2.0 becomes effective, which we believe with the end of Q1 of 2019.

And how do we think about -- how you think about capital returns in that construct assuming to get a step down and you can see build available at or above the minimum? And is there a level the stock price that you don’t want to buy back shares or just how you kind of view the stock price opportunities versus their opportunities?

Well, I think we look at, obviously, being able to deploy back to the business from a return standpoint and that's a critical component of what we think about. I think the other part that we haven't talked about much recently is what do we think the excess needs to be over PMIERs? And we've been waiting a little bit for 2.0. But we don’t also don’t control that fully because it depends upon the dividend flowing out of MGIC. But we do have some leverage. We always talk about the reinsurance of being able to scale back on reinsurance to bring that more down the line. So I think we have to mix all of those hidden parts the excess we want to hold. We've talked about 10% to 15%, we're obviously foreign excessive there right now. And so we have some more flexibility there. With 2.0 comes around there will be some of that excess. We will look at that, we will look at deploying into other -- into the business, into credit risk transfer as other alternative and try to way those returns and think we were getting the best value from.

Okay. And can you give us a sense of kind of the outlook of where you think the pace of investment income moves like in the future periods given asset growth and reinvesting at higher rates or investing in cash at higher rates?

Yes, I think from a yield perspective we saw a little bit of an increase this quarter. I think with our portfolio, we don’t look to move big chunks that are at one time. We normally like things mature and sort of move for the most part. So that's really going to be something that moves overtime as oppose to see anything dramatic really happen to think from the yield standpoint. But, obviously, as they continue to stimulate more cash on balance sheet that help both from a yield standpoint we will position overtime and you will see that sort of move, I would say it's slowly as my expectation.

Okay. Next question is probably for Steve. It looks like the pace of new delinquencies from the pre-vintage, the pace of decline is picking up. Is there anything specific you are seeing? Do you think its HPA related it's just for now?

Our interest at this point is at HPA related that has something that we're monitoring in making sure we're trying to get under, but it does look like it's probably driven by HPA.

Our next question comes from Philip Stefano of Deutsche Bank. Your line is open.

Why don’t you keep on the repurchases? And I think the last question started to get to the valuation but it was embedded in a bit of a string of questions there and one of the push on that. I guess is there evaluation where make sense and you’re more active or there is evaluation where you start to, I guess, it feels as rich and you dial back on repurchases. Any guidance you can give us or thoughts around that?

Yeah. So, I think it’s tough to give you anything or early prescriptive. It is something that we look at and we obviously think about what we think the value of the company as versus that -- versus other alternatives that we have for the cash as a holding company. And I can tell you I guess based upon our actions this last quarter we thought that there was the right trade off to make to repurchase the shares that the consideration will go through in the future when we think about that as well.

Okay. And if I heard it correctly that the pace of the new notices improved or it feels like it accelerated in the second quarter of '18 and that was partially driven or maybe mostly driven by a moratorium in the hurricane states. Is that right?

Are you talking about the notice activity or you're talking about the collective standpoint?

Yeah. Correct, the notice activity.

This is Mike. Sequentially we’ve got fewer notices that provide on a year-over-year basis that hurricane; I mean, I would say there was very muted impact there. So as Pete tell you we did, we have this kind of trending around 9% or 10% year-over-year improvement extra hurricane activity. It took a step better improvement year and that's -- in our intuition this is HPA related, but we’re going to continue to monitor and proceed.

But the number of new notices was down in the mid teens year-over-year?

Yes.

Was that related to the moratorium or foreclosures in the hurricane states?

That wouldn’t affect the notice activity.

Got it. Okay. Understand. Thank you.

Yeah. Foreclosures paid but not that notice activity.

Got it. Okay. Thank you.

Sure.

Our next question comes from Mackenzie Aron of Zelman. Your line is open.

Thanks. Good morning. Two questions from me. First, is this quarter’s tax rate is a good run rate for rest of the year?

I think we’re just right about 21%. I think the right way to think about it is that being the new federal tax rate, we’re going to be in that ballpark for the rest of the year.

Okay. And then Pat, one for you just kind of more big picture. Is there any updated thoughts that you can provide us on how the company is thinking about the pros and cons of black box system and now that another competitor down the market. Just any updated thoughts on what is that something to look into?

Well, I think you picked up on it. The market seems to be moving in that direction where two MI companies already out there and I think we know at least one other who is going to filing. So, directionally we think that will continually evolve and that’s the black box pricing will come to fruition. I can’t comment on the timing of that. What we always start is with our customers and what their needs are. And if our customers demand that we need to go that way we will be prepare to go there. So it’s clearly a great risk management tool. Steve and his team love the capabilities, but we’re monitoring it closely what we’ve also there as the market does and again we'll do so in conjunction with our customers.

Our next question comes from of Bose George of KBW. Your line is open.

Hi guys. Good morning. In the press release you guys noted that if the price cuts have been in place in 1Q, the premiums would have been down by 8.5%. And initially when you’d given, you’ve announced the price cuts you noted the impact would be 11%. So I mean - is the difference really would be some of the adjustments you guys made in your pricing since then or I just curious about that.

This is Mike Zimmerman. The 11% refers just the borrower paid monthly and versus the 8.5 that we reported skews on a weighted average basis for the entire mix of business. So it's a really good difference between those two numbers.

Okay, that makes sense, thanks. And then the percentages the loans with the DTI over 95 just ticked down a little bit to 19%. And I guess last quarter the GSEs made some changes in that. Is that percentage -- do you expect that percentage to go down further.

This is Steve. It’s the DTI period and 45 has come down a little bit. I would anticipate that the pricing changes that the MIs have in the market now where in DTMI, it's being priced directly. We'll continue to put pressure downward on that percentage. I do believe that Fannie Mae is looking at additional update to DU that would also put downward pressure on that percentage. We continue to believe that it's too high. And we're monitoring it very closely.

Great. Thank you. And I did mean above 45. Thanks for that.

Our next question comes from Randy Binner of B. Riley. Your line is open.

Thanks. Good morning. Just a few clean up items. So Pat in your opening comments you mentioned your market share has something to do with FHA share gain I think. Could you expand upon that a little bit please?

Well, our indications are that we are gradually -- we as an industry are gradually winning share back from the FHA. I think if you go back a year or so it was probably in the 14% penetration rate it's evolved to 15 $. We think it's moving closer to 16%. So it is gradual. But in that regard that we have more available to us and we're winning.

But did nothing you had as far as terms and being changed there potentially as they look to the credit quality of their book.

No. No. We're not seen anything. I mean I think with the new commissioner now finally in the chair, those decisions, if at all are on the comp. So nothing so far in that regard. You know the win that went in its just day-to-day business, no major changes.

And then you mentioned pricing conditions have returned to a pretax kind of level. And I think that comment is in regard to earlier in July that MIs have published rate cards. We can see that and it got to kind of a more consistent level. But is that comment also true for the black box writers that that you think what they're doing from a pricing perspective from what you can see is kind of back to the pretax cut level?

We haven't observed anything different meaning that it's just pretty much more expanded. It's kind of -- as I said in my opening comments, it's kind of settled in.

Yes. So we're back to equilibrium there. And then I guess the last one is just the net investment income was a little bit more meaningful, just want to make sure there was nothing unusual or one-time in nature on the better yield you picked up on the investment portfolio.

Nothing one time in nature. The one thing we guys have mentioned earlier we look to reposition the portfolio. There's probably some geography as we go forward that little bit we're going to be more overlaid taxable versus duties, which means that we get a little bit more benefit on net investment income line and have to pay for in the tax line but -- nothing has a onetime item there.

Understood. Thanks a lot.

Thanks Randy.

Our next question comes from Mihir Bhatia of Bank of America Merrill Lynch. Your line is open.

It's just a follow-up real quick on the FHA comment on gaining market share. Now this is before the price cuts given to being. So do you expect the private MIs obviously lower prices? And the FHA at least initial comments as you indicated all that it doesn’t seem likely that they have lower prices. So do you think that will help with this continuing to gain market share? Do you think that pace accelerates? Just want to see how you guys thinking about that?

There is opportunity for us on the margin. I think when we looked at the price adjustments over the course of the last couple of months the private MI execution became more attractive in certain spells, certain segments if you will. And we think that's on the margin. I don’t think there would be a major shift but it is moving in our direction.

Okay. And then just -- I was curious some of your competitors have been little more active in the capital market transactions if you will the layoff risk. How do you guys think about that? Is that something you've looked at, something you'd be interested in?

Yes, it's something that we've looked at overtime and continue -- we'll continue to look at potential execution there. We have traditional reinsurance program in place. And so I think as we think about it, we think about the potential of the use. I think you are putting insurance like notes as both capital management as well as some risk management. And want to make sure it can sort of, I guess, coexist with our existing, but it's something we'll continue to look at and obviously it could be a close potential to what others in the industry are doing, I guess, it's positive for the industry that people are going to layoff in various forms of risks that we have what is two more traditional reinsurance markets or through the capital. So that's something we'll continue to keep an eye on.

Got it. And then just my last question, we've seen in the last year with imagine and then EPMI program alternative products if you will to lend up it. Can you talk about the potential for something like that the GSEs could do on the borrow-up it side? Obviously, there is some charter implications there do, but just they did the lend up it stuff. So I was just curious some of that you know if you rolled up risk around that have you heard anything? What you -- how you would think about that?

It's Mike. I mean relative to the programs that they also introduce, they do appear to be interesting single market whether its lender or borrower base signals. We have not heard anything about them looking at monthly premiums enrolling our programs for monthly premium plans in similar basis. Today it's obviously is going to be about the product affirms and conditions and operating that the inventory and lenders and GSEs collectively offer to borrowers. So again back to one that sounds why we are purchasing not only in CRT but all the things other pilot programs with the same day as we need to stay close to that while continuing to bolster the traditional borrower paid monthly. So we haven't heard anything about either agency is rolling out monthly borrower paid monthly programs.

And I'm showing no further questions in queue at this time. I'd like to turn the call back over for any closing remarks.

This is Pat. I am just closed by thanking everybody for your interest in the company and participating on the call today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.