MGIC Investment Corp

NYSE:MTG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Idarais, and I will be your conference operator for today. At this time, I would like to welcome everyone to the MGIC Investment Corporation First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Mike Zimmerman, Senior Vice President of Investor Relations. You may begin your conference.

[Michael Zimmerman, Senior Vice President, Investor Relations]

Thanks, Idarais. 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 2019 are Chief Executive Officer, Pat Sinks; Chief Financial Officer, Tim Mattke; and Chief Risk Officer, Steve Mackey.

I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that will refer to during the call and includes certain non-GAAP financial measures. We've posted on our website a presentation that contains information pertaining to our risk in force and new insurance written and other information we think you will find valuable.

During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K that was filed earlier this morning.

If the company makes any forward-looking statements, we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K.

At this time, I'd like to turn the call over to Pat.

[Patrick Sinks, Chief Executive Officer]

Thanks Mike and good morning. I am pleased to report that we are off to a great start for the year as our financial results demonstrate. Our balance sheet is strong and continues to improve as evidenced by the increase in book value per share compared to yearend 2018. We are maintaining our focus on the long-term success of the company and we are in an excellent position to continue to serve our customers while creating shareholder value.

In a few minutes, Jim will cover the details of the financial results, but before he does let me make a few comments. Main drivers of our future revenue are insurance in force grew by 7% over the last 12 months ending the quarter at $211.4 billion. The increase was driven by the higher annual persistency on the existing book and the level of new insurance written. The size of the mortgage origination market generally has the largest impact on the volume of business we will insure. I would characterize the overall mortgage origination market as healthy despite the volatility in mortgage rates to remain attractive. While the supply homes available for sale are tight, there is a strong demand for homes.

So while we may not see a surge in purchase originations, we expect it to remain steady. As a result, I remain optimistic about our ability to grow the insurance in force because we have a compelling business proposition for our customers and consumers continue to feel confident about their future economic prospects. I feel very confident about our ability to serve our customers, given our capital strength and position in the market.

The quarterly financial results reflect very low credit losses, our post 2008 business is producing and the favorable operating environment, we are experiencing especially as it relates to employment, wage growth and housing fundamentals. Our inventory of delinquency notices continuous to decline is at a level not seen more than 20 years. And the number of new delinquency notices received during the quarter declined. The strong credit performance continuous to be tailwind for our financial results. Existing insurance in force has very strong credit characteristics and is expected to generate meaningful returns for shareholders.

Before I turn it over to Tim, I want to remind you that our business objective is straightforward. We strive to be a relevant business partner with our customers in order to prudently grow insurance in force, generate long-term premium flows and create book value growth for our shareholders. One way, we are executing on that objective is to offer competitive products and services while maintaining a sharp focus on risk adjusted returns on capital and expenses. We deployed our new pricing engine, MiQ early in the first quarter, as more customers adopt MiQ, it's more granular approach to risk based pricing will assist us in managing the risk and expected return profile of the insured portfolio.

We expect it will also allow us to continue to be a relevant business partner with our customers. However, we know that one approach to delivering price does not work for all customers. So we will continue to work with customers to deliver competitive options that meet our return thresholds in a manner that works best for all involved. That said, I continue to believe that the adoption rate of pricing engines like MiQ will increase over the course of time.

With that let me turn it over to Tim.

[Timothy Mattke]

Thanks Pat. In the first quarter we earned $151.9 million of net income, or $0.42 per diluted share compared to $143.6 million or $0.38 per diluted share in the same period last year. In the first quarter on an annualized basis, we generated the 17% return on beginning shareholders equity. Premiums are an increase compared to the same period last year due to higher average insurance in force, as well as a higher profit commission from our quota share reinsurance transactions, partly offset by the effect of lower premium rates.

Losses incurred consist of reserves established on new delinquent notices plus changes to previously established loss reserves. Total losses incurred were $39.1 million compared to $23.9 million for the same period last year. We have been disclosing for some time that certain parties have made claims against us concerning some of our past insurance claim decisions. The increase in total losses incurred reflects a pretax charge of $23.5 million related to the probable loss related to litigation of our claims paying practices that we have previously disclosed.

These matters are part of a confidential arbitration process, so we won't comment on the specifics but we look forward to putting this behind us. Separate from this charge that impact the losses incurred, there was a $31 million reduction of losses incurred due to changes in previously established loss reserves before reinsurance which is similar to the amount we experienced in the first quarter of 2018. As we do each quarter, we review the performance of the delinquent inventory to determine what if any changes should be made to the estimated claim rate and severity factors of previously received notices.

We continue to experience a favorable credit cycle. The positive development was driven by a higher than expected cure rates and delinquencies that are aged two years or less. During the quarter, we received 7% fewer new delinquency notices that we did in the same period last year. The rate of improvement on a year-over-year basis reflects the strong credit performance on business written beginning in 2009 and the fact that the remaining 2008 and prior books which is a source of the majority of our new notices received continues to be a smaller and smaller portion of our overall portfolio.

The 2009 and forward books account for just 35% of the new delinquency notices but accounts for approximately 84% of the risk in force as of March 31st, 2019. The claim rate of new notices received in the first quarter of 2019 was approximately 8% which reflects the current economic environment and anticipated cures and was lower than the 9% claim rate we used in the first quarter of 2018. While continuing to diminish in number, we expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters.

Net paid claims in the first quarter were $57 million while the number of claims received in the quarter declined by 30% from the same period last year. This activity reflects the continued decline of the delinquency inventory. The effect of average premium yield for the first quarter of 2019 was 47.4 basis point effectively flat year-over-year and sequentially. The effective yield reflects changes in losses ceded to reinsurers, changes in the recognition of premiums on single premium policies, change in the premium refund accruals and the levels of premium ceded to the various reinsurance transactions we have in place.

While there could be some volatility we expect that the effective premium yield will trend lower in future periods. This decline is expected mainly because the older books of business written higher premium rates continue to run off and replace the new books of business written at lower premium rates. Net underwriting and other expenses were $48.4 million in the first quarter of 2019 compared to $48.7 million in the same period last year.

We continue to expect that in 2019 expenses before reinsurance will be flat to 2018. The effective tax rate for the quarter was 20.4%, up marginally from the first quarter of 2018 as we had more taxable investments than we did a year ago. During the quarter, MGIC paid a $70 million dividend to the holding company. The dividend payment reflects the fact that MGIC is generating meaningful capital and we expect to be able to continue to do so for the foreseeable future.

We expect the dividends of at least this quarter's level will continue to be paid to the holding company on a quarterly basis subject to the approval of our board. As a reminder before paying any dividends we notify the OCI to ensure it does not object any dividend payments from MGIC. At quarter end, our consolidated cash and investments totaled $5.6 billion including $299 million of cash and investments at the holding company. Investment income increased year-over-year as a result of a larger investment portfolio and higher yields. The consolidated investment portfolio had a mix of 79% taxable and 21% tax-exempt securities, a pretax deal of 3.16% and has duration of 4.0 years.

Our debt to total capital ratio was approximately 18% at the end of the first quarter of 2019. At the end of the first quarter, MGIC statutory capital is $2.7 billion in excess of the state requirement. At the end the first quarter, MGIC's available assets total approximately $4.5 billion resulting in a $1.1 billion excess over the required asset. Regarding the appropriate level of excess to PMIERs, is difficult to actively manage to a specific target given the regulatory requirements for paying dividends. Some level of excess provides a nice buffer against adverse economic scenarios, as well as a potential for additional capital requirements from the GSEs should they occur in the future.

In excess to minimum PMIERs requirement also positions us to take advantage of new business opportunities should they occur. As forecast change about the timing and severity of a recession investors have been trying to determine what impact there would be to our earnings power, if we were to experience a moderate economic downturn. If such a downturn begins today, we would expect to continue to be able to generate double-digit after tax returns and continue to increase book value. We arrive at that expectation based on our current internal modeling of the existing book of business that is based on a modified 2017 CCAR-adverse scenario to make certain assumptions, including among other items a 10% decline in home prices and unemployment rising to approximately 7% and that incorporates our existing quota share reinsurance treaties and insurance like no transaction.

Finally, I want to spend a few minutes discussing our capital position and how we think about allocating capital. First, I would say that when you take a step back and look at the uses of the annual amount of capital that's being generated to do business, we expect to write in the existing level of dividends MGIC is paying, the substantial majority of capital is being created is accounted for. As a reminder, in 2018, we repurchased nearly 16 million shares or 4% of our shares outstanding at an average cost of $10.95.

We have $25 million remaining under a share repurchase program that does not expire until the end of 2019. Additionally, the Board recently authorized additional $200 million share repurchase program that runs through the end of 2020. I would expect us to continue to be opportunistic and utilizing the remaining 2018 and new 2019 authorization. When deciding when to repurchase shares, we consider a number of factors including our internal evaluation using discounted cash flows, as well as market-based metrics like price to book and price to earnings ratios. But also recognize that historically our share price has been volatile.

When we discuss strategies to allocate and utilize the capital exist at the writing company, we first estimate how much capital is needed to support the new business that is being written. We have also started to become modestly more active with the GSE risk transfer transactions that require capital support. And we expect remain active in this area provided that the returns meet our thresholds. Of course, we're also sending dividends now a $280 million annual run rate to the holding company.

We do have periodic options to adjust the level of quarter share reinsurance we utilize which could impact the amount of excess. But the level of reinsurance we have today creates the level of excess we do have. While there could be no impact on our first quarter financial results, we did give notice to the reinsurers of the 2015 quarter share transaction that we are exercising our option to terminate that treaty which in turn allowed us to renegotiate a new treaty that effectively reduces the percent ceded on that block of business from 30% to 15%.

The new treaty will be effective starting June 30th, 2019 and is expected to reduce our PMIERs excess by approximately $200 million and will be modestly accretive to earnings beginning in the third quarter of this year. The transaction while agreed to with our reinsurance partners still needs to receive GSE approval which we expect to receive. So we will continue to analyze and discuss with the board the best options to play capital that maximizes long-term shareholder value.

With that, let me turn it back to Pat.

[Patrick Sinks, Chief Executive Officer]

Thanks Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain optimistic about the future role that our company and industry can have, but it continues to be very difficult to gauge what actions may be taken in the timing of any such actions. We continue to be actively engaged on this topic in Washington. A new FHFA Director, Mark Calabria has recently been sworn in and he has appointed Adolfo Marzol as his principal advisor. Director Calabria has a great deal of knowledge about housing policy and Mr. Marzol has a great deal of expertise and how the mortgage market functions on a day-to-day basis.

Recently President Trump directed the US Treasury Department to develop a plan as soon as practical for administrative and legislative reforms for the housing finance system. With such reforms aimed at reducing taxpayer risk, expanding the private sectors role, modernizing the government housing programs and achieving sustainable homeownership. Exactly what will unfold and how the role of the GSEs, FHA and private capital play out remains to be seen, but we are encouraged that Director Calabria and the team he is assembling see the private sector as part of the solution for transferring credit risk away from taxpayers.

Regarding the FHA, we continue to think it is unlikely that it will reduce its MI premiums and that the primary focus by the FHA is on improving its operational policies and procedure. Our company and our industry offer many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership, the down payment. I believe that our company is well positioned to acquire and manage mortgage credit risk in a variety of forms, supported by a robust capital structure that includes our strong balance sheet, and where appropriate reinsurance treaties and the capital markets.

I will close my comments where I started. We are off to a strong start in 2019. We grew our insurance in force by more than 7%; investment income increased credit losses continue to improve, expenses are being held in check and we increase the quarterly dividend to our holding company. We are writing high-quality new business in what is expected to be a low loss environment that is being added to an existing book of business it is performing exceptionally well. And we are generating significant shareholder value. That is why when I look ahead, I'm very excited and confident about the future of MGIC.

With that operator, let's take questions.

[Operator]

[Operator Instructions]

And your first question comes from Douglas Harter from Crédit Suisse.

[DouglasHarter]

Thanks. On the reinsurance treaty that you've renegotiated which vintages does that cover? And is there any change to kind of your use of reinsurance on a new insurance written?

[TimothyMattke]

Sure, Doug. This is Tim. The way to think of it as that covered business that was 2016 and prior. So it was the largest outstanding treaty, but it covered vintages all the way back through crisis era as well. So we had-- we're getting $400 million of premium credit. We're going to cut it effectively in half from a 30% quota share down at 15% quota share which we think is the right thing to do sort of at this point with those vintages. And again, I think it's a way to demonstrate some the flexibility that the reinsurance is allowed to do, and appreciate the help of our reinsurance partners in that.

[DouglasHarter]

And then I guess on the 2017 and later vintages, I guess when would you have the next option to kind of revisit that treaty? And I guess how are you thinking or how are you thinking about that? And kind of if is there a point of delineation on the 2016 before is it just kind of when the treaties came up?

[TimothyMattke]

It's really just more when the treaties came up what we had in there. I think we're still a couple years out from anything on the 2017 and being able to be looked at. But again, I think we try to think ahead and think about when we might want flexibility associated with. There's been good seasoning associated with those books of business to look at that. So continued use the traditional reinsurance markets, continue to look at insurance like dove markets as well as effective ways to layoff capital and manage our risk.

[Operator]

Your next question comes from Geoffrey Dunn with Dowling & Partners.

[GeoffreyDunn]

Thanks, good morning. Tim, first question with respect to that QSR adjustment. How much risk is currently associated with the '06 or 2016 and prior?

[TimothyMattke]

I guess to look at that, Geoff, I mean effectively is a 30% quota share. So I think from our supplement if you look at that for most of those vintages, I'd say post 2011 is in 30% of the risk is going into that. If you start talking about the risk associated with the '08 and prior, I'd say it was only a select portion of that. So I say the good way of sort of approximating that is to look at the supplements and assume 30% with anything sort of post crisis and pre crisis, it's a smaller amount.

[GeoffreyDunn]

Okay. And then also this quarter there was a jump up in the NIW subject to reinsurance. Does the 2019 quota have any kind of different restrictions on business? Or is it a broader pool of business that's eligible for the QSR?

[TimothyMattke]

We were able to negotiate some changes in caps to certain risk characteristics that when we look at the first quarter business that compared to the fourth quarter last year, it said some of those caps might have been impacting how much was ceded. So it was really along those lines.

[GeoffreyDunn]

Okay. And then just a number question the accelerated single premiums in the quarter?

[TimothyMattke]

Accelerate single premiums in the quarter was just under $6 million.

[GeoffreyDunn]

And then last question what is your ILN strategy with respect to frequency? Is this something where you think you're going to come to market once a year? Are you going to try to come twice a year and wrap each half year of book? How are you approaching that?

[TimothyMattke]

Yes. Geoff, I mean it's again, this is Tim. It's a good question. I think, obviously, we do think we're going to be somewhat programmatic with it. It's one of those things where we have the quota share in place. We have taken to account sort of building up a reasonable amount of risk that we can cede off. And that a bond that can be sold through that. So I think there is basically a play, interplay between getting the appropriate size of securities that can be sold and sort of timing that is close to sort of when the business has been written as possible.

[GeoffreyDunn]

So sticking with kind of an annual run rate or is it just up in the air?

[TimothyMattke]

I think annual is probably the way to think about it. I mean it could potentially be quicker than that, but again with our 30% quota share in place and how long it takes depending upon the volume business we write. I think annual is the right way to think about it as opposed to anything that's more frequent than that.

[Operator]

Your next question comes from Randy Benner with B Riley SBR.

[RandolphBinner]

Hey, good morning, thanks. I'd --like a last question on the claims, pain related litigation. Can you just elaborate a little bit more on what the issue was there? And if this amount you've put aside would settle that litigation from your perspective?

[MichaelZimmerman]

Yes. Randy, this is Mike. I mean so the issue is just they are questioning our claim saying decisions in the past where we did not settle claims in recessions or denials or other issues so on that front, so it's just that laying off those decisions, and they're questioning the legitimacy of those. So that's the issue that surrounds it. Several years ago, this settlements were countrywide and others along those same lines --. So that's the issue with it.

Second part of your question on that was--?

[RandolphBinner]

Well, I guess so I mean so this is --I can't --this is a class action, is that right?

[MichaelZimmerman]

No, no. It's not a class action. Individual servicer questioning the claims.

[RandolphBinner]

So it's with one servicer. Would you view this is a resolution of that litigation? Or with this --

[MichaelZimmerman]

Well, it's not resolved yet. So we were at a point where we can make a probable and estimated charge. So we took the charge at this point and we hope to be able to resolve it, it's going to behind us.

[RandolphBinner]

It's all --

[MichaelZimmerman]

No. It's not done. The last long time right. I mean so not unlike the IRS litigation these things can linger for a long period of time.

[RandolphBinner]

It's all legacy though from the crisis years, yes?

[MichaelZimmerman]

That's right.

[MichaelZimmerman]

Then on just on MiQ, I think when we had this last call it was quite new and I'm just curious now that a quarter has gone by. Do you have kind of a feel for the kind of the take-up rate and the feedback you're getting on that from your distributors?

[TimothyMattke]

This is Pat. Yes, it's been in the market now for a little more than 90 days. We're learning as we go. We have a number of customers signed up. Some are already using it. Some are just hooking up the technology. I would call it just kind of a steady increase in the amount of business we're doing there. It continues to be one of a number of options. We have not pushed it on our customers rather we've relied on their desire to how fast they want to go.

So we still have the premium rate card in the market. We do forward commitments on occasion. So it's just one solution, if you will, but it's progressing as pretty much as we had expected. We're learning as we go, but I still expect that by the end of this year it'll be the dominant way of doing business.

[RandolphBinner]

So MiQ, so that MiQ by the end of the year will be the majority and they like over 80%. Is that kind of rough number?

[TimothyMattke]

I wouldn't go so far as to say 80%. I mean we haven't disclosed anything on that, but yes it will be the majority, that's for sure.

[Operator]

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

[BoseGeorge]

Hi, guys, good morning. Just going back to the quota share. Did you give a number for the net premiums that were ceded under that in the first quarter?

[MichaelZimmerman]

Yes. Bose, this is Mike. In the press release that out there, so hang in second, premium ceded-- $28 million of ceded premiums written and earned in the quarter. That and Bose just for clarity that's related to all the reinsurance transactions quota share reinsurance not just for the particular treaty that we have given notification to terminating them effectively come up with a new agreement on.

[BoseGeorge]

Okay. And roughly how much of that is the QSR? Is this treaty just trying to think about what the number is that will come into earnings and starting in the third quarter?

[MichaelZimmerman]

Well, I think there are a couple things to think about there is, we're still going to have it in place in the third quarter and it's just going to be reduced from 30% to 15%. So that runs rates going to go down. We were able to reduce the cost a little bit. So as we said in the comments, I'd say mildly accretive to earnings but it's not something that I would view as a significant.

[BoseGeorge]

Okay, great, thanks. And then actually just going back to your comments on capital. You've got this $280 million annualized that's going to the holding company. And you already have whatever $300-ish million there. In terms of the capital that's the $280 million that's going there, is it safe to think about that capital as sort of available to be returned to shareholders so that could be used for buybacks? And maybe something more than that, but at least that level could be used could be returned?

[MichaelZimmerman]

Yes. I mean I think we've talked about before that we want to make sure we have sort of 2x to 3x interest carriers in the holding company. We're still a ways off from the next debt, the due, which is 2023. So you think about 3x it's $180 million. So we do have an excess there and then you think about the run rate with the amount of shares that we were purchased last year, I think we right around 135 million. I think we feel like we had the flexibility to do that. And that's a current dividend run rate up to the holding company. I think we have that available, and so I think that's in line with what you're saying.

But we're going to be look to be opportunistic with that. Quite frankly which is what we I think demonstrated over the last year.

[Operator]

Your next question comes from Jack Micenko from SIG.

[JackMicenko]

Hi, good morning, everybody. I am wondering if you have the average coupon rate on the insurance in force. I ask because I think persistency came in a bit better than expected with the moving rates in the fourth quarter and we've gotten some investor concerns around it? Was there risk to refi and that persistence really pulling back, but obviously rates would have to go through sort of the prior level for that to really have it in size. I was just curious if you had a rough number for us to think about on where the portfolio has been on a rate basis?

[MichaelZimmerman]

Yes. Jack, this is Mike. So the short answer is no, right. Typically, our claim is what the weighted average coupon is? But I mean I think if you look at each vintage year in the 30-year mortgage rate that's being delivered to Freddie and Fannie that would be a proxy for it, but I don't have a calculated weighted average coupons but certainly where the increase in rates really was that second part of 2018, right. I mean so that would be the book that's probably most likely to be exposed. But it's a pretty small segment.

[JackMicenko]

Okay. And then on the NIW, the 95 LTVs moved up about 300 basis points in terms of mix. Are that strategy and the impact of more adoption of dynamic pricing? Or is that more what the markets giving you relative to maybe some of the competitive landscape with some of the government programs?

[MichaelZimmerman]

I say all the above. That the latter part of your answer. It's difficult for us to say it's just because of MiQ. Just market dynamics in the mix during this period of time.

[Operator]

Your next question comes from the line of Mackenzie Aron from Zelman & Associates.

[MackenzieAron]

Thanks, good morning. First question around the severity, they're continuing to trend lower. Can you just talk a little bit about what's driving that? And can we expect to see that benefits continued now that's valued are around 44,000?

[TimothyMattke]

Mackenzie, it's Tim. I think obviously this quarter we saw the average claim paid come down. I think historically sometimes that sort of bounced around a little bit. So I think we're hopeful that trend continues. I think it's safe to say when you look at sort of where the default inventory is now, there's a little bit less out of some of the states that were judicial where it just took a long time. And so some of the cost of how long it was in the delinquent inventory added on to the severity.

And I think that was home price appreciation, obviously, that's been beneficial to it. I think it's a good trend but again I think the drop in the quarter I'd say it's --we'll look to see another quarter see if that persisted at that sort of level. But again very happy with it was sort of where the trends have gone from a severity standpoint.

[MackenzieAron]

Okay, great. And then similarly on the claims rate, is there a floor that we should be thinking about is the legacy continues to roll off? And we see that benefit in a claim rate trending lower. Obviously, it's a hard number to peg, but anything we should be thinking about that would it kind of offset the downward trend?

[TimothyMattke]

Mackenzie, just to be clear, are you talking about claim rate on new notices or the claim rates -- new notices? Yes I mean 8% for the quarter is probably as low as I can remember. Keep in mind the first quarter on a seasonal basis normally is a little bit lower than the annual rate for the year. But again I think we've been very happy with the credit trends and again with the reserve release we had this quarter. Things have continue to perform better than what we've been putting it on say a year ago.

So we reflected that. With talking about a floor, I think we've talked about in the past, I didn't see it getting much below 8% to 9% and it's hard to see it necessarily doing so for any prolonged period of time. But again we're obviously experiencing a good environment right now and good credit quality of the portfolio.

[MackenzieAron]

Okay, that's helpful. If I could just ask one more, Pat, just a bigger picture question on the competitive environment now that the industry is pretty well along and rolling out the black boxes. What are you seeing just from the competitive standpoint compared to about a year ago when things were more heated?

[PatrickSinks]

Well, I think our understanding is that everybody all five, six MIs are in the market with their form of risk-based pricing. And some are obviously further along they've adopted it sooner than the rest of us did. So we're trying to kind of feel our way through that. Thus far I wouldn't say there have been any major surprises. But we're monitoring as we go. And I think it remains competitive. There's nothing different about that. We're just going about it a different way with a different pricing mechanism.

[Operator]

Your next question comes from the line of Chris Gamiatoni from Compass Point.

[ChrisGamiatoni]

Hi. Good morning, everyone. Could you help me think about when you do find your stock attractive for opportunistic? If I just look today, buying back your stock complies to 12% to 13% return, risk-free return. And holding the cash at the holding company seems to probably aren't something much lower than that. So I'm just trying to figure out what's that deterministic point for you?

[TimothyMattke]

Hey, Chris. This is Tim. Obviously, we're not going to give out of the exact spot. All I can do is point to what we purchase back yet historically and I think we gave a little bit more color as far as some of the metrics we look at which is discounted cash flow, as well as some market indicators as far as price to book and price to earnings. And there are definite trade-offs there. I think we're aware of sort of what goes on in from a marketplace. But it's one of those things where we just continue to look at it, have discussions with our board about where we think appropriate levels are.

Feel like we're pretty disciplined and sort of the methodology looking at it. And again I think are hoping to be opportunistic when the opportunity presents itself. But recognizing also that we're trying to return capital to shareholders if we can't deploy it.

[ChrisGamiatoni]

Okay. And I appreciate the comments about the difficulty of managing the excess capital at the subsidiary level and pulling back I guess the $200 million credit for the QSR. Have there been any thoughts or discussions about a special dividend of a larger nature post PMIERs was 2.0 and the availability of ILN market?

[TimothyMattke]

Yes, Chris. I mean I think we have conversations with our regulator on a pretty routine basis. Sometimes more in-depth probably on an annual or semiannual basis about sort of where we think we can go with dividend. I would tell you that we haven't had any in-depth conversation about sort of large or special, but we do have conversations with them regularly about how does reinsurance traditionally ILN impact their view on dividend capacity.

Where do we think that can go to? And again so we're very happy that the regulator approved the increase to $70 million a quarter this year. But obviously that's not our full earnings run rate. But again continue to have that dialogue and I would say that we'll continue to explore not only quarterly but could there be other dividends but at this point there's nothing imminent and nothing really just to discuss in detail is in the quarterly.

[ChrisGamiatoni]

Okay. And just one little one. The new premium yield on new business dropped one basis points quarter-over-quarter. Was there anything material in that or is that mix related?

[MichaelZimmerman]

Chris, this is Mike. Yes, I mean mix related and don't forget right, it's -- we've been discussing for a period time right with the new premium rates that were in effect last year. The older book falling off, or that the yield, but as new premium rates were effective last year that's going to result in a lower premium rate. So mixed related but nothing other than that.

[Operator]

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

[MihirBhatia]

Hi, thank you and good morning. A couple of just quick questions. First just staying with just the capital return. Was there something in Q1 that, I don't know, while you were doing maybe the reinsurance or something where you weren't able to be active for some reason with capital returns or with repurchase?

[TimothyMattke]

Mihir, this is Tim. No, no. There's nothing specific to preclude us for being active with share repurchases.

[MihirBhatia]

Okay. And you all didn't do any in Q1? Is that right?

[TimothyMattke]

Correct.

[MihirBhatia]

Great, okay. And then just wanted to understand that --I think in your disclosure you talked us a footnote about changing the way DTI is calculated? And what was the driver of that? And I guess what is the impact that you'll expect from that change?

[MichaelZimmerman]

Mihir, this is Mike. So that happened last year really where it conformed with what market practices were. So we're calculating it using the very --for pricing and eligibility is being is excluded outward. So it's really conforming to market practices. That was the driver or that was the change.

[MihirBhatia]

Okay, no, that's helpful. And then just on the premium rate, obviously, I think just following up with the impact of MiQ do you expect that to moderate that drop, accelerated or no change? I think the expectation is that average premium rate will continue to decline a little bit just from as the new stuff and the lower pricing works its way, but unlike with MiQ obviously it's more granular pricing and it's not just the rate card. So I was just wondering will that help moderate that downward trend or not really?

[MichaelZimmerman]

So, Mihir, it's Mike. It's difficult to say it's going be mix depended on the business that comes in. And obviously the price because it's a dynamic pricing tool. Same diamond, how much of it comes through MiQ versus other ways of delivering price. So it's still one that we just will continue to watch as it comes through but it's difficult to say, it will definitively trend one way or the other.

[MihirBhatia]

And I'm sorry just one last question staying on that just following up. When you all priced out the returns are pretty similar across all the buckets, right. I mean that's the idea behind this dynamic pricing is all more granular.

[MichaelZimmerman]

This is Mike. We haven't changed our return criteria, correct.

[Operator]

Your final question comes from Phil Stefano from Deutsche Bank.

[PhilipStefano]

Yes, thanks and good morning. And thinking about new notices, it feels like some of your peers have started to talk about the deflection and an uptick in new notices coming through. Obviously, we got the 7% improvement year-over-year in first quarter 2019. I guess thinking long run how should we think about the inflection that's probably going to come at some point as this legacy book burns off? And we have this normalized rate moving forward of the new business post crisis.

[MichaelZimmerman]

Phil, it's Mike again. I can't speak honestly to the competitor statements of what they're experiencing. Clearly, our book is a little bit -- it's more mature, stable from that side of it versus others who might be growing. So I guess that could be one possible reason they see a higher rate. About two-thirds of our notices are still coming from the older book and third coming, a little more than the third coming from the newer book and very low loss rates.

So now the Steven --

[StephenMackey]

Yes, this is Steve. I would just say as the legacy book continues to roll off, we're going to be looking more at the economic fundamentals that drive mortgage performance. And where we stand today there's outstanding economic fundamentals that drive mortgage performance. We've got a very tight labor market. We've got solid wage growth. We've got home price depreciation. So all those bode well for the performance of the post-crisis vintages. And as long as those trends stay in line, I would expect to see continued strong performance from our post crisis book vintages.

[PhilipStefano]

Maybe trying to get to the same point but from a different perspective. Assuming we're looking at just the post-crisis book of business, is there a percentage of loans in force that you'd expect to be new defaults on a quarterly basis? Or is there a way to think about kind of what normalized looks like from that perspective?

[MichaelZimmerman]

So, Phil, this is Mike. I mean so clearly we bottling out, we have seen -- spent a lot of time looking at that and doing forecasts. We don't --we're not prepared to tell you we expect an X or why were that because that leads into certain extent, some forward guidance relatives to earnings and losses incurred with it and we don't use forward guidance. But, historically I would say if you look back at long periods of time, you go back to the 90s and so, on you'd see 1% -1.5% of a portfolio, current performing portfolio roles delinquent in any given quarter.

Then you apply the cure rate. Whether that range is still appropriate given the comments that Steve made relatively outstanding credit characteristics, and the news economic environment we're in. Does the trend lower than that? Does it stay in that range? That's something that we continue to watch and monitor at the same time. We -- but that's why we say we continuously expect strong performance. But is there a normalized level? I mean we have a very different mix of business today than we do from the historic side of it as well, so it's difficult to say.

[Operator]

Your next question comes from Geoffrey Dunn with Dowling & Partners.

[GeoffreyDunn]

Thanks. Tim, just one follow-up with respect to the incidence assumption. Last year you had I think about a 50 basis point uptick on the incidence assumption into the second quarter. And you've always cautioned us that the back half of the year you could see upticks depending on what the experiences is. With you now down to 8% is that a level you think can be sustained? Do we still think about seasonal pressures a year go on potentially? And with what you're seeing what do you think is the prospect for it to go potentially even lower?

[TimothyMattke]

Geoff, again, a good memory on that. I mean from a seasonal standpoint, there's always going to be a view that the first quarter claim rate should be lower based upon sort of just history of what you've seen. So I would say that I would still expect that seasonally that you would expect the first quarter to be better than sort of the remainder of the year.

That being said, obviously, you see the claim rates that we've estimated over the last couple years has continue to trend lower. So it's hard to say that it wouldn't be at that level going forward, but based upon what we know now and based upon knowing sort of the history around seasonality, our expectation is that it wouldn't be at 8% next quarter for example.

But, again, we will look at it in the second quarter based upon the information we have then taking an account sort of the trends and the seasonality we've seen historically.

[GeoffreyDunn]

And given how the books performing, the potential drop below 8%?

[TimothyMattke]

I think it's tough to tell. I think where we are right now we feel comfortable that 8% is the right level for this quarter. But it's difficult to say if it goes below that or if it goes back up next quarter.

End of Q&A

[Operator]

There are no other questions from the phone.

[Patrick Sinks, Chief Executive Officer]

Okay. This is Pat. Again, the year is off to a great start. We're very pleased. Thank you for your interest in our company. And have a great day.

[Operator]

This concludes today's conference call. You may now disconnect.