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MGIC Investment Corp
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Good morning, my name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the MGIC Investment Corporation First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Mike Zimmerman, Senior Vice President of Investor Relations, you may begin your conference.
Thanks Felicia. 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 first 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 we will refer to during the call and includes certain non-GAAP financial measures. We have also posted on our website a presentation that contains information pertaining to our primary risk in force, the new insurance written and other information which we think you will find valuable.
During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call, are contained in the Form 8-K that was filed earlier this morning. If the company makes any forward-looking statements, we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K. At this time, I'd like to turn the call over to Pat.
Thanks Mike and good morning. While the environment we operate in continues to evolve as it has since we opened our door 61 years ago we are focused on executing our business strategies and I am pleased to report that we had another strong quarter. In a few minutes Tim will cover the details of the financial results but before he does let me provide a few highlights.
In the quarter we were $10.6 billion of new business which was 14% higher than the same quarter last year and we are still targeting to write $50 billion for the full year. This reflects the strong purchase mortgage market and some possible share gain from the FHA. Looking at GSE securitization data reported by Inside Mortgage Finance private MI purchase volume increased more than 14% year-over-year while FHA purchase volume decreased 9%. While this data is lagged, it does suggest that our industry seems to be increasing its share of the total origination market. During the quarter refinanced transactions remained low accounting for just 12% of our new insurance written compared to 17% for the first quarter of 2017. Compared to the same period last year there was a 22% decrease in refinance applications which was offset by an 8% increase in purchase applications.
A shift towards purchase activity is a positive for our industry as our industry's market share as a percentage of total originations is three and half to four times higher for purchase loans than refis. The expanding purchase mortgage market, our company's market share of approximately 18% plus, the hard work and dedication of my fellow coworkers to deliver stellar customer service at higher annual persistency resulted in greater than a 7% increase in insurance in force ending the quarter at $197.5 billion. Since insurance in force is the primary driver of our revenues it is a key metric that we focus on as well as the expected returns on the new business.
Let me take a few moments to touch on last week's announcement on changes to our borrower-paid mortgage insurance or BPMI pricing. Before I provide more insight into our announcement let me state what was not a motivation for making the price changes. Despite speculation by some it was not a response to Imagine which is a Freddie Mac pilot program. At its core Imagine is another form of lender-paid mortgage insurance or LPMI that has a marginally lower price than what we currently offer on a majority of the LPMI of mine that we write. A revision to the BPMI pricing is also not a concentrated effort to get more share from the FHA. Nevertheless our premium changes offer some modest benefits from both of these items.
Over the past week many investors have asked about our decision to adjust premiums so I want to provide some perspective on how we came to the decision we did and why we did it in the manner we did. On our last earnings call the response to a question about pricing and the corporate tax rate I answered that I had not yet seen any tax related pricing changes of significance and that we did not have a material change to our pricing in mind at that point in time. However the environment began to change in mid-to-late February where we began hearing from a few of our customers that they had been offered BPMI rates from our competitors that were lower than published rate cards. These types of reports are not necessarily unusual as we hear about BPMI discounts from time to time but typically they are one off deals and not widespread. Then in early March a popular mortgage industry blog discussed BPMI price discounting for a very large lender by one of our competitors. From that point the volume of customer inquiries about our plans began to rapidly increase and we learned that the discounted prices were much more widespread and involved more than just one other private mortgage insurer. At that point we decided we had to act as this revised premium rate structure in our judgment was clearly already being implemented.
When deciding how to respond we took into account state regulations which according to the California Insurance Regulator prohibit a mortgage insurer from selectively offering to lenders different premium rates that is if you want to vary off the rate card the regulator says he needs to establish an objective, risk related criteria and proactively offer that lower rate to all lenders doing business in California that meet the criteria not just the select few. This is not a new interpretation. We are very fortunate to do business with just about every lender in the country. The overwhelming majority of these customers want a level playing field when it comes to MI pricing. They do not want to be disadvantaged to other lenders when competing for loans. As a result we have been very transparent all through last week that lowered our premium rates for all lenders and borrowers.
I have often said that MGIC does not proactively use price to gain market share, this remains true today. Our premium adjustment is a reaction to market conditions. We are simply reacting to these new market conditions in an open and transparent manner. Our goal has never been to be number one in market share for the sake of being number one and I believe that our actions have consistently reflected this. I have repeatedly said that return on capital is our priority by incorporating the lower federal tax rate into the new premium structure it brings expected after tax returns in line with the returns we expected to generate on business we wrote in 2017 under the GSE's private mortgage insurance eligibility requirements or PMIERs as they exist today. While lower than the otherwise could have been due to the tax cut they still result in very attractive expected lifetime returns.
If we have to lose market share for the right reason we will give it every consideration. I've been asked over the years how much share would I be willing to lose. I've never provided a specific number. Our goals are to remain a relevant business partner with our customer and prudently generate long-term premium and book value growth for our shareholders. In that sense market share matters at some level. So are we prepared to lose market share for the right reasons, the answer is yes. In this instance we have received ample evidence from our customers if we did not participate in some manner our relevance would be put at risk. I hope this helps you better understand how we reached this decision in a transparent manner in which we announced it. We continue to have pricing that will protect our policyholders, help people attain home ownership, and provide a meaningful return to our shareholders. With that let me turn it over to Tim.
Thanks Pat. In the first quarter we were at $143.6 million of net income or $0.38 per diluted share compared to $89.8 million or $0.24 per diluted share in the same period last year. To provide better insight into our operating results and to make year-over-year comparisons to the financial results more meaningful we disclosed adjusted net operating income, a non-GAAP measure along with the reconciliation to GAAP net income in our press release. Our adjusted non-net operating income for the quarter was $144.5 million or $0.38 per diluted share compared to $117.1 million or $0.31 per diluted share for the first quarter of 2017.
The primary driver of the improvement in our financial performance for the quarter was a lower tax provision. The tax provision for the first quarter of 2018 reflects a new lower corporate tax rate compared to the first quarter of last year. Additionally the Q1 2017 tax provision included an additional $27.2 million that was recorded relative to the IRS litigation. Regarding this litigation in the second quarter we have received notification from the IRS that they were notified that the Joint Committee on Taxation had no objection to the settlement and we are now moving towards finalizing all the required documentation. We hope that this matter is finally completed in the next few quarters. Losses incurred were $23.8 million compared to $27.6 million for the same period last year. Losses incurred consist of reserves established on new delinquent notices plus any changes to previously established loss reserves.
As we do each quarter we review the performance of the delinquent inventory to determine what if any changes should be made to the estimated claim rate and various factors of previously received notices. We continue to see some positive primary loss reserve development but less than we have seen in prior periods. Specifically we recognize $31 million of positive development on primary loss reserves compared to $49 million of positive development in the first quarter of 2017. During the quarter we received 2% fewer notices including those from the hurricane affected areas than we did in the same period last year. Notices received outside of hurricane affected zones were down 4% compared to last year. The level of new notice activity in the hurricane impacted areas was nearly in line with first quarter of 2017 so we used the same claim rate for all new notices received in the quarter.
The claim rate in the quarter was approximately 9% which reflects the current economic environment and anticipated cure [ph] and compares to 10.5% in the first quarter of 2017. Keep in mind that historically the delinquent notices received in the first quarter have cured higher rates in subsequent quarters. During the quarter new delinquent notices in the legacy book generated nearly 73% of the new delinquent notices received while accounting for approximately 21% of the risk in force. This speaks as much to the quality of the business written since 2009 as it does for declining delinquent inventory in the legacy books.
The new delinquent activity from the larger, more recently written books remains quite low reflecting our high credit quality as well as the current economic conditions. We expect that the legacy books will continue to be the primary source of new notice activity. Reflecting the smaller delinquent inventories and the impact of the GSE for closure moratoriums related to the hurricanes the number of claims received in the quarter declined 44% from the same period last year. Net stake claims in the first quarter were $82 million compared to $128 million last quarter to down 36% for the same reason.
The effective average premium yield for the first quarter of 2018 was approximately 47.3 basis points which is down about two basis points from last quarter. As I have discussed in the past for a variety of reasons we have expected that the effective premium yield will trend lower however the exact amount and timing is difficult to predict. For this quarter we saw a continued decrease in earned premiums due to acceleration of single premium cancellations, less benefits from reduction of premium refund accruals, and the continued run off of the older books that have higher premium associated with them.
I would also like to point out that the average direct premium rate we disclosed on new insurance written is lower than in previous reported periods. There is no change to the previously reported monthly BPMI premium rate but upon review of the calculation we discovered that the manner in which borrower-paid split premiums which accounts for less than 1% of our new insurance written was being included had been causing the weighted average to be overstated. So we changed the calculation to reflect this. In essence what was occurring was the upfront premium was being included as recurring premiums versus being spread over an average life. This change has no impact on the reported effective premium yield in this or any prior quarter.
Net underwriting and other expenses were $48.7 million in the first quarter of 2018 compared to $43 million in the same period last year. The increase in expenses was primarily due to higher stock based compensation which resulted from a higher stock price of the grants paid, changes to our non-executive compensation and employee benefit plans. At the end of the third quarter -- first quarter [indiscernible] available assets for PMIER's purposes totaled approximately $4.7 billion resulting in a $850 million excess over the required assets. MGIC best rate capital is $2.2 billion in excess of the state requirement.
In addition to writing new business and exploring new opportunities as they arise we'll try to manage the amount of PMIERs excess by continually reviewing our use of reinsurance as well continuing to seek and pay dividends out of the writing company to the holding company. When we analyze various options to deploy our capital resources we need to take into account that the holding company's primary source of capital is the writing company so while capital is being created at the writing company level we need to notify SBOIC [ph] not to adjust any dividends payments from MGIC.
We also consider the resulting leverage ratio, the ability to continue our positive ratings trajectory, the debt service ability of the holding company and of course changes to PMIERs. We'll continue to evaluate all capital management options. As we reported in the press release during the quarter MGIC paid a $50 million dividend to the holding company. We are optimistic that dividend at least this level will continue to be paid on a quarterly basis. At quarter end our consolidated cash and investments totaled $5.1 billion including $257 million of cash and investments at the holding company.
The consolidated investment portfolio had a mix of 70% taxable and 30% tax exempt securities, a pretax yield of 2.8%, and a duration of 4.2 years. Our adjusted total capital ratio was approximately 20% at the end of the first quarter of 2018. The holding company has resources for more than our target of three years of ongoing debt service. As of March 31st the holding company's annual debt service on the remaining outstanding debt is approximately $60 million. This includes approximately $12 million that the holding company pays MGIC which owns $133 million of our 9% juniors subordinated debt.
Finally I know that many of you are interested in the possible changes to PMIERs GSE has recently shared with us. Unfortunately we are not at liberty to discuss any of the proposed changes or subsequent discussions that we have had with the GSEs in any detail as we are bound by non-disclosure agreement. As a reminder in December of 2017 we informed due as FHA has not yet taken a position on the proposed GSE changes, however if they were implemented as proposed and effective on December 31, 2018 our PMIERs access at that time would be materially lower than our current PMIERs access of $850 million. However, we expect that we'll continue to maintain an access and that we will be able to pay quarterly dividends to our holding company at a $50 million quarterly rate. As a result we expect the cash at our holding company at the end of 2018 will increase over the level at the end of first quarter of 2018. At this time we have been told by the GSEs that changes to the PMIERs will not be effective prior to the fourth quarter of 2018 and there would be a six month implementation period to the effective date. We do not plan to provide update on the status discussion for the GSEs and FHA until they are finalized. With that let me turn it back to Pat.
Thanks Tim. Before moving to questions let me give a quick update on the regulatory and political fronts. With regards to housing finance reform we remain optimistic about the future role that our company and industry can have but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions. As an individual company and through various trade associations including U.S. M.I. we are actively engaged on this topic in Washington. What is possible that GSE reform proposals may be forthcoming from the Senate and the House, we do not think it is likely that they would be acted upon in 2018. We are encouraged as the discussions are now more inclusive about the role of each of the GSEs, FHA, and private capital versus treating them as separate topics.
Regarding the FHA specifically a new Director has been nominated. Based on our discussions with various parties in the administration we believe that the FHA will not expand its footprint in housing finance in the foreseeable future. With respect to the new pilot program that Freddie has introduced what we find most troubling about the program is not so much the new competition that it brings rather it is the fact that Freddie and the SHFHA are tracking new counter parties by creating an unlevel playing field. We believe this is a result of having two sets of capital and collateral requirements for the exact same risk; one that is public and transparent through PMIERs and one that is not public and lacks transparency but appears less stringent. Clearly as a counter party is required to hold less capital to support the same risk and they can charge a lower price to get a similar return. In addition we now have a government agency while in conservatorship expanding its reach into the primary market.
Looking ahead I am very excited and confident about the opportunities MGIC has to continue to serve the housing market. Our insurance in force increased by more than 7% in the quarter at $197.5 billion, persistency continues to trend favorably and the credit trends continue to improve on the legacy book. I expect that our insurance in force will continue to grow due to the level of new business we expect to write. Further I anticipate that the number of new mortgage delinquency notices, claims paid, and delinquency inventory will continue to decline. And finally we will continue to focus on capital management activities and generating very attractive returns for our shareholders.
The last few weeks have been challenging but we continue to focus on the long-term. I continue to believe that there is a greater role for us to play in providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders and we are committed to pursuing those opportunities. With that operator let's take questions.
[Operator Instructions]. Your first question comes from Mark DeVries.
Yes, thanks. Pat I appreciate all the context around the decision to cut the price down on the BPMI but had a couple follow ups; one is, could you just share your thoughts on what you expect the industry response to be to the price cuts?
Mark I don't know what they're going to do, I honestly can't speculate. We've not heard anything to this point and I'll just have to leave it at that.
Okay, the reason I asked I mean, we are getting plenty of questions from investors who are kind of concerned that this kind of touches off a series of price cuts, but assuming there is a response and I don't know how there isn't a response now that you've kind of set up a low public rate on the rate card. It is the fear that it goes below that do you think you found a new return level that you would help set kind of the new equilibrium back to where it was prior to the tax cuts?
Well, we certainly do. I mean I think that was our objective, it is to find something that was reasonable. Last year's return into that pricing structure was generated what we believe was very strong returns that's why we targeted to go back to that point. And hopefully that sets the bar.
Mark, this is Mike. Just maybe to add to that response, this is a response to what's already in marketplace. So, whether [indiscernible] better publicly respond, that's what we don’t know about but what we did was in response to what's already taking place.
Understood, and then, sorry Pat, I think you alluded to a couple of unintended benefits which were potential market share gains relative to the FHA and some potential offset to pressure from Imagine, could you elaborate a little bit more on those points on kind of where you think the benefits could be and give us some sense of how meaningful that could be?
Sure, well relative to Imagine our understanding is it is off to a based on customer feedback it's off to a relatively slow start and I don't mean that as a criticism. That's just where it's headed, can't reduce it. So, there were some discussion and I know it's being pitched that Imagine offers lower pricing. Again as I pointed out in my comments we believe that comes from capital arbitrage not through actual expense structures. So this reduction should make us more competitive in that regard on the LPMI side of it in that regard or in that segment rather.
Specific to the FHA, looking at the simple math we think as much as 10% of the FHA volume now looks more attractive to a private mortgage insurer execution. I am not prepared to say we're going to win that 10% but it's reasonable to think that we have a greater opportunity there on the FHA side.
Mark, this is Mike, just to give some color to that on the FHA is that I think that's theoretically what's in play but from a -- on the 97, for example, we dropped down a [indiscernible] so maybe now down to 720s is what the -- potentially more attractive depending on lender preference and borrower preference. And then in the 95 LTVs, we moved down where the bright line used to be around 720, now we are down to maybe around 700. So again we wouldn’t expect all that 8% to 10% to move to our sector but certainly a segment of that could come that way.
Okay, great, thank you.
Your next question comes from Sean Dargan.
I think Tim you said that that you weren’t going to give premium margin guidance but if we take a step back and just think of the shift from refi to purchase and then pricing actions we probably shouldn't expect it to go higher over the course of this year, is that correct?
That would be correct, yes.
But it sounds like the penetration rate of private MI of total mortgage origination continued to increase over the first quarter if your estimate of market share is correct and should that continue if we do see more of the market move to purchase over the course of the year?
Hey Sean this is Mike. I think yeah, I mean again [indiscernible] our MVS [ph] securitization data and obviously that's lagged a little bit. But traditionally purchase were 90% purchase activity within the MI space we have three and half to four times higher market share as we talk about as an industry within the purchase. So as long as purchase market is growing which is forecasted to on both the unit and dollar basis we would expect to win our fair share and we outperform in the purchase market versus [refi] [ph].
Okay, and just one final question, is there an expected return on new business. And I realize that that addresses -- but I mean the investor fear is that this is going to keep on getting closer to your cost of capital, is there a number internally that you won't write new business below?
Well this is Tim, I think from our perspective again a large part of where we end up back after this business is closer to where the returns would have been pre sort of tax reform and so I think we feel very comfortable from a return perspective at those levels and we are hopeful of what we have done from a pricing standpoint, that's the level that the pricing is going to be at.
Okay, thank you.
Thank you. Your next question comes from Doug Harter.
Thanks. Sticking with the returns on new business, I understand you can't sort of give more detail about PMIERs, but I guess just help us think about is there any way to think -- I guess the thought process internally around how that pricing might change under kind of new PMIERs? Now given that you've said that the capital required, you have less of cushion under PMIERs 2.0?
I guess, this is Tim, again I think the one thing we have been able to see at least what the GSE has proposed at this point so, we do have information from that. We don’t know if that will be the final where it is. So, I guess from our perspective at least we had that data point as we are thinking about where we wanted to put the pricing tools with the rate card that we put out. So from our perspective at least we had that information even though we recognize from a market standpoint we are not able to discuss that with you and you aren’t able to see that.
Understandable, thank you.
Your next question comes from Bose George.
Hey guys, just one more on the price cuts and the potential on how the rest of the industry responds. You know just given that we already have -- I mean there is one player who uses black box so there's less transparency there. Do you think we could move towards an industry where there's just less pricing transparency, where everyone doesn't have to kind of reset their rate cards based on this?
This is Pat. It's possible, the black box has been in the market now for a number of years started by United Guaranty and Arch brought in their own model and then Arch bought United Guaranty. What we react to more than anything is our customers. We stay very close to them and that is why we have not instituted the black box but if the demand comes from them then we will have to react accordingly.
And then just when you look at the competitive landscape now versus last year, I mean do you think the difference was that people were willing to sort of compete the tax benefit away and now that that's happened we go back to a landscape that's stable which looked like things were quite stable for an extended period before the tax reform?
This is Pat again. I think that premise is correct. That's certainly what we targeted was to return to let's call it the 2017 returns. Again where competition lands I'm not sure but based on what we have heard going back to February as I described in my opening comments that appeared to be what they were doing but I can't say it with certainty.
Okay, and then actually just switching the subject, the change that Fannie is making to the loans with DTI over 45, what's the expectation in terms of how that impacts the market. I mean I assume it goes down but do you think it goes down meaningfully just curious there?
This is Steve Mackey. I think it's going to take a little while to see that change but our expectation is that it would trim that DTI grid in 45 by a couple of points maybe two to four at the most but just a couple of points. Just the way they targeted that was a combination of layered risks. But we'll have to see as that takes hold and we see the originations come through in the next 45 days or so.
Okay, great, thanks.
And Bose just the question in mind of everybody we did make a change on the low FICO scores earlier this year where we eliminated less than 700 above 45. So, certainly that is still above 700 but they have a better obviously demonstrated ability to manage credit which they have exited but that is something where we keep an eye on.
Okay, great, thanks.
Your next question comes from Mackenzie Aron.
Thanks, good morning. First question, can you just provide the dollar value of the single premium cancellations this quarter?
Yeah, I think single premium cancellation sort of the accelerated was around $6 million.
Okay, great, and then more broadly on NIW and with the first quarter seeming to be off to a pretty good start can you just update us on what you're thinking for the full year. I think last quarter you had said just a slight increase similar to what we saw in 2017. Does that still feel reasonable and how should we be thinking about growth for the remainder of the year?
This is Pat, we continue to think that we are going to rate 50 billion which is what we had disclosed in the first quarter in the year-end earnings call back in January. So we're still on target for the 50 billion.
Okay, got it and then just last question on the LPMI, I know you said off to a slow start, does that mean you're not seeing as much pressure I think the expectation when the Imagine program came out and that the industry would be forced to compete with that pricing on the lender paid even though it's already discounted, can you just give us an update on what you're hearing from your customers in reaction to that news getting out into the market?
Mackenzie, I just heard the question relative to our positioning of the LPMI as it currently exists versus the Imagine program. Yes, so that's there in the comments there the majority of our business closes two thirds or more is very close to the Imagine pricing. As said it is early in the program but the initial feedback has not been -- it is not immediately stopping by the lending community. I would say we will see how that plays out but with the pricing close by they do prefer doing business with the MI versus directly with the GSEs. At least that's been related to us in certain conversation. So let's see how it plays out. Obviously that's where the price is at today and it is kind of where we get to the troubling part of the program as Pat mentioned in his comment about the lack of transparency around Imagine and what is the requirements, the capital requirements versus the transparency of PMIERS to figure out how is -- how does that all shake out and what is the competitive landscape look like, and what the program if it is successful.
Okay, thank you.
Your next question comes from Jack Micenko.
Hey, good morning guys, it is actually Som [ph] on for Jack this morning. So on a direct premium yield how much was it overstated by an average and how should we think about your net premium yields going forward as you've stated in your rate cards?
I think I'll take that couple of pieces and try to address sort of the fallout that we saw in the fourth quarter again. When you look at it there's three things that sort of enacted from where we were last quarter. We talked about accelerated premium on singles, we are probably -- that's probably reduced this quarter by about a half a basis point. If you think about the premium refund accrual and how that sort of interacts with what we think about our claim rate and loss reserves we probably had about half basis point less in this quarter because of that as well. And I would say the other basis point out of the two total is really sort of on a direct basis. So, that is when you think about the falloff of the legacy books of business becoming a smaller part of the pie as well as through the premium reset on those after ten years. That was sort of on a direct basis that one basis points. So, all in the tool spread across those three years is really how we look at it.
Okay, and how should we think about premiums going forward with the new rate card?
Well I think from a premium yield perspective again we have been saying that we expect the yield to continue to trend downward with the newer rate card obviously we said that that's going to be off of where we are currently at 10% to 11%. So, that's going to continue to put pressure on the premium yield over the next few years. It'll take a while for the new business to fully get baked into that but obviously it's additional downward pressure on the premium yield as we go through the upcoming year.
Okay, so an expectation of say over the next one to two years, right?
So, this is Mike. I would say it is going to take -- you are going to start to feel the impact as each year goes by but this year you won't see much impact because it is effective with applications starting in June and [indiscernible] year. Next year you have a full year of NIW but that's one year of the total in force but each year I think it is a little farther out on a fully stake basis until two years of -- probably closer to three, four, maybe five years before it is fully reflected.
Got it, okay, and then on capital structure going forward I mean so we've seen some of your peers take to dial in market obviously over the past year. So was just wondering if you guys have considered ION is to remain a part of your capital structure at some point down the line as a way to maybe offset that reduction and excess capital you disclosed where PMIER is 2.0 to be implemented as proposed today?
Yeah, I think we pay very close attention to what it was doing in the industry and we obviously have conversations about how we execute with our current reinsurance structure with traditional reinsurers versus doing something from an insurance like knowledge perspective. I think what we've seen the execution is that is pretty good, it is something we will continue to look at whether it's for capital release or whether it's for thinking about risk management sort of purposes. It's something that we'll continue to look at but I think it is very good from industry perspective. It shows one additional resource that the industry can lay off capital or layoff risk and has done over time and so it is something that we will look at as a potential for us as well.
Got it, and just a quick one on loss ratio, I mean is there a way to get to just the cure default ratio on the hurricane book by anyway?
So, this is difficult to do because we don’t have -- we get notices that come from areas that may not have anything to do with the storms. So, it is definitely that's why we broke out the notice activity in prior period which we will probably stop doing going forward and kind of return to normal levels. But from a care perspective it's difficult to get that level of granularity. So the long answer is no.
Right, okay great, thanks guys.
Your next question comes from Phil Stefano.
Yeah, thank you and good morning. I was wondering if there's any way -- it seems like the expenses are a little higher than we expected, the commentary with higher stock comp and that changes to employee benefit plans. Presumably the stock comp is more of a first quarter issue where the employee benefit plans is probably going to be more persistence severe. Guidance in the past that kind of poked around the idea of a mid single-digit expense growth, maybe you can help us try to triangulate how much was driven by stock versus the benefit plans and how we should think about expense growth in the forward quarters?
Phil it is a good question, it is Tim. I guess I would say one thing from a stock perspective that would be sort of recurring too and it's really a function of where was the stock price on the day we granted it and you think about a replacing grant that we would have had on the book three years ago. Stock price especially executed in January this year ran up pretty good. And so our expense is really dictated by that and is sort of fixed in at that point we granted. So that penalty recurring during the years as well as benefit plans that you know and not get in too much accounting but the benefit plans is all about the assumptions in there and as things change and discount rates, etc that you have to reflect the expense. So, we think that that's sort of based for the year as well.
You know we tried to -- we talked I think at the end of last year, expect something that single-digit probably people sort of run around the 5% mark. Because of those items it is probably going to be a little bit higher than that. But I think on a gross expense basis we are maybe 6 million higher this quarter then we have been sort of running last year. I don't think it's going to be quite that much the rest of the year. The first quarter we always have a little bit additional expenses but it is definitely going to be higher than last year. So, I think it is not going to be fully basis of 63 that we had this quarter but it's probably somewhere in that 3 million to 4 million over where we were running last year as we look to the rest of this year.
Got it, got it and then in the K there was an implication there, the reinsurance fee for 2018 were probably placed sometime in the first quarter. It just feels like that was done I guess is that right and were the terms significantly different than the previous treaties?
No, I think we're finalizing that and putting originations out of that treaty. Terms were very similar. I think we made tweaks around the edges as far as what is included, as far as what we thought made most sense from a capital standpoint to include and from a larger standpoint we think we got a little bit better pricing on it with discussion with the reinsurance panel. But for the most part the structure looks very similar to what we have been doing before.
Got it, thanks. That's all I had.
Your next question comes from Randy Binner.
Hey, thanks. On FHA you noted that you expect to pick up market share there but I just want to clarify did you see any of that in the first quarter or is that more of a prospective statement?
Randy, this is Mike. So it kind of was more prospective when talking about the premium adjustments that we made. Begin using the securitization data lag it appears if you got the purchase market strong we typically do better there than FHA. But until all the statistics come out we won't know that definitively. But it was really more prospective statement so that we put the premium adjustment that we made we've become more competitive in a couple of cells that I mentioned and we will see how that plays out.
Then on persistency I don't know if this has come up and it was a little bit higher this quarter, was there any one time decision in the persistency being higher this quarter?
Yeah, it was kind of higher so no it's just -- I think it is in line with where we thought it would be and some in order of things that we can get against higher mid through upper 80s. We have been kind of consistent they can yield 80 to 82 is probably is probably the best as we could get at a portfolio level.
Okay, and then one more little one, I think just kind of looking at the PMIERs 1.0 disclosure in the press release I think you require capital to take down just a little bit, is that just a function of the legacy business winding off or was there any change that was notable in the old required 1.0 capital?
No, I think probably the biggest driver there from PMIER standpoint with loans going delinquent you have a pretty sizable increase in your requirement. So with the hurricanes last year into the fourth quarter we had a lot of loans move from being current to being delinquent that we thought it would eventually gearing up a lot of losses on. Got our PMIERs that doesn't matter and so that's probably the biggest delta is that those hurricane notices are starting to come out of the inventory and so that reduces our requirement.
Okay, got it, thanks.
Your next question comes from Mihir Bhatia.
Hi, thanks for taking my questions. I guess my first question just, I want to go back to Imagine for a second, just wanted to confirm was there any impact on your single premium pricing from Imagine, understand that you typically do a discounted pricing off your rate card but just so like was there any demand from any of the lenders if you will to lower pricing or more discounts?
There is but no is the short answer to that.
Good, then moving on to PMIERs, you guys have been again not specific to PMIERs 2.0 but historically you have run a 10% to 15% buffer. I think you have talked about having materially lower excess assets. Is your expectation you want to build back up to that 10% to 15% buffer or was some of that because of uncertainty around PMIERs 2.0, so maybe you don't need to build up like as much excess capital, any thoughts around just how you're thinking about that as PMIERs 2.0 is implemented?
Yes, it is Tim, I think that is the right way to look at it. We've obviously said we were targeting PMIERs 1.0 at 10% to 15% sort of excess. We are having it now recognizing that we don’t fully control being able to release that excess depending upon what dividends we get out. But the uncertainty around where PMIERs 2.0 would turns out was part of the reason why we would want to hold a little bit of excess, just the uncertainty there. So, it is something once we know the final rules of PMIERs 2.0, I think we will take a look at what we think is an appropriate access to hold after that and that will be our target. That won't mean that we will get down there right away necessarily but we do have some options with our reinsurance contract for example as far as early cancellation features on that that we would take a look at as well. So I think once we know the final rule of PMIERs 2.0 we will be updating where we think we should target above that from an excess standpoint.
Got it, shifting gears a little bit just on in terms of the mortgage market and some of the business you're writing, notice the DTI over 45% I think it's around 20% last quarter, I guess 2018 which is four times what it was in 2016, is that just a function of the market changing or I guess what is driving that and what -- how high would you be comfortable getting that because I assume you don't want to get back to the 35% to 40% that you had in 2017?
Yes, this is Steve Mackey. So that change was driven in the market by changes that Fannie Mae made to their DU scorecard and what they would allow back in July. And it really ramped up as it went through really Q4. So it's much higher than what we are comfortable with. I mean we had discussions with Fannie Mae about that. That's one of the reasons why we announced the guideline changes in January to reduce that and limit greater than 45 to anything above 700 FICO. And it comes -- based on Fannie Mae's own evaluation, they've tightened up their rules around DTI greater than 45 and limited it further. So we expect that to come down from that 20% level which is well above what we are comfortable with and then we'll continue to monitor where it is and if we need to take further action we will.
Alright, and then just last question on now that you had a little bit of quarter of tax reform under your belt, are you seeing any impact in the mortgage market, maybe different impacts just from states particularly salt versus -- states with salt versus non-salt is going to make a difference, is that just loan sizes mitigate that impact but you don't see that?
Yeah, this is Steve Mackey again. We're not seeing any change in mix of our flow business that we could attribute to tax changes. There are such strong demand and such shortage of supply across many, many markets that that dynamics scene is still seems to be very firm in the marking and seems to be driving things more than anything else.
Thanks, thank you for taking my questions.
Your next question comes from Chris Gamiatoni
Good morning, thanks for taking my call. I'll start with any of the housekeeping one. The percentage of NIW being covered by reinsurance still is at 77% this quarter, should that be -- is that what we should think about from the new treaty?
Chris, this is Tim. I think that's probably a good level to think about. As I mentioned as we looked to see 2018 treaty we excluded some loans that we didn't think gave us as much capital really. So you should expect to see a little bit less from a NIW coverage on the reinsurance of the 2018 treaty that you would have seen on previous treaty because of that.
Okay, and I'll go back to the ROE question. With the rate, the BPMI rate card change you said it gets back to ROE that were previously underwritten under PMIERs 1.0, doesn't that imply that ROE's will be lower under PMIERs 2.0, so tax reform is net negative?
Chris, this is Mike. All things being equal, yes is right the more capital we have to hold that would put some downward pressure on it. The question I think that unfortunately we can't answer because of the NDA is give you some guidance as to the level of the of what that incremental capital requirement would be. We hope to be able to do that yet this quarter but that's totally dependent upon the GSE and SHFHA completing the PMIERs.
Can you give us a sense of where you think underwritten or worries are heading in the future. I think in the past you had said kind of unlevered mid teens returns, just any type of rough sense would be helpful?
I think, yeah, I mean from where we are 1.0 we said unlevered but with reinsurance sort of mid teens returns and so based on it I think we have seen from a marketplace perspective. I think that's the right way to sort of think about things right now as we move forward too.
Okay, and was there any -- I mean give us any color of the types of lenders that were pushing for a kind of lower premium rates, was it broad based, was it national lenders, the non-bank First banks any type of color would be helpful to think about the future?
Sorry about that, I am sorry this is Pat. When we first got it and I described it kind of one of deals. They typically come from larger lenders or a competitor or two of ours was offering a deal in that regard. But again as that blog became public then the calls started coming in from customers of all different sizes. Again we do business given our history and the strength of our sales organization. We do business with just about everybody in the country and so the calls were coming in from large and small. As an example smaller customers were asking that they're very concerned about a level playing field. If you hear some of the rhetoric coming out of Washington D.C. under dot frame and things like that or changes to timeframe it's all about making sure that the community banks get the same terms that the large banks get. It was similar in this bank when smaller customers were also calling saying what about us, don’t leave us behind. So it really did range the spectrum from large to midsized small.
Okay, and then just another housekeeping you said that the premium rate on from the BPMI card would be 10% to 11% lower. So if we just took your mix from Q1 and put the new BPMI card on it, does that get a surround 50 bps?
Yes, I think this is slightly higher than that but yeah, that is directionally right.
Okay, thank you so much.
The next question comes from Geoffrey Dunn.
Thanks, good morning. Tim with respect to the mix issue pressure on the premium yield, can you provide a rough idea of the legacy premium yield versus the 09 cost yield so we can see where this current rate might settle out before we think about the new pricing impact?
I don't have that mix in front of me Geoff. I think the right way and just the way I think about it is we obviously saw a pretty big drop in 2017 and that was primarily the result of if you think about 2017 book falling off and also getting a sort of ten year reset. And we have a little bit of volume beginning of 2018. So I think we're getting to the point where we're getting close to where we thought the premium yield will start to stabilize. And I think your question of where to go with the rates sort of that we put out recently that puts more pressure on it going down. So I think we think about what we might be able to put out but that's the way I guess I would sort of think about without anything from a change perspective. We still have a little bit more to go but obviously the change in rate card will put additional pressure on that going forward.
Okay, so I think if we strip out the reinsurance impact and refunding it was about 53 bps on a core basis without adjusting per cruel maybe autumn in 52-53 range and then think about the rate card above that?
I think that's probably a good way to think about it, yeah.
Okay, and then Pat you mentioned obviously the pickup in call volume in March and the thought process of having to remain relevant at a certain level, do you think your market share was hurt by the discounting in the first quarter?
Too early to tell and the reason I say this, I am not dodging the question, it's more of a case of it really revolves around how often lenders evaluate their MI partners. In other words the phone call start coming in to say someone's offered me a better deal can you match it. That doesn't mean the lender takes immediate action. I mean some will, some will just say I've got to evaluate, they've got to work for their own processes. So you know we'll know market share here in the next few weeks but at this point in time it is a little early to tell. But our clear view was and my clear view was that going forward it had become widespread enough that that relevance was going to be put at risk.
Is it fair to say that you could be at risk in your April May production since you were not effective on the new rates till June?
It's fair to say that could happen. I can't tell you it will happen but that's when you start to see it, yes.
Okay, thanks.
Your next question comes from Eric Goshim [ph].
Good morning gentlemen, thank you for taking my question. Similar on the market share question that was just asked, Pat when you say relevance is that relevance you mentioned that the call started coming in from the smaller lenders as well as the larger lenders, can you kind of gauge that term of how much relevance would have been at risk?
Well I'm not going to hang a number on it but I will give you some examples. We have been down this road in the past were our company our competitors will cut prices. We had an example a few years ago where I believe it was Radian and this is public information cut their premiums by 5 bps and I think by the next day or the next week everybody in action.
We have more dramatic example for those of us who've been around for a while would be when you go back to the captive reinsurance in the early 2000s. We had competitors offering high fee captives. We pulled our number back and 40% to 25%. We immediately saw a dramatic drop in our market share. Our national market share dropped inside of 12 months from in the range of 20% to just north of 19%. So I can't say that that would happen in this case, it is a judgment call but our experience is and we went through this in the in the great recession with customers also reallocating market shares. If you suddenly see your market share drop from 20 to 5. It is harder then I will get it back to 20. The customers just don't look at their MI locations every month. They would look at every six months, every year and so you're sitting there. In some cases you might find yourself on the outside and one thing we've learned over the years is that when you're on the outside you may be able to come back to that customer with a great case as to why you should be on the inside but their answer is I've already got four guys who are doing this or they've brought the deal to me and I need to reward them. So I can't hang a number on it, it is a judgment call but we've had this experience in the past where if we don't take action in certain circumstances the way that I have described it is if our national market share is 18%. If we were going to lose a half a point of share or a point to share I wouldn’t lit it. Our sales organization wouldn’t like it that we fight like I will get one of that. But I wouldn't lose any sleep over it because that's just a day to day ebbs and flows of the market. However when we start to get the volume of calls that we had, let's say this is the way the market is now going to be, what are you going to do, then it becomes more widespread and again that relevant gets called into question. Now in this case one of the key things that drove our decision was the fact that we could still generate excess returns. It was not a case where we had to say well gosh, our returns are excellent. We're picking up the tax benefit and now we've got to cut them by 50% or something like that. It was not that at all. We were able to make this decision which we obviously believe in that have the courage of our convictions and still brings the returns back to after tax mid teens. So, it's kind of like in a sense and not to be cavalier about it if people like the returns in 2017 on December 31st, they had like the returns today. So again, you're asking the right question but again I can't give a specific number. It's a judgment call based on many years of experience and a lot of dialogue with our customers it's just so hard to get material market share back.
Fantastic and I appreciate that color. So I was going to ask a different question but based on your response maybe I'll broaden it out. Corporations in the U.S. receive the big benefit via tax cut. I'm unclear why in the MI industry competition wound up going to a level that basically erased the vast majority if not all of the benefits of the tax reform. Do you have a sense of what was driving your competitors, I know that's probably a difficult question but what was driving the competitors to say this is great, we have all these excess returns and we can drive for shareholders and we're just going to will them away via competition knowing what happened in 2013 is that everyone is going to match at some point in time and so than the whole industry suffers and all the shareholders in the industry suffer as opposed to receiving the benefit of tax reform?
That's a great question and I ask that question myself all the time. And you really have to direct your questions to those who did it. I'm not sure.
You didn't mention them Pat so I don't know who they were, I am kidding.
Well, you could probably guess. But it became more than wide spread, more widespread was not just one MI. Then that is a question we ask ourselves so again I'm not trying to dismiss your question, I'm not sure what your motivations are. Our motivation is long-term. We try to think long-term. We're not trying to buy market share for the next 90 days because exactly to your point if we drop share premiums like yesterday and we can match by tomorrow. I mean that's the way these things happen. Now I don't know what they're going to do with this particular move but I cannot speak to their motivations, you have to ask their management teams.
And so the question I was going to ask before I got to that was when tax reform came into place you were looking out into the future you had some expectation of capital generation and capital returns and maybe capital actions to one improved ROEs and then maybe take actions that could be beneficial to shareholders whether that's initiation of the dividend or buybacks because you mentioned capital returns is one of your -- capital management returns is one of your target. Well, when you -- and this is probably not fair but I'll ask it anyway, can you give us a sense of what you may have been thinking about under tax reform and the returns that were coming and how much of a delta that is versus what now you'll be doing with basically 2017 returns?
Well, I think what we did was take a very cautious approach and that was as an example you talked about corporate America. A lot of announcements in December and January bonuses and doing different things for employees and buying back stock across corporate America. And so we naturally looked at that to say what should we do. But we felt it was premature to take any specific action that we realized it was a possibility that those that look at the business differently than us may try to compete away if you will that increase in risk don't do too well to tax cut so we were very very cautious and fortunately we were out of so I think it was more of a case of us Jeanne being very thoughtful now to the extent that it influences our capital planning again we're in the same position than we were back in December in terms of returns. The cash flows as Tim alluded to in his comments at the holding company remain very strong. The dividend we are getting out of writing companies at a $50 million run rate we feel good about that. So those fundamentals have not changed and so from a capital management perspective we still consider, still weigh our options, we work very closely with our board in this regard and we will monitor things as we go forward.
Fantastic, thank you very much.
[Operator Instructions]. There are no further questions at this time.
This is Pat. I realize full well as I said in my comments that the last four, five, six weeks have been challenging. And I hope what we did this morning was to provide a deeper explanation as why we took the steps we did, why we're thinking the way that we did. We always want to be transparent. We are most definitely thinking for the long-term which sometimes can cause some pain in the short-term but we believe in the long-term value of the business. We've been at this for 61 years and that's what drives us. So I thank everybody for participating on the call and management is always available to take calls as you continue to follow up. Thank you.
This concludes today's conference call. You may now disconnect.