NMI Holdings Inc

NASDAQ:NMIH

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the NMI Holdings First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we'll conduct a question-and-answer session and instructions will follow at that time. At a reminder, today’s conference may be recorded.

I’d now like to introduce your host for today's conference, Mr. John Swenson of Management. Sir, please go ahead.

[John Swenson, Vice President, Investor Relations and Treasury]

Thank you. Good afternoon and welcome to the 2018 first quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Chairman and CEO; Claudia Merkle, Chief Operating Officer, Adam Pollitzer, our Chief Financial Officer; and Julie Norberg, our Controller. Financial results for the quarter were released after the close of the market today. The press release may be accessed on NMI's website located at www.nationalmi.com, under the Investors tab.

During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If, and to the extent, the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in the light of subsequent events.

Further, no interested party should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that in today's press release and on our website, we have provided a reconciliation of certain non-GAAP measures used on this call to the most comparable measures under GAAP.

Now to our conference call. Brad will open with an overview of the quarter, Claudia will provide an update on the customer development and the market environment and then Adam will discuss the financial results in detail. After some closing remarks from Brad, we will take your questions.

With that, let me turn the call over to Brad Shuster.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thank you, John. And good afternoon, everyone. In the first quarter of 2018 it was another record quarter for National MI as we achieved new highs across every key metric we used to measure success.

We wrote $6.5 billion of new, high quality mortgage insurance up 82% over the first quarter of 2017. Primary insurance and force of more than $53 billion was up 10% sequentially over the fourth quarter of 2017 and up 54% over the first quarter of last year. We continued to deliver the fastest rate of growth of insurance and force in the industry.

Net premiums earned were a record $55 million, up 10% sequentially and 65% over the first quarter of last year. Our top line growth continues to drive record bottom line results. Adjusted net income was a $22 million or $0.34 per diluted shares, and our GAAP net income was $22.4 million also $0.34 per diluted share.

Return on equity for the quarter was 16%. We are pleased to have again delivered record financial results and are starting 2018 with significant positive momentum in customer development, portfolio growth and return on equity.

With regard to pricing, we are evaluating the appropriateness of recent rate announcements by our competitors. As a rule, we do not view pricing as an efficient competitive tool or the best means to achieve and maintain market presence.

Instead we have always held the view that customer service in terms of coverage matter, and that sustainable market presence is built from these core values. Our strong growth in customers and wallet share over these past two years of price stability are certainly evidence of this.

We expect to conclude our evaluation of the competitive environment and provide an update on our pricing strategy shortly. In setting our pricing strategy we will continue to take into account the needs of our customers and their borrowers and our own risk management in return objectives and consider how these might be advanced through in increasingly granular evaluation of risk.

We will also consider key external variables such as our current understanding of the PMIERs 2.0 framework. Since riding our first policy in 2013, NMI has enabled more than 260,000 American families to achieve and maintain the dream of homeownership.

We have developed strong partnerships with hundreds of vendors based on an innovative coverage and customer service approach. Tax reform and the immediate and lasting benefit it provides to our financial position will allow us to deliver incremental value to this group through a thoughtful and measured pricing strategy.

That said, we will also recognize the importance of delivering attractive risk adjusted returns in excess of our cost of capital for our shareholders and generating strong bottom-line results to continually strengthen our balance sheet and counter party profile.

Our pricing strategy will balance these objectives, our desire to serve our customers and their borrowers and our desire to deliver for our shareholders. We are maintaining our outlook for a mid-teens return on equity in 2018 and expect that we will continue to deliver mid-teens returns over the long term after giving a effect to any change in our pricing strategy.

Shifting to Washington matters, regarding PMIERs we have been actively engaged with the GSEs and FHFA around the proposed changes that were shared with us and other any industry in December. We continue to expect that the industry will be afforded a six month implementation period following publication of any final changes and that any new rules would not take affect before the end of the fourth quarter of this year.

We expect to be in full compliance upon effectiveness and anticipate that we will continue to maintain an ex-desk position upon implementation based on our current capital plan.

In mid-March we all learned about Freddie Mac’s IMAGIN Pilot program. We have actively shared our views directly and through our U.S. MI trade group about the nature of the pilot and how it fits relative to GSC charter requirements, PMIER standard and the state insurance regulatory framework as well as the manner in which the program was introduced to the market.

As structured, IMAGIN is constrained to the LPMIs singles market and at this point we don’t believe we have lost a single loan to the program. Broadly speaking, we support the innovation that provides qualified borrowers with increased access to home-ownership opportunities and furthers the sustainability of the housing finance system.

We do not believe IMAGIN program accomplishes these goals. We question the long-term value and contribution of a program that relies on temporary capital commitment from providers who are not held to the highest state regulatory and PMIER standards and have not demonstrated their commitment across a full cycle.

Over the long term, we believe that National MI and the broader private mortgage insurance industry provide unique value and stability to the high LTV market, through permanent capital support and our ability to evaluate risk on a primary underwriting basis.

There is an increased level of discourse in Washington around GSE reform. As always, it is a complex topic and it is too early to tell what if any meaningful policy initiatives may emerge.

To date, all serious reform proposals have reinforced the need for more participation of private capital in front of tax payor risk. And we believe that private mortgage insurance will continue to be a preferred first of capital within any framework of reform.

With regard to activities at HUD and the FHA, we continue to believe that the FHA is unlikely to expand its footprint in 2018 and that’s a direction of future policy decisions will be benign to positive for our industry.

Now let me turn it over to Claudia for more detail on customer development and the market.

[Claudia Merkle, Chief Operating Officer]

Thank you, Brad. In the first quarter, lenders continued to respond to our strong team and unique customer value proposition. As of quarter end, we had nearly 1300 approved master policies. We continued to attract new lenders to our platform and activated 21 new customers in the quarter including four new top 200 lenders.

This expands our active customer base to approximately 900 mortgage originators including 148 of the top 200 lenders in the country. We also continued to expand our business with existing accounts to increasingly recognize our growing presence in the market, our strength as a counter party, our superior customer service and the value of our commitment to a broad based underwriting approach.

Looking at the broader mortgage insurance market, we believe first quarter volume was up more than 15% from Q1 last year, although it’s too early to have a precise view of how the market will develop over the remainder of 2018.

Current interest rates were still constructive for the purchase market. However, we do expect to see some contraction in refinancing volume as rates continue to move modestly higher. Refinancing represent 16% of our MIW in the first quarter, down from 17% in the fourth quarter of 2017.

In terms of our production, we expect 2018 MIW to be meaningfully higher than the $21.6 billion we generated in 2017. Our results are driven by the efforts of the entire National MI team and reflect their focus on pursuing high impact lender relationship and delivering a superior customer experience. We are grateful for their efforts and also for the support of our customers who have entrusted us with their business.

Shifting to the underwriting environment, the market remained solid and our inforce portfolio continues to perform better than initially expected and priced. We nonetheless continue to take a long term view of the credit cycle and continuously monitor our slower business to identify credit and loan quality trends before they become issues in our portfolio.

We are unique in this regard, because we individually underwrite or validate the vast majority of the loans that we ensure which we believe is far more than the rest of our industry. This allows us to provide a continuous feedback move to our customers and to identify and address emerging risk in either the broad underwriting environment or individual lender manufacturing practices.

It also allows us to offer accelerated 12 month precision relief on a larger portion of our insured portfolio. We were pleased to announce in April that we passed an important milestone and have granted 12 month rescission relief on more than 100,000 loans.

With that, I’ll turn it over to Adam.

[Adam Pollitzer]

Thank you, Claudia and good afternoon everyone. We had another strong quarter and achieved record results across every key financial metric. We generated record first quarter NIW of $6.5 billion and continued our rapid growth and high quality insurance in force.

This drove record net premiums earned of $54.9 million, record adjusted net income of $22 million or $0.34 per diluted share and record adjusted return on equity of 15.9%. These results reinforce our strong outlook for the business and our financial performance.

Now to the detailed results. Primary insurance-in-force was $53.4 billion at quarter end, up 10% from $48.5 billion at the end of 2017 and up 54% compared with the first quarter of 2017.

As of quarter-end, monthly product represented 70% of our primary insurance-in-force, up from 62% at the end of the first quarter of 2017. 12 month persistency in the primary portfolio was 86%, roughly flat with the fourth quarter.

Total NIW volumes of $6.5 billion was up 82% compared with the first quarter of 2017. Monthly product represented 84% of NIW, which compares with 83% in the fourth quarter and 81% in the first quarter of last year.

Net premiums earned for the quarter were $54.9 million, up 10% compared with $50.1 million in the fourth quarter and up 65% compared with the first quarter of 2017. We earned $2.8 million from the cancellation of single premium policies in the first quarter, down from $4.2 million in the fourth quarter

Reported yield for the quarter was 43.1 basis points compared to 43.7 basis points in the fourth quarter and in line with our guidance of 43 to 44 basis points for the year. The continued benefit of our higher mix of monthly insurance in force was offset by a decreased contribution from the cancellation of single premium policies.

Gross premium yield, which is before the impact of reinsurance was 49.2 basis points compared to 50.4 basis points in the fourth quarter.

Weighted average rate on NIW across all products in the first quarter was 51 basis points. Over the long term, we expect to price our business and achieve portfolio yields that allow us to deliver on our strong mid-teen returns target.

Investment income was $4.6 million up from $4.4 million in the prior quarter. We expect investment income will continue to increase as our investment portfolio grows and we realize the benefit of incrementally higher new money rates.

The book yields on our investment portfolio was 2.4% in the first quarter. We are now generally achieving reinvestment yields of approximately 3.5% on similarly situated assets. Underwriting and operating expenses in the first quarter were $28.5 million compared to $28.3 million in the fourth quarter.

Our expense ratio in the quarter was 51.8% compared to 56.5% in the fourth quarter, a nearly 5 point improvement in just one quarter highlights the significant operating leverage in our financial model. We continue to focus on efficiently managing our cost base and expect our expense ratio to trend down consistently quarter-to-quarter exporting the cost we might incur in connection with the term loan refinancing or additional ILN issuance.

Claims in the quarter were 1.6 million. We had 1000 notices of the fault in the primary book as of the end of the first quarter, including 474 notices related to loans in FEMA disaster areas from last year’s hurricanes and wild fires.

This compares to 928 total notices including 533 from FEMA zones at the end of 2017. We paid 17 claims in the quarter which compares with 11 claims paid in the fourth quarter bringing ever-to-date claims paid to 56.

Our first quarter loss ratio, defined as claims expense divided by net premiums earned, was 2.9%. As mentioned last quarter, we expect our loss ratio to be in the low to mid-single digits over the next few years.

Interest expense in the quarter was $3.4 million and we recorded a gain of 420,000 attributable to a decrease in the fair value of our warrant liability.

Now moving to the bottom line. Net income for the first quarter was $22.4 million or $0.34 per diluted share. Adjusted net income, which excludes the warrant fair value gain was $22 million also a $0.34 per diluted share up from $14 million or $0.22 per diluted share in the fourth quarter.

Effective tax rate for the quarter was 15.7% reflecting the accounting treatment for vested equity compensation. We expect our effective tax rate for the full year to be approximately 21%.

Cash and investments were $826 million at quarter end, up from $735 million in the prior quarter. As of March 31st, we have $123 million of cash and investments at the holding company including $79 million of net proceeds from our equity offering.

In April, we contributed $70 million of cash from the holding company to NMIC to support the continued growth of our business. At quarter end, total available assets under PMIERs grew to $555 million which compares with risk based required assets of $522 million. Giving effect to the $70 million contribution, access available assets at quarter end would have been approximately $103 million.

Shareholders’ equity at the end of the first quarter was $602 million equal to $9.18 per share, which compares with $509 million or $8.41 per share at the end of 2017.

Our adjusted return on equity was 15.9% in the first quarter compared to 11% in the fourth quarter. We continue to expect that we will deliver a mid-teens return on equity for the full year in 2018.

Over the longer term, we expect to continue to deliver mid-teens returns that are significantly in access of our cost to capital. The embedded earnings potential and return contribution of our $53.4 billion portfolio insurance in force increased in an immediate and permanent manner following corporate tax reform and will be the primary driver of our financial performance to an extended period.

Additionally, we expect our continued success in expanding our NIW footprint and growing our insurance and force at by far the fastest rate in the industry. The continued migration of our portfolio mix towards an 80:20 monthly balance which carries higher rates and returns, the continued scaling of our fixed expense phase and the increasing contribution of our investment income at incrementally higher reinvestment yields will all further support our returns over the long-term

We expect these significant and positive trends will allow us to continue to deliver strong mid-teens returns for our shareholders over the long term even when considered in the context of recent industry pricing actions and potential changes to the PMIERs framework.

We’ve had significant success accessing a full spectrum of capital and reinsurance markets to fund our PMIERs needs, and estimate that our weighted average cost of PMIERs funding today is approximately 8%, down nearly 30% from our weighted average funding cost at January 1, 2016 of approximately 11% when PMIERs first went into effect. We expect to continue to lead in this regard and pursue funding solutions for any increased requirements the GSEs and FHFA might impose on their PMEIRs in an equally efficient manner.

In summary, we achieved record results in insurance and force premiums earned, adjusted net income and return on equity. As we continue to grow our portfolio of high quality mortgage insurance and manage risk and expenses, we expect that our embedded operating leverage will continue to drive margin expansion and strong mid-teens return on equity t hat exceed our cost of capital.

With that, I’ll turn it over to Brad for his closing remarks.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thank you, Adam. Before we turn to Q&A, I’d like to offer my perspective on some of the recent and significant announcements impacting our industry. I have worked in the mortgage insurance market for 25 years and started National MI with a specific vision and purpose.

We had and continue to have two key goals. Supporting our lender customers to help borrowers attain the dream of sustainable home-ownership and delivering attractive risk adjusted returns for our shareholders across the cycle.

The environment we operate in today is fundamentally different and I believe more attractive than it was at any point in the past. Recent industry developments don’t diminish the opportunity that is available for National MI or our ability to deliver results for our customers, borrowers and shareholders.

National MI has made a significant investment in developing and deploying a modern IT platform that allows us to efficiently underwrite or validate a significant majority of the loans we ensure.

We can evaluate risk in a more granular fashion with greater speed and increased precision and at a lower unit cost than ever before. We have been equally successful in establishing a modern risk transfer framework and funding profile

The solutions available to National MI in the capital and reinsurance market allows us to manage the aggregate risk in our portfolio and funds our economic and regulatory needs across a broader and deeper capital spectrum and at a lower cost than ever before.

We have a long-term positive view on the U.S. housing market and the quality of the regulatory guardrails that have been established in the mortgage finance system. Within that framework we believe we are unique and how we have deployed technology to efficiently evaluate and manage risk, while maintaining the lowest absolute expense footprint in the industry.

These capabilities combined with the ability to manage both risk and cost of regulatory capital through reinsurance and capital market solutions positioned National MI to deliver on its dual mission for many years to come.

With that, I'll ask the operator to come back on so we can take your questions.

[Operator]

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

[Bose George, KBW]

Hey, good afternoon. You might have address this in the prepared remarks, but do you think your premiums will be stable going forward, just leaving aside anything on the ILN side?

[Adam Pollitzer]

Yes. Bose, I think that's right. Certainly through 2018 we'll see stability in our premium yields absent anything that we might do in the ILN market. In terms of our expectations beyond 2018 we generally don't provide exclusive long-term guidance, but there are number of positives that we would expect to come through. We'll continue to see a yield benefit from the shift in our mix of insurance-in-force, that 80.20 long term blend and have that, what we call the core yield dynamic before giving effect to reinsurance and cancellation revenue continue to pull towards higher way towards our rate on new NIW.

For us the run-off effect that happens is different for other in the sector. We didn't price business either in a legacy environment or early post crisis vintages at particularly higher yield, so the run-off impact for us is less – of less consequence. And even though we're talking about it excluding the impact of reinsurance we do believe that our cost of reinsurance will continue to improve marginally. Our profit commission on our latest quota share deal is higher than it was on our first deal and we would expect to achieve incrementally better pricing on the next ILN transaction than we executed in the first deal. And obviously all of that has to be considered in the context of where cancellation revenue moves and the pricing strategy that we'll be announcing shortly.

[Bose George, KBW]

Okay, great. That's helpful. And then actually just can you remind us in terms of the timing for the ILN. Is there any update there?

[Adam Pollitzer]

Yes. I would say it's something that we're going to focus on in the near term. I don't have a specific transaction date targeted yet, but it’s a market that's open on strong terms to MI issurers and we like to capitalize the markets when they're available at favorable terms for us.

[Bose George, KBW]

Okay, great. Thanks. Actually just one more from me. The commentary on the IMAGIN program that was helpful about not losing any loans into that program, but just wanted to clarify is that -- because the pricing advantage of that program is not meaningful or it just you don't see it in the market that much or just any color there would be helpful?

[Bradley Shuster, Chairman and Chief Executive Officer]

Yes. Bose, we're seeing limited uptick on the part of our lender customers for the program. And we're aware of a number of them that have opted out of it. And our view is that the pricing advantage that was promoted initially is somewhat over stated given that most LPMI today is executed at levels that are pretty close to the IMAGIN pricing. And to the extend there is any pricing advantage in IMAGIN, its coming from the fact that the counterparties aren't required to hold PMIERs type capital levels and that combined with the fact that its cancelled after 10 years as oppose to our life of loan coverage.

[Bose George, KBW]

Okay. That's helpful. Thanks.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thanks.

[Operator]

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

[Mackenzie Aron, Zelman & Associates]

Thanks. Good afternoon and congrats on the strong quarter. First question I guess just going back to capital real quick. On the debt refinancing can you remind us what the time of that would be and what you'd be looking to achieve there?

[Adam Pollitzer]

Again, Mackenzie, it's Adam. We'll take it. Similarly we haven't provided any specific indication, but it's another item that we're focused in the near-term. We believe term loan and ILN market will continue to offer us support on attractive terms, both will remain important components of our overall capital and PMIERs funding strategy and we'd expect to pursue both capital paths in the near term.

[Mackenzie Aron, Zelman & Associates]

Okay, perfect. And then on the operating expenses, I know, Adam you had provided some helpful commentary last quarter, so just curious given how strong the volume is and how strong it looks like the opportunity for the company is right now. Is there any updated thoughts on incremental investment in people or infrastructure just on the operating expense side?

[Adam Pollitzer]

It’s a good question Mackenzie. And one of the virtues of our platform and our system and company is how scalable it is. And so not withstanding the strong volume flow that we're seeing, we don't expect to make any significant incremental investment to support that volume flow. So at this point we're not changing the guidance that we provided in February about the dollar quantum of expenses and the growth that we're expecting relative to the second half of 2017.

[Mackenzie Aron, Zelman & Associates]

Okay. And then, just last one, Brad, this one is for you. Just curious, appreciate the fact that you provided on pricing and potentially a shift towards more granularity. It seems like just based on the conversations that you've been having, what you see in the market, does it feel like there is more reception among customers for more differentiation in pricing across the various MIs that maybe we can move away from some of the very commoditize nature that the industry has seen over the last three years, so maybe more adoption of risk based pricing system. Does it feel like the industry can move in that direction? Is that what you were suggesting?

[Bradley Shuster, Chairman and Chief Executive Officer]

Yes. Mackenzie, our discussion on technology and granularity its all about risk selection from our perspective and managing volume and concentration levels, so we make sure we're maintaining appropriate risk adjusted returns. And I think we've seen a similar advance in migration and the technological capabilities of our customers such as they are able to operate with more granularity on our part and the part of their other counterparties, so I see that as a continual evolution for the market and frankly a very positive one.

[Mackenzie Aron, Zelman & Associates]

Great. Okay. Thank you.

[Operator]

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

[Randy Binner, B. Riley FBR]

Hey, good evening. Thanks. I'll pickup right there. So this seems like a little bit of a shift towards, I guess, what would referred to as Black Box pricing. So is it something that you've already rolled out or something that's going to roll out? Can you just give a little more understanding how that's going to kind of come into the market and if that would really feel different from the lender perspective the way that your pricing business in the future versus the way you're doing it now?

[Bradley Shuster, Chairman and Chief Executive Officer]

Hi, Randy, it's Brad. Let me clear, we're not announcing anything. As we said in our prepared remarks we are evaluating the changes that are occurring in the market some of which had been announced by our competitors. So, we are looking at what's evolving in the market and we are looking to take advantage of the technology we've developed and its ability to take more aspects of risk into account when we develop our pricing. And so we are working on that and we need to further access the receptivity of our customer to taking approach on an extended basis and we'll be coming back to the marketplace with some announcements on that in the future.

[Randy Binner, B. Riley FBR]

Okay. And then let me just get in a couple housekeeping items. One is on the tax rate and Adam if you covered this, I apologize if I missed it. But you said the tax rate would be 21% for planning purposes, but it was a little bit lower in the quarter. Was there one-timer in there?

[Adam Pollitzer]

No. So, Randy, I think what we guided towards on the fourth quarter call is that we would have a 21% full year rate, but that we would expect the same pattern as we saw in 2017 which is a lower effective tax rate in the first quarter and the most notable item where we take into account discrete items that occur in a particular period and reflect those in our tax rate, but the most notable discrete items that occur with some amounts of predictability and repeatability in the first quarter relates to the vesting of our equity awards.

And so we take what is either a windfall benefit and shortfall charge through our GAAP expense – excuse me, through our tax expense in the period in which the vesting occurs. And so given the rise in our stock price that translates through to a windfall benefit and that's why you see a first quarter effective rate of 15.7%, but we're expecting through the full year is that we still see a 21% effective rate. What that translates to is an effective rate on a quarterly basis in the second, third and fourth quarters of approximately 22%.

[Randy Binner, B. Riley FBR]

Understood. And then on the expenses I appreciate the expense ratio is lower. But was there – is that -- which you call that kind of a normalized absolute level of expense or something we can run rate off of – I think the last time we talk about this, you'd said that it was something like double digit growth off of second half 2017 expense base. So is that, is that still the right way to think about what expenses would be going forward because this would…

[Adam Pollitzer]

Yes. That's right.

[Randy Binner, B. Riley FBR]

It’s a little bit above that.

[Adam Pollitzer]

No. It would be below. Well, so let's break it down. So the second half 2017 expense total was $52.9 million, so we said annualized that, right, double it and then create a run rate. And so the way to think about that in the context of the first quarter is $52.9 million of total second half 2017 expenses if it were rate -- if it came in equally in the third and fourth quarter would have $26.5 million. The $28.5 million that we deliver in the first quarter is roughly 7.5% higher than that $26.5 million quarterly run rate that would indicate as a base, not a run rate but as the basis on which to layer your growth estimate. And so that's how we thinking about it that still how we're thinking about where will land for the full year in 2018.

[Randy Binner, B. Riley FBR]

All right. That's perfect. Thank you.

[Operator]

Our next question comes from line of Jack Besaiko with SIG. Your line is now open.

[Jack Besaiko, SIG]

Hi. Good afternoon. Adam, I wanted to go back to the premium question. I think it was Bose question. I think you said stable flat through the year, but as we think about NMI and remixing of the portfolio in that list, are you saying that will not continue or how do we think about -- I guess the other way to ask is, new money borrower paid, that's coming on the book at a net number what, two to three basis points higher or something like five to six, is there a way you can help us think about the trajectory beyond maybe this year, because I just want to make sure I understood what you'd said to Bose correctly?

[Adam Pollitzer]

Yes. So we are expecting that we will see a continued pull and what we'll call our core yield. It’s our core yield, if you strip away the cost of reinsurance and the impact of cancellation revenue was roughly 47 days, it was actually exactly 47 basis points in the first quarter. It was 46.7 basis points in the fourth quarter and it was up -- that number was about – trace it all the way back to the first quarter of 2017 was about 41 basis points. And so what that's reflecting is we are generating and writing our NIW in this quarter weighted average was about 51 basis points.

So we're seeing a basis point or so of increase in weighted average rate on our NIW and much more importantly that move from roughly 41 basis points in the first quarter of 2017 to 47 basis points core yield in the first quarter of 2018 faces almost entirely to the pool of our mix in insurance-in-force, 62% to moving 70% mix of monthly. That dynamic will continue. The guidance that I sort of signal to Bose that will continue in this range of 43 to 44 for the year reflects our plans to pursue and ILN offering in the near terms, so it layers in what we estimate the cost of that ILN will be and how it rolls through our seat of premium, and its also given in the context the pricing actions that some of our competitors have announced and those that Brad indicated we'll be sharing our end in the near term. And so that's how it remains at that 43 to 44 basis point level through the course of the year.

Over the longer term what we would expect to see, we're not going to put a specific number on it, but there's a series of – there's a balance between some of these competing items that will move yield up on a net base that sort of move the yield down. We absolutely expect that we'll continue to see that pull on the core yield. We went from 62% to 78% mix and that dragged our core yield from 41 to 47 basis points, the move from 70% to 80%, mix will happen over a longer period of time, it just the way the math works out but we would expect a similar drag in where our yield will go. In the extreme when you roll forward and the portfolio is completely turnover, we'd expect our core yield to roughly approximate our weight on NIW.

[Jack Besaiko, SIG]

That's very helpful. Thank you. When you talk about the pricing rollout or your ultimate, are you essentially referring to an early January -- early June timeframe rather?

[Bradley Shuster, Chairman and Chief Executive Officer]

We have a made a decision on that, but it won't be too far in the future where we will make an announcement on that front. I just want to emphasize one important point Jack, and you've known us since we founded the company and we been consistent on this point throughout. We have no intention of being the price leading in our industry, but we're fully cognizant that we need to be competitive on an overall pricing basis. So you can expect to see that kind of philosophy embedded in any change that we roll out in the future.

[Jack Besaiko, SIG]

All right. Great. Appreciate for taking the questions.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Chris Gamaitoni, Compass Point]

Thanks for taking my call. Most of my questions been answered. But I would love some more color on maybe some further clarity on why you think customers are opting out of the IMAGIN program, is it simply the pricing isn't enough or is there some other dynamic going on?

[Bradley Shuster, Chairman and Chief Executive Officer]

Well, I think there's a lot of different dynamics going on. One of the important factors is that as mortgage insurers we underwrite or post-close review the quality of the risk and that important step is backing in the IMAGIN program. I think that ultimately maybe a limiting factor in terms of the reinsurance market acceptance and growth for the program, because we have quota share agreements with lot of the same reinsurers as our competitors do. And those quota share agreements limit the amount of how much high DTI, high LTV, low FICO risk we could see it under those agreement. There are no such limits in the IMAGIN program that type of risk attribute is uncapped and so while we think you may see some reinsurers going to participate in the early days. I think you'll – you may see appetite dry out fairly rapidly to the extent that the program is adversely selected for those risk characteristic.

[Chris Gamaitoni, Compass Point]

Okay. And then related to future pricing, what do you think your currently underwriting return is to right now given the tax benefit and no change in the score card or the rate card today?

[Bradley Shuster, Chairman and Chief Executive Officer]

It's high teens to low 20s depending on the risk cohort.

[Chris Gamaitoni, Compass Point]

Okay. And do you have a view of where kind of the two other competitors have announced changes, where that would be under your model?

[Bradley Shuster, Chairman and Chief Executive Officer]

Back into strongly mid-teens return profile.

[Chris Gamaitoni, Compass Point]

Okay. And is there a level of return where you start rethinking kind of how aggressive you want to be in the business or you always going to be trying to make kind of whatever relevant to customers?

[Bradley Shuster, Chairman and Chief Executive Officer]

No. I think we been pretty consistent on saying mid-teens not only are achievable and sustainable over the long haul, but I think they're also appropriate given the long term nature of the risks that's been taken and the fact we can't reprice it ever in kind of the history of the industry when its running to difficult patches in the past. So I think a solid mid-teens return is sustainable and appropriate given the risk that we're taking. And I think the customers appreciate that.

[Adam Pollitzer]

The other think to consider is that none of these items exist in a vacuum and so the decisions that we're making around pricing and our targeted returns, we think about those relative to our cost of capital because we want deliver returns that are significantly in excess and really generate value there. But the decisions that we're making on the pricing side and the risk side actually have a direct impact on our cost of capital. Our cost of capital will increase as our risk profile increase, as our risk profile will increase to the extent we're overly aggressive with those pricing decisions. And so there is a natural balance between the two. Its not as simple as saying just because today we think we're funding at an 8% weighted average of PMIERs that its value creative to chase rates down a 10% let's say return.

One, we would deliver and think we should be as an industry, but most importantly as a company position to deliver mid-teens returns over the long term, but we also think about that relative to what it means to our risk profile and our cost to funding if we meaningful deviate from that position.

[Chris Gamaitoni, Compass Point]

Okay. And is there any way for you to give us a view how you conceptually view your own cost to capital like just given the commentary you just made? I know you probably won't give a number, but how do you view that internally?

[Bradley Shuster, Chairman and Chief Executive Officer]

Yes. It's pretty straight forward, right. Today we have four sources of funding that we've tapped into, debt, equity, quota share and ILN and we look at what portion each of those contributes to in our overall PMIERs calculation and its not – it simply as stacking them atop each other because the reinsurance reduces risk and so reduced the requirement and the dept and equity which are hard dollar funding, actually builds the balance up, but we have a framework for how we think about those relative to each other.

We said for – since we executed the deals that we view our quota share and ILN transactions as roughly 5% pretax cost to funding and there's the methodology that we through to calculate that for each of them. Our debt is reasonably straight-forward to measure. We know where LIBOR is today. We know where our spread and our equity we access on a cap-end basis and then we look at what that means on a weighted average after tax level.

[Chris Gamaitoni, Compass Point]

Perfect. Thank you so much.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open.

[Geoffrey Dunn, Dowling & Partners]

Thanks. Brad, I want to come back to your comments about the potential for more granular risk selection. Historically there maybe nuances in pricing but at the end of the day we saw this as recently as spring 2016 everybody ends up with the same spot. This time around we've seen some nuances pricing from Genworth versus MGIC. Radian suggesting nuances to its pricing, and now it sounds like you could come out with something that's a variant there as well. What make this time difference that type of differentiated pricing for the stick and particularly when at least historically in the top 20 banks they are looking for uniform pricing. Is that mentally is shifting as well? I'm curious what might allow the MI to offer different pricing that might sustainable?

[Bradley Shuster, Chairman and Chief Executive Officer]

So, I appreciate your remarks that certain customers will require uniform pricing across all their MI partners and we appreciate that and we're certainly going to continue to be a part of that. So that's not going to change. But I think increasingly many customers are able to handle or differentiation on our part. And as I said the tools we're talking about and technology and the granularity, its about risk selection and managing our volumes across various aspect of risk. So we think that just really important in terms of running a successful MI platform over the long haul, so it's really more about risk management than it about business production.

[Adam Pollitzer]

Geoff, just one small point I suspect this wasn't a deliberate distinction, but you asked about the top 20 banks and it's important to note that the top 20 banks are not the top 20 mortgage originators today. The customer landscape has evolves and obviously each of those within the top 20 have their own view as to how they want to engage with the MI industry but the customer landscape and customer dynamic has in fact changed and continuous to move forward.

[Geoffrey Dunn, Dowling & Partners]

So it sounds like and maybe we're already there, but it sounds like you're suggesting we kind of move towards the two tier pricing structure, one where you have a uniform card and one where there's added granularity which I don't where added granularity becomes Back Box, but is that effective -- I think we're already kind of there in the market, but is it that what you're suggesting?

[Adam Pollitzer]

I mean, I'll just revert back to my earlier comments that in the prepared remarks we are studying it, we are going to have the hour something soon, but directionally, I think we’ve been pretty clear that there is an evolution occurring and so – but we’ll leave it there and we’ll come back with more.

[Geoffrey Dunn, Dowling & Partners]

Okay, thanks.

[Bradley Shuster, Chairman and Chief Executive Officer]

Thanks.

[Operator]

I’m showing no further questions in queue at this time. I like to turn the call back to management for closing remarks.

[Bradley Shuster, Chairman and Chief Executive Officer]

Great. Well we’d like to thank you all for joining us on the call today. We will be presenting at the B. Riley FBR Conference in Southern California on May 24 and the KBW Conference in New York on May 31. And we look forward to seeing you at those conferences. Thank you.

[Operator]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.