MGIC Investment Corporation (MTG) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Mary, and I will be your conference operator for today. At this time, I would like to welcome everyone to the MGIC Investment Corporation Fourth Quarter Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host for today, Mike Zimmerman, Senior Vice President of Investor Relations. You may begin your conference.

Thanks, Mary. 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 fourth 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 MGIC's website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that will -- we will refer to during the call and includes certain non-GAAP financial measures. We've posted on our website a presentation that contains information pertaining to our 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. If 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 party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K. At this time, I'd like to turn the call over to Pat.

Thanks, Mike, and good morning. I'm pleased to report that we had another strong quarter of financial results and are in an excellent position to continue to serve our customers, while creating shareholder value in 2019. In a few minutes, Tim will cover the details of the financial results, but before he does, let me make a few comments. The quarterly financial results reflect very low credit losses of our post-2008 business and the favorable operating environment we're experiencing, especially as it relates to employment, wage growth and housing demand. The main driver of our future revenue, our insurance in force, grew nearly 8% over the last 12 months, ending the quarter at $209.7 billion. The increase was driven by our 2018 new insurance written and the higher annual persistency associated with our prior business. The business we've written since 2008 has very strong credit characteristics and is expected to generate meaningful returns for shareholders even if we experience some moderate economic downturn in the future. I've previously said that the biggest near-term challenge is to the size of the mortgage origination market and therefore, the volume of business we'll ensure for rising interest rates and lack of housing inventory. Well, mortgage rates have actually remained attractive and there is an increasing supply of homes coming to the market. So while many are predicting a slowdown in housing, I remain optimistic because consumers continue to feel confident about their future economic prospects, and I feel very good about our ability to serve our customers given our capital strength and position in the market. Moving on to credit for a moment. Performance continues to be outstanding. Our inventory of delinquency notices declined sequentially in year-over-year and is now at a level not seen since the mid-1990s. Further, after adjusting for the impact of the hurricanes of 2017, the number of new delinquency notices received during the quarter declined on a year-over-year basis. The strong credit performance continues to be a tailwind for our financial results. Before I turn it over to Tim, I know many of you have questions about the competitive dynamics within the industry. When it comes to competing in the market, our strategy is fairly straightforward. We want to remain a relevant business partner with our customers in order to prudently grow insurance in force, generate long-term premium flows and create book value growth for our shareholders. Recently, more competitors have introduced pricing engines that use a number -- a greater number of loan-level characteristics to determine premium rates than the traditional rate card. We have also just begun to deploy our own pricing engine called MiQ. MiQ allows a more granular approach to risk-based pricing, which assists in managing risk and shaping the insured portfolio. However, we know that one approach to pricing does not work for all customers. So customers that prefer to use a rate card approach may continue to do so. In terms of broad market adoption of MiQ, we expect it to be customer driven, but I believe that will increase over the course of 2019. With that, let me turn it over to Tim.

Thanks, Pat. In the fourth quarter, we earned $157.7 million of net income or $0.43 per diluted share compared to $27.3 million or $0.07 per diluted share in the same period last year. The significant increase reflects the reduction to our deferred tax assets in the fourth quarter of 2017 that resulted from the 2017 tax law change. To provide better insight into our operating results and to make year-over-year comparison to the financial results more meaningful, we disclosed adjusted net operating income, a non-GAAP measure. A reconciliation of GAAP net income to adjusted net operating income is included in the body of the press release. In the fourth quarter, our adjusted net operating income per diluted share was roughly flat at $0.42 compared to $0.43 in the fourth quarter of 2017, resulting from increases in some areas and decreases in others. Premiums earned increased due to higher average insurance in force as well as a higher profit commission from our quota share reinsurance transactions partly offset by a lower effective premium rate. Additionally, in the fourth quarter 2017, the 90 million shares associated with 9% convertible junior subordinated debentures were not included as they were antidilutive. The shares are included in the fourth quarter 2018 calculation. Losses incurred were $28 million compared to a negative $31 million for the same period last year. Losses incurred consist of reserves established on new delinquent notices plus changes to previously established loss reserves. During the fourth quarter of 2018, there was a $22 million reduction in losses incurred due to changes in previously established loss reserves before reinsurance compared to a reduction of $103 million in the fourth quarter of 2017. 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 rate and severity factors of previously received notices. We continued to experience a favorable credit cycle. A positive development was driven by higher-than-expected cure rates and delinquencies that are aged 12 months or greater. During the quarter, we received 38% fewer new delinquency notices than we did in the same period last year. Much of the decrease was due to the high number of notices we received in the fourth quarter of 2017 that resulted from various hurricanes. The claim rate on new notices received in the fourth quarter of 2018 was approximately 9%, which reflects the current economic environment and anticipated cures. It compares to 10%, excluding the hurricane impact, in the same quarter last year and was flat to the 9% we used last quarter. New delinquency notices received from the legacy books represent the majority of new notices received in the quarter. The new books account for just 33% of the new delinquency notices, but account for approximately 84% of the risk in force as of December 31, 2018. The relatively low delinquency activity from the larger, more recently written books reflects their high credit quality as well as economic condition. While continuing to diminish in number, we expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters. Reflecting the smaller delinquency inventory, the number of claims received in the quarter declined 22% from the same period last year. Net paid claims in the fourth quarter were $75 million. The effective average premium yield for the fourth quarter of 2018 was 47.3 basis points. The effective yield was lower sequentially for a variety of reasons, including changes on losses ceded to reinsurers, changes in the recognition of premiums and single premium policies, changes in premium refund accruals and premiums ceded connected to the recent ILN transaction. While there could be some volatility, we expect that the effective premium yield will trend lower in future periods. This decline is expected mainly because the older books of business written higher premium rates continue to run off and replace the new books of business written at lower premium rates. Net underwriting and other expenses were $50 million in the fourth quarter of 2018 compared to $44 million in the same period last year. The increase in expenses was primarily due to compensation, including stock-based compensation, which reflects the stock price as of the grant date and changes to our nonexecutive compensation as well as other expenses. We expect that in 2019, expenses before reinsurance will be flat to 2018. The effective tax rate for the quarter was 19% compared to 89% in the fourth quarter of 2017. The fourth quarter 2017 effective tax rate was materially impacted by the change in tax code that resulted in revaluation of our deferred tax assets. We expect that the effective tax rate going forward would be 21% since this quarter included a true-up related to our IRS litigation settlement. As we reported in the press release, during the quarter, MGIC paid a $60 million dividend to the holding company and for the full year paid $220 million to the holding company. The dividend payment reflects the fact that MGIC is generating meaningful capital and that we expect to be able to continue to do so for the foreseeable future. We expect the dividend of at least this quarter's level will continue to be paid to the holding company on a quarterly basis, subject to the approval of our board. As a reminder, before paying any dividends, we notify the OCI to ensure it does not object to any dividends paid from MGIC. At quarter-end, our consolidated cash and investments totaled $5.3 billion, including $248 million of cash and investments at the holding company. The consolidated investment portfolio had a mix of 78% taxable and 22% tax-exempt securities, a pretax yield of 3.09% and has a duration of 4.1 years. Our debt to total capital ratio was approximately 19% at the end of the fourth quarter of 2018. At the end of the fourth quarter, using PMIERs 1.0, MGIC's available assets totaled approximately $4.8 billion, resulting in a $1.4 billion excess over the required assets. If PMIERs 2.0 were effective, the excess would have been $1 billion, a 26% excess over the required assets. Now that PMIERs 2.0, which is effective March 31, 2019, is finalized, we are in process of determining what level of excess would be appropriate on a going forward basis. At the end of the fourth quarter, MGIC's statutory capital is $2.6 billion in excess of the state requirement. Next, I want to spend a few minutes discussing our capital position and how we think about allocating capital. We utilized an additional $75 million of the share repurchase authorization in the fourth quarter and repurchased nearly 7 million shares at an average cost of $11.06. For the full year, we repurchased nearly 16 million shares at an average cost of $10.95. We have $25 million remaining under our share repurchase program that does not expire until the end of 2019. I would expect this to continue to be opportunistic in utilizing the remaining authorization. Regarding the appropriate level of excess to PMIERs, it is difficult to actively manage to a specific target given the regulatory requirements for paying dividends. Some level of excess provides a nice buffer against adverse economic scenarios as well as the potential for additional capital requirements from the GSEs should they occur in the future. When we discuss strategies to allocate and utilize the capital that exists at the writing company, we first estimate how much capital is needed to support the new business that is being written. We've also started to become honestly more active with the GSE risk transfer transactions that require capital support, and we expect to remain active in this area provided the returns meet our threshold. Of course, we are also sending dividends now at $240 million annual run rate to the holding company. When we take a step back and think about the existing uses of capital to new business and existing level of dividend, they account for the substantial majority of capital that's being created annually at the writing company. We do have periodic options to adjust the level of quota share reinsurance we utilize, which could impact the amount of excess, but the level of reinsurance we have today, it creates the level of excess we do have plus it also helps with the dividend capacity. In addition, since PMIERs is more restricted in the state capital standards, we believe having an excess, not unlike reinsurance is beneficial to our dividend paying discussions with the OCI. We'll continue to analyze and discuss with the board the best options to deploy capital that maximizes long term shareholder value. Finally, as Pat referenced, if we experience a moderate economic downturn that began today, we'd expect to continue to be profitable, increase book value and maintain an excess over the PMIERs 2.0 Minimum Required Assets. We arrive at that expectation based on our current internal modeling of the existing book of business that's based on modified 2017 CCAR adverse scenario to make certain assumptions, including among other items, a 10% decline in home prices and unemployment rising to approximately 7%. And that incorporates our existing quota share reinsurance treaties and insurance like no transactions. 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. 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 engaged on this topic in Washington. A new FHFA director, Mark Calabria, has been nominated, but needs to be confirmed. Meanwhile, Joe Otting of the OCC, who will be the acting FHFA director. Exactly what will unfold and how the role of the GSEs and private capital play out remains to be seen. But we are encouraged that both Calabria and Otting see the private sector as part of the solution for transferring credit risk away from taxpayers. Regarding the FHA, we continue to think that it is unlikely that they will reduce their MI premiums and that the primary focus of the FHA is on improving the operational policies and procedures of the reverse mortgage business. With respect to the pilot programs that Freddie and Fannie have introduced based on our discussions with lenders, the interest in these programs continues to be modest. We will continue to monitor these initiatives, but currently they do not materially change our forecast for NIW or insurance in force growth in 2019. We are aware of the issues that face our company whether they are legislative, competitive or credit related and are actively working on them. While we don't know exactly how these issues will or will not impact our future, we do believe that currently we are writing high quality new business in what is expected to be a low loss environment. And that this business is being added to a book of business that itself is performing exceptionally well and we're generating significant shareholder value, which we expect to continue for some time. Our company and industry offers many solutions and a great value proposition for lenders and consumers to overcome the #1 barrier to homeownership, the down payment. And despite a lot of media coverage, to the contrary, mortgage credit is available and remains affordable for many consumers. I believe that our company is well positioned to acquire and manage mortgage credit risk in a variety of forms, supported by a robust capital structure that includes our strong balance sheet and where appropriate, reinsurance treaties in the capital markets. We accomplished a great deal in 2018. We grew our insurance in force by more than 7%, investment income increased and in a smaller overall origination mortgage market, we've wrote nearly 3% more business. We repurchased more than 4% of our common stock outstanding, executed an insurance linked note transaction that reduces potential future earnings volatility, decreased our debt ratios, received an A- rating from A.M. Best for the main operating subsidiaries and increased dividends to our holding company to $220 million. In 2019, 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. That is why when I look ahead, I'm very excited and confident about the future for MGIC. With that, operator, let's take questions.

[Operator Instructions]. Your first question comes from the line of Chris Gamaitoni from Compass Point.

Just to clarify on the capital statement. Is there any reason not to believe that you could buy back at least at the level that you received dividends from the subsidiary?

Chris, this is Tim. I mean, I think, we weigh a number of factors, including what other needs are at the holding company. So I don't want to say that we would buy at least that level. Obviously, this last year, we looked to be opportunistic, and we thought we had cash at the holding company to be able to utilize for that. But I wouldn't go as far as saying that we would be able to buy it at at least that level. It depends upon price, it depends upon other factors as well.

Okay. And when do you anticipate being able to get normal dividends out of the subsidiary when the contingency reserve's built back up to a sufficient level?

Yes. I think from a run rate basis, Chris, I mean, part of it is, I think, the ordinary dividends would be at a lesser level than we have right now. And so there is always that sort of discussion with the regulator as to what part is ordinary, what part would be extraordinary, but I think the way you've sort of phrased it until the contingency reserve's fully built, there still is some headwind as far as giving ordinary dividend and that's sort of a good run rate. And so we still have a few years to go before that's fully built.

Okay. And just to clarify on the statements about profitability in a downturn. Did I hear right that you're using the CCAR adverse scenario?

Correct. 2017, modified.

And is there any way to give us a sense of, is profitability mean you make a dollar or is it like 3% ROE or any type of level, which is very roughly?

I don't think we're going to that level of detail.

Your next question comes from the line of Randy Binner from B. Riley FBR.

So I have a question about MiQ, and you had mentioned that you're going to continue to offer kind of standard rate card format. So can you kind of break out what percent of your business now is in that new pricing model? And then as you look out in the future, kind of what percent of your business you think would transition to that more than multi-varied model than the rate card?

This is Pat. We just have rolled it out here in January, so it's quite new. So I don't have any specific numbers relative to percentages. And then, as we've consistently said, it all starts with the customer. If customers want it sooner rather than later, we'll be prepared. My sense is it'll be a gradual increase over the course of the year. So we haven't said -- we haven't publicly stated any kind of target by the end of the year, but we will be in the market with it as is everybody else and we will compete.

Yes, I mean, I guess -- I mean, it's scalable, right? Because I think what we've heard from some other writers is that their books pretty rapidly moved to the black-box pricing from the rate card. So if the demand was 90% of your counter parties want to do, could you hit that goal by the middle of the year? Or would there be constraints to that?

Well, I don't want to put a time frame on when we hit it. I will say again, we'll compete. So if the market moves faster because of customers wanting it, we will be in the market.

And then on the reserve release, nominally, it's a little bit smaller in this quarter than it's been in the past couple. Any color you can provide on what action years the reserve release apply to?

Yes. I think most of the notice inventory is still out of the '08 and prior books. So it's really across those books is where the majority of the reserve release would be from. And as I mentioned, it's really from the 12 months more delinquencies where we saw improvement on the cure rate.

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

I was hoping you could talk a little bit about the ILN impact on the quarter. Were there any expenses associated with that? Were there any premium yield drag that -- I think you came -- priced late October, so supposedly there is some more premium drag that's going to come from this. Any ways to think about that?

Yes, Phil, actually, this quarter, I can't talk about it unlike last quarter. So we did disclose in the risk factors some amount of premium drag from this. I would say that was a little bit heavy because of some of the initial sort of costs associated with the transaction. So I think from a run rate, it's something less than $10 million for the year that you think about this cost thing. It's a very cheap, effective cost to capital. And so from that standpoint, we feel very good about it. From expense standpoint, there was a little bit, but nothing as I mentioned increase in expenses this year year-over-year. That was really the main reason. So again, we feel like it's another good form of capital for us. We think it is cost effective and also attached to a nice spot. So it's a great tool to have.

Got it. Okay. And second one is, what's the free cash flow conversion as a percentage of earnings? How are you guys thinking about this?

Are you talking about free cash flow or percent of earnings? Well, I mean, I think -- to me, I guess, we always think of it through the lens of what we have at MGIC and what -- how that turns into PMIERs and what ultimately can get to be dividends to the holding company. And so we don't think of it in terms of sort of that everything is free cash flow because of the restrictions on dividends. But from MGIC's perspective, as I talked a little bit on the opening comments, as we think about dividends to the holding company, that basically the $240 million run rate, the amount of capital needed to deploy back into the business to write new business as well as to be able to support some of the other sort of GSE risk share things that we're looking at. That takes up the majority of the 1/3 of the cash flow that we're creating, although we are still building up in excess to PMIERs as you noticed over the last year. So that's sort of how I think about where the free cash flow is going right now.

Got it. Okay. And the last one for you is circling back on MiQ. As we think about the number of factors that are potential for you to use in pricing. Do you have a feel for how many factors you're going to be using initially? I mean, thinking about the rate card at least in my mind as being a 2-factor model, how much more information do you think you're going to be gathering and pricing from? Is it 5, is it 6? You don't have to put a definite number on there, but maybe you can just help us think about the amount of metrics you're going to be looking at?

Yes. So this is Steve Mackey. So in the way we've constructed this, we have quality base pricing grid and then a set of add-ons, price adjusters and that base pricing grid is roughly 8 factors, which gets you to probably around 70,000 prices, unique prices, and then with the adjusters, there's 4 categories of adjusters and those are based on the LTV and FICO. That puts the number of unique prices well over 1 million.

Your next question comes from the line of Mark DeVries from Barclays.

Tim, could you give us some sense of what impact if at all the ILN transaction will have on your ability to request additional dividends from OCI?

Well, Mark, right now, we think we're going to get full PMIERs credit for it. And from a -- we have access from the state regulatory standpoint. It helps in discussions for sure and that's one of the things that we factor into our thought process around all of reinsurance is how much does it help us, is it a dollar for dollar or sort of that we get to take that out by no means is that the case. But it helps build sort of the overall picture for our regulator, I think, as far as how we are able to any sort of downturn were to happen that we're in a good spot and that they feel very comfortable at the level of dividend.

Okay. And is there any color you can give us on where ultimately over the next several years you think that $60 million a quarter dividend could ultimately go to?

Mark, I think that's really, really tough to say. Obviously, our earnings are exceeding that right now, but I don't think that we would expect even going back precrisis that we were able to get out our full earnings on an annual basis, definitely not in a quarterly run rate. So it's conversations we continue to have with the regulator, as you noticed the rate of increase flow this year, but we were still able to increase it up to the 60s during the second half of the year. So there will be additional conversations we have, and we think we have a good story to tell.

Okay, fair enough. And then are you thinking at all about dividend to shareholders as part of your capital returns?

Mark, it's one of the things that we talk about with our board pretty much every quarter just to talk about as an option and have done so far a while. I think a number of factors go into that. Obviously, we've been executing on share repurchase and I view that as preferred method concurrently. And so I'd say there's nothing imminent right now, but it's something that we always talk about as one of our options.

Okay, got it. Is there a valuation of shares, which should be less inclined to buy back your stock? I'm assuming we're not anywhere close to it right now.

Yes. I don't want to get too much into detail, but we look at it, obviously, the things that we're hopefully creating shareholder value by buying it back below intrinsic value through a number of different ways to think about that. So again we executed this last year where we thought that was the case and also thought we had the wherewithal to do so at the holding company. And going forward, that will be sort of the lens that we plan on looking through as well.

Your next question comes from the line of Doug Harter from Crédit Suisse.

Can you talk about the factors or the mix that led to the modest decline in the premium on new insurance written this quarter?

Doug, this is Mike. I think relative -- versus mix I mean, it's really more about they fully implementing of those price changes from earlier year as they kind of role through, right? We've made those -- they were effective June, July. So you didn't have a full period in the third quarter and now you have a full period in the fourth quarter. So I'd say it's more driven by those price changes than it was by mix.

Got it. So sort of normalizing from that, you would characterize it as relatively flat?

Yes. I mean, it's mix dependent. Absolutely.

Okay. And then, I guess, as you think about the pricing engine kind of as you roll that out, is there expected to be any impact on pricing, either positive or negative from the rollout of that?

This is Mike again. I mean, yes, that's the whole point of going to those types of pricing engines more accurately reflects the current conditions and expected conditions going forward, up or down. But I think it's hard to give you any percentages because it's going to be environment dependent.

Your next question comes from the line of Bose George from KBW.

So just actually going back to the question on the premium on NIW. So going forward, is it safe to say that 50 basis points number is a good run rate unless the mix changes. So now all the price reductions are kind of fully incorporated in there?

Bose, this is Mike. No, again, I don't think it's going to be mix and environment dependent and how much transition from rate card over to MiQ and things of that nature. So as Tim have guided to and we've guided to for a number of quarters and years actually, is that more importantly, the effective yield of the overall portfolio, we think, would continue to trend lower over time.

I mean, I can understand why the effective yield on the insurance in force will trend down. I mean, on the NIW, does it reflect sort of the reduced rates already in that number?

Well, for the current period, yes. But we're not going to give -- we can't give and we're not going to give forward guidance relative to where we think premium rates will be in future period. That's just something that we don't do.

I mean, that's fair. But I mean, there is no -- if prices are relatively stable in the market, then there's no reason to think premiums should necessarily decline, right, if the mix is not changing meaningfully?

Well, I think the keywords used there, if things are stable. And -- but the other, there could be changes up or down as the previous [indiscernible] earlier.

Okay, fair enough. And then actually just in terms of the premium this quarter, can you just quantify was there a benefit to the premium just from the reserve release?

There was some benefit from the reserve release because we were able to effectively release some written premium accruals, but I would say that was -- it was more modest than it has been in most recent quarters.

Okay. And then actually one on the ILN. Do you foresee doing more of those transactions just as -- you clearly don't need the capital, but just as part of a broader approach to risk management?

Yes. Tim again. I mean, I think our view is it's another form of capital and risk transfer that we can utilize and it's cost effective when we issued it. Capital markets can change, but it's something that us and the others in the industry have utilized more so this last year, and I think it's safe to assume that if markets are available, that's something we'll consider strongly in the future.

Okay. Actually, just one more. What's a good tax rate going forward?

Well, I think, 21% is probably good. We'd a little bit of this quarter, but 21% is the right way to think about it moving forward.

Your next question comes from the line of Jack Micenko from SIG.

Tim, can you just maybe get a little more granular on the 2 basis points sequentially. I mean, how much of it was mix? How much of it was the release? How much of it was maybe a falloff on accelerated premium? How do we think about the two -- the sort of some of the parts?

It was really spread across all those, Jack. From an example, for the single premium acceleration, I think our accelerated premium fell from being 6.6 the last couple of quarters down to 5.1 this quarter. So I think that's like 1/3 of a basis point. We look at all -- everything entitled with reinsurance as far as ILN and then change in profit commission and everything, that was probably somewhere closer to a 1 basis point. So you mix all those things together, that I think starts to get closer to the two.

Okay. And then, I guess, we're at a 26% excess now $1 billion. Under 1.0, you had, I think, always sort of pointed to a 10% to 15%. Maybe walk us through why -- I mean, obviously, you're evaluating, but is 10% to 15% the right number? Under 2.0, is it -- why could it be lower, why could it be higher? But just help us understand sort of where that may sort of fall in as you think through it?

Yes. Jack, I think it is something we're still looking at. I think it -- I don't know if it's easy or early enough to say if it would be higher or lower at this point. But I think we look at it along with the types of capital we have with the reinsurance and we've talked before that we have the options on some of our quota share to make changes that if we want to. So I think we'll look at it, but again to the certain extent that we think that it's giving us additional dividend capacity having that excess, that is another factor that we think about as well. So the extent that we are unable to get out the same amount of dividend, I think that's when you think us trying to come back a little bit closer to where our target's been before. With PMIERs 2.0, the main change was taking away the premium credit so there weren't a lot of other changes. So that's one thing that we'll consider when we think about what the right level is going forward.

And then sort of one follow up to that. I mean, what are you thinking? I mean, obviously, you're thinking about some growth and there's this $240 million kind of run rate number out there, but obviously, you're assuming there's portfolio growth. Do you have an NIW forecast for '19 for the industry and for your company as well?

Yes. Jack, this is Mike. I mean, for our company, we're looking at probably flat up to last year. So right around at $50 billion. Obviously, the overall market's going to be a little bit smaller given refis and where the purchase activity is coming in at. So we would see about the same levels in '19 versus '18.

Your next question comes from the line of Geoffrey Dunn from Dowling & Partners.

Tim, the expense growth [indiscernible] I think you suggested flat on a gross basis. What changes about '19 after a couple of years of mid-to upper single digit growth?

Geoff, we said that before ceding commissions, that it would be flat '19 to '18. It's something that we talk about periodically. We like to be focused on expenses, be smart about it. The last few years, I think we've had some expenses that we've, as I mentioned earlier, some things with restricted chair that have had things rise up because the stock price was up. We talked a little bit about investing a little bit more from some of the technology things, things like that. I just feel like we're at a good run rate right now, that we're able to sort of benefit from some of those things, like moving forward, and particularly on the technology investment. And so I think we took a hard look at it in the environment and think that it's the right thing to sort of try to keep flat when we look at '19.

What's more sustainable long term? Is it something closer to low single digit GDP number or mid-single digits? I think I've asked before, and had suggestions that mid-single plus.

Yes. It's tough to say. I mean, I think again, we're going to look at this hard and look at ways to leverage technology moving forward. So we're focused on '19 and trying to be flat in '19. And if December is successful in that, I think, we continue to look out past that point. But I don't think we expect to have expense growth rate higher than GDP by any means.

Okay. And then your QRS ran through the '18 book, I believe. Has that renewal occurred? Have you renewed it? Have you changed the cede level? Can you update us on that front?

Yes. We have renewed it for '19 in similar cede level. It's a similar structure and related sort of bells and whistles associated with that.

Okay. Then with the ILN market, with the -- assuming conditions remain favorable, why renew at a 30% cede rate rather than drop it to 15% or 20% type of thing. I think you've indicated in past calls that you'd consider maybe a blended approach with traditional and capital market. So given all the options right now, why maintain a 30% on the '19 book?

I mean, that's a good question, Geoff. I mean, part of the thought process is, we're getting the 30% on the '19 book, which is a forward commitment for us. Any additional ILN we would do, we wouldn't be able to place ILN on that for over a year at this point. We still find very attractive cost to capital and the fact that we have in our other quota share transactions the ability to terminate those early. I think that's where we look to sort of trim and sort of right size as opposed to doing it on the forward commitment basis.

Okay. And can you remind, I think you had some sort of termination option recently or am I misremembering that?

Yes. No, I think every six months basically starting at the end of this year, we have the ability on our oldest quota share to be able to terminate if we want to. So we did not do that as of the end of this year, but we have another option every 6 months going forward.

Your next question comes from the line of Mihir Bhatia from Bank of America.

Just wanted to start with firstly, the government shutdown. I was curious if you all are seeing any impact of that across your portfolio, whether it being maybe people are more -- looking to work more with the private MIs versus the FHAs are seeing delayed closings or just impacts of some of the laid off or not laid off furloughed workers where you are not maybe delinquencies and stuff? And if it extends for longer, what are some of the impacts you might see?

Mihir, this is Mike. So the short answer to the first part of your question is, no, we haven't seen any impact to it. The -- from the conventional lending world, the IRS's processing their verifications on employments and things of that nature. What happens if it extends longer, we had to wait and see. It's clearly the number of workers compared to the overall employment base and homeowner base is relatively small. But who knows, we'll see how long it lasts and what implications that has to overall economic conditions and confidence. But, no -- nothing as of to date.

Got it. And then second question is just on -- going back to MiQ for a second and your rollout of it. As you roll it out, is there any expense associated with it as in -- if you need to roll it out faster with all the other companies doing it, would there be higher incremental like maybe expenses? Are there some efficiencies with rolling it out versus the rate card process or is it pretty much the same?

This is Pat. It would be more reallocation of resources. So there might be some increase in expenses on the margin, but nothing material.

Got it. And then I was -- the other thing I was curious on, the pricing itself within MiQ. Obviously, it's more granular, so I assume that means some borrowers end up with a little bit maybe higher cost versus the rate card [indiscernible] benefit. But what if you ran your whole NIW like this quarter through it. Would you on average end up in the same place. Would you end up a little bit better, worse. Anything you can provide?

Mihir, this is Mike. We are not going to make any comments and won't make any comments relative to pricing of where would have been or where it could be in the future.

Okay, fair enough. I think -- and then just the last question. Obviously, new leadership at the FHFA. And I was curious, couple of years ago, there was a fair amount of talk around deep MI and hoping to do that. New leadership at least in past before they assumed the roles had shown, I think, a more openness to private markets taking on some more risk. So I was curious if that is something you see happening or is it just out of the question with the way the government, congressional shutdowns and opposing parties being in charge, et cetera?

This is Pat. It's difficult to predict for the reasons you said at the end there that it will happen because there are so many moving parts, including political reality. That said, we believe it continues to be a good idea and a discussion we want to have with Mr. Calabria and Mr. Otting dependent on how it plays out. So it's something we will continue to pursue because we think it's the right thing to do. In terms of housing policy, it's the right way of derisking the GSEs. We think we will have a receptive audience in terms of their willing to listen, but will it actually translate into action, that remains to be seen.

[Operator Instructions]. You have a follow-up question from Bose George from KBW.

Actually just a quick follow-up on the ILN. The cost of the ILN this quarter, was that in the NIW premium number that you gave, the 50.2 basis points?

The cost of the ILN for this quarter would be -- are you talking about -- oh, the 50.2, that's on direct basis. So that is not included in there.

Okay. And then just to clarify the $10 million run rate annualized cost of the ILN, did you say that was fully in the numbers for this quarter or were there some other expenses as well?

I would say it was more heavily weighted this quarter than it would be on run rate going forward. And I'd say it's slightly less than $10 million a year. So if you look at the run rate for this quarter, that would get you above the $10 million. So a little bit of additional cost associated with it in the initial quarter that you -- starts up. But on a run rate going forward, again, I think it's something just shy of $10 million on the premium.

There are no further questions at this time. You may continue.

Okay. This is Pat. Thank you for joining us on the call this morning and your interest in our company. As I said in our -- my summary, we had an outstanding 2018 in terms of managing the business. I thank my 800 coworkers, and we are very excited about taking on 2019. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect.