Ladies and gentlemen, thank you for standing by. And welcome to the MGIC Investment Corporation Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session [Operator Instructions] Thank you. It is now my pleasure to turn today’s program over to Mike Zimmerman. Please go ahead.

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 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 and new insurance written and other information we think you will find valuable. During the course of this call, we may make comments about our expectations of the future. 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.

Thanks Mike, and good morning. I’m pleased to report, and while we continue to position the company to achieve our long-term strategic goals, we are also generating and delivering shareholder value on a quarterly basis. In a few minutes, Tim will cover the details of the financial results. But before he does, let me provide a few highlights. First, PMIERs 2.0 was finalized in late September with an effective date of March 31, 2019. While there were several operational items addressed, the biggest financial requirement change that impacted us was the elimination of the credit for premium related to the pre-2009 books. This is an amount that was already diminishing as the legacy book ran off, and while it lowered our excess over the minimum PMIERs requirement for all practical purposes it does not impact the execution of our strategic plan. The good news is that the rules are now published, and while they certainly could change in the future, we expect some period stability, which allows us to more confidently execute our business and strategic decisions. The quarterly financial results reflects the favorable operating environment we are experiencing, especially as it relates to employment, wage growth and housing demand, and very low credit losses of recently written business. The main driver of our future revenues insurance in force grew nearly 8% over the last 12 months ending the quarter at nearly $206 billion. The increase was driven by higher annual persistency plus the addition of new business. While the decline in refinance transactions has resulted in a smaller overall origination market, on a year-to-date basis, our new business writings are up about 6% to over $38 billion compared to $36 billion last year. Of course, I would like to do more or whatever business we write must generate appropriate…

Thanks, Pat. In the third quarter, we earned $181.9 million of net income or $0.49 per diluted share compared to $120 million or $0.32 per diluted share in the same period last year. To provide better insight into our operating results and to make year-over-year comparisons for the financial results more meaningful, we disclosed adjusted net operating income, a non-GAAP measure, while there were 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. There were multiple drivers to the improvement in our financial performance for the quarter, including lower losses incurred, higher earned premiums and investment income and a lower tax provision. Premiums earned increased primarily due to a higher profit commission. I will go into more details about the higher profit commission in a moment. The tax provision for the third quarter of 2018 reflects a new lower corporate tax rate compared to same period last year. Losses incurred were a negative $1.5 million compared to $29.7 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, the review the performance of the delinquent inventory to determine what if any changes to be made the estimated claim rates and severity factors of previously received notices. As Pat mentioned, we have an experiencing of favorable credit cycle. This continues to benefit us as credit performance continues to outperform our expectation and again resulted in positive primary loss reserve development during the quarter. Specifically, before considering the impact of our reinsurance treaties, we recognized $59 million of positive development on primary loss reserves compared to $38 million of positive development in the third quarter of…

Thanks, Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain optimistic about the future role that our company and industry can have. But it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. We continue to be actively engage on this topic in Washington. While it is possible, that proposals to change the GSEs either legislatively or administratively, maybe forth coming, we do not expect anything substantial to occur in 2018. Perhaps after the midterm elections and as a new FHA director is nominated, you will all get more clarity. But mean while 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. Regarding the FHA, we continue to think it is unlikely that the FHA will reduce its MI premiums and that the primary focus by the FHA is on improving the operational policies and procedures and reverse mortgage business. Next FHA actuary report is due in mid-November, which should give some insight into the health of the FHA's flagship insurance fund and may provide some clues as to the direction of FHA in 2019. With respect to the new pilot programs that Freddie and Fannie have introduced, based on our discussions with lenders, the interest in these programs has been low to date, and again the attention of Congress. The lack of interest could be a result of existing LPMI pricing from MIs being reasonably competitive, as well as the fact that more singles business has migrated over to borrower paid over the last several months. We will continue to monitor both pilots as they run…

[Operator Instructions] We have a question from the line of Mark DeVries from Barclays. Your line is now open.

Tim, I know you said you can't comment on the ILN transaction. But I was hoping you could comment on kind of the expected benefits from doing that? And what I'm getting out is -- are you doing this mainly because you just view it as attractively price for insurance it helps to reduce tail risk? Or do you also expect this to really kind of help with your capital flexibility ability to take capital out of the writing company? Thanks.

Hey, Mark, it's Tim. Unfortunately anything related to ILN, I can't comment on specifically.

Okay. Well, then just bringing it back to capital then. Can you update us on your thoughts around establishing a dividend here? I mean, I know, you have said before you consider that you want to make sure that you have got a reliable sustainable dividend up from the writing company, it seems like you have gotten that, obviously they continue to allow you to increase that. Just updated thoughts on a dividend versus buybacks here.

Yes, Mark, it's something we always have discussions with internally management with the Board about our options for any sort of capital returns, dividends, definitely one of those things that we consider on top of the share repurchase plan we have in place. You are right. I think, our view is that we want to have more certainty around, if we establish a dividend to shareholders, sort of the size of it that it would be meaningful, and that it would be something that we will be able to sustain and potentially grow overtime. And to do that, I think, we have a good amount of comfort of the dividends falling out as you said. We've been able to increase about $50 million that helps the discussion. But we still have discussions with the regulator about it. So we'll still have those discussions internally about dividends back to shareholders. But at this point, we are not ready to announce anything.

Okay. And then just one more question from me. Have the FHFA given you any sense of when they will next revisit PMIERs? How stable will be standards be?

Hey, Mark, it's Mike Zimmerman. No, the only clues we have for that is what the announcement, when we put them out is that the FHFA has put out the capital conservative framework or the CCF, and they mentioned that the PMIERs could be revisited once CCF is finalized. But we don’t have any timing as to when the CCF will be finalized. So, like here, we do expect some of the period of stability with this, but exactly when they revisit them next gives that milestone is when CCF is finalized.

Next question is from the line of Philip Stefano from Deutsche Bank. Your line is now open.

So we have the second quarter where you notices have declined pretty substantially year-over-year. And last quarter when we talked about, I think, there was some speculation, it might be home price depreciation driven. But it sounds like it was early days in the process and you didn't have a great feel for if there was something more secular happening. I guess, did you have an update on the thoughts around that? And the extent to which maybe this larger than expected new notices declines could persist?

Yes. Hi. This is Steve. We’ve seen this trend continue into Q3, but it hasn’t been anything that has been payable to isolate to particular segment of our portfolio. So, don’t really have a lot more color to add. It’s just coming through. Nice trend is coming through across a bunch of different sectors. We just can’t isolate it.

Got it. Okay. And so we have the FHA director earlier this week talking about the potential for -- I don’t know, fraudulent is the right word, but that’s the word I’m going to use fraudulent home appraisals. To what extent is this more epidemic? Could this impact the mortgage insurers? To what extent is this a risk for your business?

Yes. This is Steve again. I view this more as an operational risk because it would have to be a credit event happening and that there was a fraudulent appraisal. I do think that the tools of the GSEs have in place, that collateral that evaluate appraisals are really strong tools and they help minimize this kind of risk. But I see this as -- it’s a potential problem that needs to be rooted out, but I don’t think it’s one of the significance that would cause us to take any additional action than managing our underwriting and quality control program as we do today.

Got it. Understood. Understood. And one quick one on capital management. Is there anything that's being in the negative on the [indiscernible] position that would prohibit you from having a normal and common shareholder dividend?

Anything from a negative at the writing company, you're saying, Phil, that was prevented. No I don’t view that is being one of the things that would be a requirement or a barrier.

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

Hi, guys. Good morning. Let me just try one more on the ILN. Once it’s issued, there is obviously going to be the premium impact. I mean, could we assume that there will be an offset through some capital management, some other change?

This is Mike. I mean, I appreciate the attempt. But unfortunately we’re just not to be able to make any comments about the ILN or potential implications of it.

Okay. Yes. No problem. Let me switch to a couple of others things. The percentage of loans with DTI over 95 ticked up again. It’s up to 20. Now given the DOC changes, I would thought that number would have trend to down a little. Any sort of color on that?

Yes, this is Steve. And I think DTI is over 45. I said that we continue to monitor. We have seen it starts to trend down since we are pricing for it in our rate card and many of the others are pricing for it in the rate card. We continue to be engage with the GSEs and specifically, Fannie Mae in this topic, and have encouraged them to take action in their upcoming releases of the DU 10.3, but we continue to look at our mix and decide what other actions similar to the actions that we took in January with the FICO overlay that may be appropriate to continue to bring this volume down, because I think we still believe it’s too high.

Okay. And then, just on the percentage of 95%, is that ticked up a little bit as well. I mean, do you think that can continue to go up? Or is that kind of reached a more stable level?

I think it can continue to grind up. This is Steve again. There is a couple of factors here. There's the purchase market and the strong home price appreciation that we’ve seen in many sectors of the economy. So that puts a little bit pressure on LTV. And then the GSEs have affordable programs that they're working on and then used to meet their housing goals and scorecard metrics. That’s another component in the mix. And there are actually some depositories as similar programs that help meet their CRA requirements. So all of those things, I think could continue to drive 97 or above 95 up margining, like we've seen over the last year.

Our next question from the line of Randy Binner from B. Riley FBR. Your line is now open.

My question is on the expense ratio, which was better than we had expected in the quarter. So could you outline, I guess, one, if there is an impact favorably there from the reserve activity. I’m not clear on that. But if not, if there was other items in there that might have been one-time or if this is a level of expense we can expect going forward?

So, Randy this is Tim. I think it is really driven by the reserve release. When we release reserves, we get a couple of benefits there. We get a benefit of profit commission, which we disclosed in the additional information, so that is helped to the line, similar levels to last quarter. But then we also get benefit to -- we have to make accruals for premiums we might refund on claims that we would take. So when we have a lower estimation of the number of claims we pay, we get that done. I view the ratio much more of a function of some strength on the revenue line as opposed to anything with the expenses.

And then, I guess, a follow-up there. Is there -- I mean, you mentioned claims were down 33% year-over-year, and you want to keep a good claims staff for the future. But is there -- are there any other initiatives we can think about? How you can kind of feel better to what you're seeing from a business perspective for expenses looking in 2019?

Yes, I just -- from an expenses standpoint, our claims department, for the most part, flows through the loss line. So that as that comes down, we really don’t get it on the expense line.

I mean, just more broadly.

Yes. That’s being said. No, I mean, it's something we’re always focused on. And we think with this scale business -- this business scales well with volume on the front end in particular, but that doesn’t mean that we shouldn’t be looking to how we can be as conscious as possible, but making sure that we deliver the right value and have the right people and processes in place. And I think that’s something we've always be committed to and we will continue to be committed to.

Next question is from the line of Jack Micenko from SIG. Your line is open.

Tim, in your capital priority commentary, in prepared remarks, you didn’t mention the convert. And so, I'm going to trying to say this early. In thinking about a theoretical capital event with the cost of around 3% and a convert of around 9%, plus the added benefit of share reduction, am I thinking about that the right way? Or are there considerations that I'm not factoring in around a theoretical thought process?

I think we always have to think about capital. And we talked about the 9% in the past. We talked about sort of an economic trade on those. And to a large extent, the trade was in a pretty narrow range. And if stock price goes up, there is more value from the equity and the value of the 9% on them diminishes. And when stock price goes down, sort of the inverts happen. And really, the cash -- for the most part, that we give -- doing things narrow at the holding company as opposed to the writing company. We did have the one I would say was unusual circumstance where we we're able to use some of the capital [indiscernible] that the regulators were nice enough to let us to do just before we've really turned dividends onto the extent excess points. So I view that as cash to holding company. It would be used for anything we do is fix this reason. We look at it on a regular basis. And it's something that we will continue to look at. But haven’t thought it would be something that was sort of the right economic trade for us from what we see other than that onetime that we thought.

Okay. That’s right though. The difference from where it's holding in the writing is a big piece. I left out. I think, Pat, you had talked earlier, and we are hearing rumbling that the FHA is probably going to tighten as the HECM book is continues to be problematic. Are you hearing anything broadly about what that could look like? Is it pricing? Is it standards maybe non-qualitative standards? Is there anything that you are hearing or seeing with -- the way there could be charge on the FHA side into the end of the year?

Candidly no. I mean, I haven’t -- I know, they're looking at HECM hard. But we don’t play in that world. So it's hard for me to get any intelligent answer on that.

Okay. But on the flow business, thinking about HECM on the flow to …

Yes, I'm sorry. I misunderstood. On the flow business, I think, again their focus is operational in HECM. And as a result, I think, Brian has said publicly they don’t expect to take premiums down, which is good news for us. So I think they are just trying to wrap their arms around what they have, even publicly in their comments about the operational issue they are having, their back office, their systems and things like that. They continue to seek money funding if you will, to improve their technology. And I think until they get their arms around that relative to how they compete with us will remain relatively static.

Next quest is from the line of Jordan Hymowitz. Your line is open.

Thanks guys. Can you hear me okay?

Yes, Jordan.

Can you talk about why the pricing for premiums continues to go down? Or singles, rather? I'm sorry.

Are you talking about the …

The average book …

… the effective yields?

The average premium rate on new interest written for singles as 153, and it was like 165, 167 in the past couple of quarters. I would have thought with the increased capital allocated that a couple of quarters ago, that would have stabilized in that level?

Jordan, this is Mike. I mean, so both -- the single purchases are pretty small percentage of the portfolio or the new writings, about 15%. There is a mix of -- there is about half and half lender-paid and borrower-paid. But on the majority of the business, the 85% the borrower-paid monthly, that's down in the quarter about 6.5%. And that reflects the pricing changes that were took place earlier in the year. So, I think, as you know as we’ve talked over the last couple of quarters that we thought, that we expect that to continue to drift lower as the whole business -- that business comes in with lower premium rates reflecting the higher credit quality of the portfolio.

So I understand why the volume is down because of the capital wise the premium rates down as well, that’s what I understand.

This is Steve. Just to emphasize what Mike was saying. I think most of this is just subtle changes in the mix between LPMI and BPMI thing or borrower-paid singles, and then just slight change in the mix of the business that we’ve seen come in. We’ve seen a big drop in LPMI singles over the last six to nine months, so the mix has shifted. So I think that’s how we’re seeing is a little bit noise in those numbers due to the shift in the mix.

Next question is from the line of Doug Harter from Credit Suisse. Your line is now open.

Thanks. Can you -- just a question on the reserve releases. Can you talk about kind of the assumptions you have in your current reserves? And how that -- how those loss assumptions compared to or claim assumptions compared to kind of the new notices that you’re experiencing?

Yes, Doug. It's Tim. I mean, from a new notice standpoint, as we mentioned, we’re putting the notice on in the 9% claim rate, which is down from 9.5% last quarter, and down from in the 10% level last year. I would say that it’s probably as low as -- as we’ve seen it obviously and quite some time, but obviously credit environment reflect sort of what’s happening there. And then when you get to the reserves, it’s really much more about how long the loans have been in the default inventory that really impacts that from an aging standpoint. So, with the reserve release, obviously, we’ve continued to see favorable results compared to where we’ve estimated, I'd say it's kind of across the board. I'll give you the example of -- we said that on new notices, we're putting them on 9% now. That's informed by recent history that we’ve seen. And a year ago at this point, we’re putting them on, I believe, 10.5%. So, obviously that has given us some favorable development. But also on some of the older loans that have been around in the inventory for a longer period of time, we just continue to see them resolve at a much better sort of cure rate than what we’ve expected.

Next question is from the line of Geoffrey Dunn from Dowling & Partners. Your line is now open.

Thanks. Good morning. Tim, just first, could you give the refunded premium number for the quarter, please?

Yes. From an accelerate singles, it was 6.6 this quarter, which is pretty much in line with where it was last quarter.

All right. And then following the June-July reprising, any sense of a market share shift away from the FHA as a result of the better execution in GSE MI?

This is Pat. I’ll take that one. It’s a gradual shift. We continue to win business back from the FHA EMI industry does in a broad sense. So directionally yes.

But nothing noticeable from the pricing shift?

No.

Okay. And then lastly, how are you thinking, I think, you've alluded to this in your comments. But how are you thinking about your 19 QSR seating level given the different options you have for reinsurance right now? It seems like maybe 30%, doesn’t necessarily makes sense going forward. But some level of QSR seems that it sounds like you want to maintain. So can you just elaborate on that?

Yes, Geoff, this is Tim. I mean, I think, we like having the quota share in place, the forward commitment nature of it, the relationships we have there and some of the flexibility we’ve had to be able to change things as the rules have evolved from PMIERs. One of the things we tried to build in is flexibility, and it's one of the advantages of using traditional reinsurance market, the flexibility as far as really cancellation early termination of the agreement, which we disclose we’re coming up on sort of our first option associated with that and the '16 and prior business. So I think, for us its always looking at sort of the mix of what loans are covered, and the capital benefit we're getting from them, what we might want to put on our new business, and sort of seeing where we are from an excess standpoint and how that really impacts the number things, not least of which is our regulator's view on dividend capacity. So I think it's a very good question. It's something we talk about every year, quite frankly, the size we wanted to be. But there are a number of variables to consider, including that which is already in place and what we can do with that.

And what -- can you just remind us what exactly your first option as at year-end on the existing QSR?

We have an option to terminate the 16 and prior QSR at our option at the -- starting at the end of this year and then every six months after.

[Operator Instructions] Our next question is from the line of Mackenzie Aron. Your line is now open.

Just one, Pat, I think this is for you on the black box pricing and the pilot program. Is there any more you can elaborate on how far along you’re in the pilot program? And what changed recently that gives you the confidence that the direction the customers are moving in? And are you seeing a change from the big money center banks that have traditionally preferred the rate cards for various reasons?

Sure, Mackenzie. It's just more of an evolving situation. We stay very close to our customers. We do business with just about everybody in the country. We know the other MIs or many of the other MIs are also talking about the black box. So in terms of market intelligence, there seems to be a greater acceptance of that. There are already two of our competitors they're in the market with those types of pricing mechanisms. There is probably more on the come perhaps this quarter. But it does take a while to adopt. You can’t just make the announcement to say, yes, we’re there. And, well, I'm talking about from a customer perspective, not the MI perspective. For them to actually give it to, particularly the big banks that you referred to, to get it through their operations. So we are confident that we’re not -- we may -- we haven't announced it yet that we’re actually in the market doing it. That's said, I’m not worried that we're losing any business. We’re going to lose any business relative to that execution. So I think, we continue to keep our ear to the market, talking to those big banks that you referred to as well as everybody else. There are still those that are not a big fan of it, but the see the handwriting on the wall. And so, I think, we will be ready when we need to be ready. And again, in the broader sense, in terms of actual adoption, you may see announcements, but in terms of a broad adoption, by that I mean cross the spectrum of lenders, I think that will be into 2019.

Our last question from the line of Mihir Bhatia from Bank of America. Your line is open.

If I could just quickly follow-up on that one on the black box pricing and the deployment, would it be -- I think, you said that if you needed to deploy it, you could. So does that mean that you guys have already spent the expenses of what have you to start to develop that solution? Or would there be like some incremental onetime expense as and when you were to announce such thing?

No, it’s a gradual evolution of mix. And we've been working on the black box for a while. So there is not going to be any onetime expense charge relative to that. We just continue to work on it. We're getting more ready to be -- ready to introduce it to the market when the market calls for it. That’s the most important thing. But our customers say, yes, you got to compete, we will be ready.

And then, if I can ask just at a higher level if you will just on the housing market, clearly right now, in general, credit has been very favorable. But I was curious with the backup in rates, and if you will, the lower origination volume, are you seeing anything from the originators maybe where they are trying to expand the credit box a little bit that gives you concern or maybe you're seeing you're rejecting some more applications? Or what have you of geographies that you are may be a little less excited to participate in? Is there anything at all across that picture that you are starting to see that gives you pause at all?

This is Steve. I'll take that. Generally speaking other than the DTI is greater 45 and the 97 is that we have talked about a little bit. Those are areas that we are monitoring closely, but other than that, no. Still have very favorable views about housing in general across the country. And originators in this cycle do not control the credit box. The GSEs do and most of our business goes to GSE route. So the GSE is the one controlling the credit box. So mortgage market is not competing at credit this point in time, which is different than prior cycles. And I think that's very favorable. So we feel very, very good about where the market is right now both from a credit standpoint and from a housing standpoint.

And then, if I can -- just along those lines, I think, the MIs in general, at least -- not sure, if you have, but at least some of your competitors have talked about through the cycle loss rates of 28%, if you will. Given that originators aren't competing as much of credit and credit is tighter. Is there any update to that view that you could share? Or is 20% still the right way to think about loss rates through the cycle?

This is Tim. I mean, I think, our view is you have to think, in general, through the cycle that times are very good right now, and we have to be thoughtful about what can happen. I think, you are right, credit is outstanding right now, and we are not seeing anything relates to that. But we are insurance company that we would expect if there could be something in the economy that could be a hiccup at some point that will cause some incremental losses. But I think from a pricing standpoint, we still like to think through the cycle, and we still zero into sort of loss rates that we historically sort of zeroed in on.

We have a follow up question from the line of Phil Stefano from Deutsche Bank. Your line is now open.

Yes. Maybe I missed this from the prepared remarks, Pat. Last couple of quarters, you've talked about $50 billion NIW number for the year, and let’s call it a high teens market share. Any changes to the thoughts around that?

No. We still think we’ll be about $50 billion. I mean, we’re seeing a flow on in the fourth quarter, which is seasonally -- I’m talking about the origination mark would ultimately translate down to us, or make its way down to us. But we’re still at the $50 billion mark.

There are no further questions. You may continue.

Okay. This is Pat. We’ll close up the call. Thank you for your interest in our company. And with that, I’ll say go brewers, and we’ll sign off.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.